Appraisal Report of Real Property

Appraisal Report Of Real Property

Fountain Plaza 100 S. Main St. Minot, ND 58701 Real Property Component

Prepared For:

Ms. Megan Meis, Gate City Bank 500 2nd Ave. N. Fargo, ND 58102

Assignment Reference:

Date of Observation: 05/19/2016 Date of Report: 05/27/2016 Date(s) of Value: 05/19/2016

Fountain Plaza, 100 S. Main St., Minot, ND

SECTION I – Introduction

Fountain Plaza, 100 S. Main St., Minot, ND

Offices in Bozeman and Savage, Montana providing coverage throughout Montana, North Dakota, Wyoming, Hawai’i and the Rocky Mountain West.

91 Morgan Creek Ln. Bozeman, MT 59718 Tel + 1 406.556.1000 [email protected]

Letter of Transmittal Advisory May 27, 2016

Consulting

Economic Analysis Ms. Megan Meis,

Gate City Bank Feasibility Study nd 500 2 Ave. N.

Fargo, ND 58102 Forecasting

RE: Fountain Plaza Forensic Analysis Real Property Component

100 S. Main St. Litigation Support Minot, ND 58701

Market Studies Dear Ms. Meis;

Research At your request, I have prepared an appraisal report of the above referenced

property located in Minot, Ward County, North Dakota. The purpose of this Valuation appraisal was to form an opinion of market value of the subject’s leased fee interest, as‐is.

The reader of this report is encouraged to review all of the assumptions and limiting conditions found within this appraisal report. This appraisal was performed subject to all of these assumptions and limiting conditions. Any use of this appraisal report represents a full agreement and adherence to any and all assumptions and limiting conditions included.

The intended use of this appraisal report is to assist the intended user with collateral analysis for mortgage lending purposes. The appraisal is intended only for the use of the intended user identified in this report and the use also identified. No other use or users are authorized or allowed and no responsibility is accepted by the appraiser for any other use or users.

All applicable research and valuation analyses have been applied and a visual observation of the existing subject property along with physical measurements that were made by the appraiser. The letter of transmittal is accompanied by an

Fountain Plaza, 100 S. Main St., Minot, ND

appraisal report which is reported as an Appraisal Report as defined by Uniform Standards of Professional Appraisal Practice (USPAP) under Standards Rule 2‐2, 2016‐2017 Edition. The information contained in this report is specific to the needs of the client and for the intended use as stated in this report.

Opinions stated in this report are based on my interpretation of an assemblage of data obtained from the observation of the subject, the comparable sales and other gathered data. The value opinion rendered is subject to the general assumptions and limiting conditions found within this report.

Your attention is directed to the assumptions and limiting conditions sections of this report. Acceptance of this appraisal report constitutes a full and binding agreement with these conditions and assumptions. This letter of transmittal must remain attached to the report, which contains (101) pages including related exhibits, for the value opinion set forth to be considered valid. The report, in its entirety, including any and all assumptions and limiting conditions, is an integral part of, and inseparable from this letter.

After analyses of data collected during the preparation of this appraisal report, opinions of market value were formed as follows:

MARKET VALUE OPINION(S) Appraisal Premise Interest Appraised Date of Value Value Opinion As‐Is, Current Leased Fee May 19, 2016 $775,000 Data Compiled by Christopher C. Seeve

Further, the estimated marketing and exposure period necessary for the subject to achieve this value under current market conditions is as follows:

EXPOSURE PERIOD ESTIMATE(S) Appraisal Premise Interest Appraised Date of Value Exposure Period As‐Is, Current Fee Simple May 19, 2016 ≈6‐12 Months Data Compiled by Christopher C. Seeve

The appraisal report that follows sets forth the most pertinent and meaningful data gathered, techniques used and logic followed leading to the reconciled value opinion. Analysis performed and opinions or conclusions were developed in concordance with guidelines and recommendations set forth in the Uniform Standards of Professional Appraisal Practice (USPAP) and the requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute.

Fountain Plaza, 100 S. Main St., Minot, ND

I hope I have been of assistance to you and appreciate the opportunity to serve your needs. Don’t hesitate contacting me with any questions you may have or if I can be of further assistance to you. Thank you.

Sincerely,

Christopher C. Seeve 05/27/2016

Fountain Plaza, 100 S. Main St., Minot, ND

Table of Contents SECTION I – Introduction ...... 2 Letter of Transmittal ...... 3 Introduction of the Subject Property ...... 8 Certification ...... 9 Executive Summary ...... 10 SECTION II – Premises of the Appraisal Assignment...... 11 General Assumptions ...... 12 General Limiting Conditions...... 14 Extraordinary Assumption(s) ...... 16 Hypothetical Condition(s) ...... 17 Identification of the Appraisal Problem...... 18 Definition of Market Value ...... 19 Ownership Rights & Relationships ...... 20 Definition of Real Property Estates for the Appraisal Assignment ...... 21 Scope of Work ...... 22 SECTION III – Presentation of Data ...... 24 General Market & Neighborhood Data ...... 25 General Market Data ...... 25 General Market Area & Neighborhood Maps ...... 62 Subject Property ...... 65 Subject Site...... 70 Subject Improvements ...... 72 Flood Map ...... 75 Plat Map ...... 76 Building Measurement ...... 77 Subject Photos ...... 78 Subject Photos ...... 79 SECTION IV – Analysis of Data & Conclusions ...... 80 Highest & Best Use ...... 81

Fountain Plaza, 100 S. Main St., Minot, ND

Highest & Best Use, As Though Vacant ...... 83 Highest & Best Use, As Improved ...... 84 The Valuation Process ...... 85 Income Approach ...... 87 Reconciliation ...... 92 Exposure Time & Marketing Period ...... 93 Qualifications of the Appraiser ...... 95 Licenses ...... 97 SECTION V – Addenda ...... 98

Fountain Plaza, 100 S. Main St., Minot, ND

Introduction of the Subject Property

Street‐side elevation, 05/19/2016, CCS.

Rear alley elevation, 05/19/2016, CCS.

Fountain Plaza, 100 S. Main St., Minot, ND

Certification I certify that, to the best of my knowledge and belief:

 The statements of fact contained in this report are true and correct.  The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial and unbiased professional analyses, opinions and conclusions.  I have no present or prospective interest in the property that is the subject of this report and no personal interest with respect to the parties involved.  I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.  My engagement in this assignment was not contingent upon developing or reporting predetermined results.  My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result or the occurrence of a subsequent event directly related to the intended use of this appraisal.  My analyses, opinions and conclusions were developed and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP).  I have made a personal observation of the property that is the subject of this report.  No one provided significant real property appraisal assistance to the person or people signing this certification.  I have performed no services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three year period immediately preceding acceptance of this assignment.  The reported analyses, opinions and conclusions were developed, and this report has been prepared in conformity with the requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute.  The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives.  As of the date of this report, I, Christopher C. Seeve, have completed the Standards and Ethics Education Requirements for Candidates for Designation of the Appraisal Institute.

Christopher C. Seeve 05/27/2016

Fountain Plaza, 100 S. Main St., Minot, ND

Executive Summary SUBJECT PROPERTY Subject Name/Type Fountain Plaza Address 100 S. Main St. Minot, ND 58701 Owner(s) of Record Albertson Rental BB, LLC

PARTIES TO THE APPRAISAL Client Gate City Bank Intended User(s) Gate City Bank Intended Use(s) Collateral analysis for mortgage lending purposes

ASSUMPTIONS/CONDITIONS Extraordinary Assumptions None Hypothetical Conditions None

REPORT TYPE/INTEREST APPRAISED/COMPONENT(S) OF VALUE Report Type Appraisal Report Interest Appraised Leased Fee Component(s) of Value Real Property Premise(s) As‐Is

SALIENT DATES Date of Observation 05/19/2016 Date of Report 05/27/2016 Date(s) of Value 05/19/2016

SUBJECT QUANTIFICATIONS ABSTRACT Site Area 0.16 acres 7,000 square feet Zoning C‐2 Improvement Type Mixed‐Use; Professional Office & Self‐Storage Improvement Quantification Ground Floor Offices 6,885 sq. ft. 47.95% Second Floor Storage 545 sq. ft. 3.79% Basement Self‐Storage 6,930 sq. ft. 48.26% Total Gross Building Area 14,360 sq. ft. 100.00%

HIGHEST & BEST USE As Though Vacant Hold for future development As Improved Continued current use at stabilized occupancy

VALUE OPINIONS Approach Premise Overall $ $/Sq. Ft. of GBA Income Approach As‐Is, Current $775,000 $53.97 Reconciled Value Opinion As‐Is, Current $775,000 $53.97

Fountain Plaza, 100 S. Main St., Minot, ND

SECTION II – Premises of the Appraisal Assignment

Fountain Plaza, 100 S. Main St., Minot, ND

General Assumptions Acceptance of and/or use of this report, either portions of or in its entirety, constitutes acceptance of the following general assumptions. Our liability extends only to the stated client, not to subsequent parties or users of the report. This appraisal report has been made with the following general assumptions:

 No responsibility is assumed for the legal description provided or for matters pertaining to the legal or title considerations. Title to the property is assumed to be good and marketable unless otherwise stated or disclosed.

 The property is appraised free and clear of any or all liens or encumbrances unless otherwise stated.

 Responsible ownership and competent property management are assumed.

 The information furnished by others is believed to be reliable, but no warranty is given for its accuracy.

 All engineering studies are assumed correct. The plot plan(s) and illustrative material in this report are included only as a visual aid to the reader.

 No legal description or ownership data were provided by the client. Information obtained at the office of the Ward County Clerk and Recorder was used to ascertain the physical dimensions and size of the property and its ownership. Should other data subsequently obtained prove this information to be inaccurate, it may be necessary for this appraisal to be adjusted.

 It is assumed that there are no hidden or unapparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for obtaining the engineering studies that may be required to discover them.

 It is assumed that the property is in full compliance with all applicable federal, state, and local environmental regulations and laws unless the lack of compliance is stated, described, and considered in the appraisal report.

 It is assumed that the property conforms to all applicable zoning and use regulations and restrictions unless any non‐conformity has been identified, described, and considered in the appraisal.

 It is assumed that all required licenses, certificates of occupancy, consents, and other legislative or administrative authority from any local, state, or national government or

Fountain Plaza, 100 S. Main St., Minot, ND

private entity or organization have been or can be obtained or renewed for any use on which the opinion of value contained in this report is predicated.

 It is assumed that the use of the land and improvements (if any) is confined within the boundaries or property lines of the property described and that there is no encroachment or trespass unless noted in the report.

 Unless otherwise stated in this report, the existence of hazardous materials, which may or may not be present on the property, was not observed by the appraiser. The appraiser has no knowledge of the existence of such materials on or in the property. The appraiser, however, is not qualified to detect such substances. The presence of substances such as asbestos, urea‐formaldehyde foam insulation, and other potentially hazardous materials on or in the property that would cause a loss in value is unknown. Should one or more detrimental substance be found that would affect value, the results and findings of this appraisal are nullified and the appraiser has the right to amend and re‐report based on the new findings. No responsibility is assumed for such conditions or for any expertise or engineering knowledge required to discover them. The intended user is encouraged to retain an expert in this field if desired.

 The forecasts, projections, and/or operating estimates contained herein are based on current market conditions, anticipated short‐term supply and demand factors, and continued current economic conditions. These forecasts are, therefore, subject to change with future conditions.

 All opinions, estimated, data, and statistics provided by others in the course of this appraisal are assumed correct. An assumption has been made that the sources are reliable, but no responsibility has been inferred for their accuracy.

 The Americans With Disabilities Act (ADA) became effective January 26, 1992. The appraiser(s) have not made a specific compliance survey or analysis of the property to determine whether or not it is in conformity with ADA requirements. The possibility exists that a compliance audit of the subject property would reveal that the property is not in compliance with one or more of the requirements of the act. If so, this fact could have a negative impact upon the value of the property. Since the appraiser(s) have no direct evidence relating to this issue, possible noncompliance with the requirements of ADA was not considered in estimating the value of the subject property.

Fountain Plaza, 100 S. Main St., Minot, ND

General Limiting Conditions Acceptance of and/or use of this report, either portions of or in its entirety, constitutes acceptance of the following general limiting conditions. Our liability extends only to the stated client, not to subsequent parties or users of the report. This appraisal report has been made with the following general limiting conditions:

 Any allocation of the total value estimated in this report between the land and the improvements applies only under the stated program of utilization. The separate values allocated to the land and buildings must not be used in conjunction with any other appraisal and are invalid if so used.

 Possession of this report, or a copy thereof, does not carry with it the right of publication.

 The appraiser, by reason of this appraisal, is not required to give further consultation or testimony or to be in attendance in court with reference to the property in question unless arrangements have been previously made. If the appraiser is subpoenaed pursuant to a court order, the client agrees to compensate the appraiser at our regular per diem rate plus expenses for any and all hearings, trials, meetings, depositions, and related travel and preparation time.

 Neither all nor any parts of the contents of this report (especially any conclusions as to value, the identity of the appraiser, or the firm with which the appraiser is connected) shall be disseminated to the public through advertising, public relations, news, sales, or any media without the prior written consent and approval of the appraiser. Quoting from and partial reprinting of this report are expressly prohibited. The omission or change of any part of this appraisal report without prior written authorization invalidates the entire report.

 Any opinions of value provided in the report apply to the entire subject property, and any proration or division of the total into fractional interests will invalidate the opinion of value, unless such proration or division of interests has been set forth in the report.

 All files, work papers and documents developed, obtained and prepared in connection with this assignment are the property of C V Appraisal Services, Incorporated. Information, estimates and opinions are verified where possible, but cannot be guaranteed.

 Any use of this appraisal report for any and all purposes by any user constitutes a full and binding agreement that the liability of the appraiser, appraisers and/or appraisal firm for this appraisal is limited to the amount collected as a fee for performing the appraisal assignment.

Fountain Plaza, 100 S. Main St., Minot, ND

 Appraisals are based on the data available at the time the assignment is completed. Amendments/modifications to appraisals based on new information made available after the appraisal was completed will be made, as soon as reasonably possible, for an additional fee.

 It is important for the reader to understand that the value opinion rendered is reflective only of the subject real property, i.e., land and building. Not included are any business enterprise/goodwill value, going concern, furniture, fixtures, personal property, equipment or other related items as part of this assignment.

Fountain Plaza, 100 S. Main St., Minot, ND

Extraordinary Assumption(s) Extraordinary assumptions are defined as: “An assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser’s opinions or conclusions. Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal or economic characteristics of the subject property; or about conditions external to the property such as market conditions or trends; or about the integrity of data used in an analysis. An extraordinary assumption may be used in an assignment only if:

 It is required to properly develop credible opinions and conclusions;  The appraiser has reasonable basis for the extraordinary assumptions;  Use of the extraordinary assumption results in a credible analysis, and;  The appraiser complies with the disclosure requirements set forth in USPAP for extraordinary assumptions”1.

No extraordinary assumptions were employed as part of the appraisal process.

1 (Dictionary of Real Estate Appraisal, 4th Edition, 2002)

Fountain Plaza, 100 S. Main St., Minot, ND

Hypothetical Condition(s) Hypothetical conditions are defined as: “That which is contrary to what exists but is supposed for the purpose of analysis. Hypothetical conditions assume conditions contrary to known facts about physical, legal or economic characteristics of the subject property, or about conditions external to the property, such as market conditions or trends, or about the integrity of data used in an analysis. A hypothetical condition may be used in an assignment only if:

 Use of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison;  Use of the hypothetical condition results in a credible analysis, and;  The appraiser complies with the disclosure requirements set forth in USPAP for hypothetical conditions”2.

Hypothetical conditions are used when certain factors are known to be false, but are presumed true for analytical purposes. No hypothetical conditions were used in this case.

2 (Dictionary of Real Estate Appraisal, 4th Edition, 2002)

Fountain Plaza, 100 S. Main St., Minot, ND

Identification of the Appraisal Problem Client Identification Gate City Bank 500 2nd Ave. N. Fargo, ND 58102

Intended User(s) Gate City Bank 500 2nd Ave. N. Fargo, ND 58102

Intended Use(s) The client requested this appraisal to assist with collateral analysis for mortgage lending purposes.

Objective of the Appraisal The engagement request provided by the client indicated Assignment “market value” as the type of valuation requested. It did not specify a definition of market value or in what scenario the subject should be analyzed, i.e., as‐completed, as‐ stabilized, as‐is, etc. Nor did it express whether the valuation should be reflective of the current date, some retrospective date or some prospective date in the future. Based on the intended use of the appraisal, the subject property’s current condition and my discussions with the client/intended user, the premises of the valuation is a current market value (as defined) opinion in it’s as‐is state.

Property Rights Appraised The client’s engagement request did not specify the property rights to be appraised. As the subject is a leased investment property, I assumed an opinion of market value of the subject’s leased fee interest was desired.

Components of Value Real property only.

Type of Value Market Value as defined in The Dictionary of Real Estate Appraisal.

Fountain Plaza, 100 S. Main St., Minot, ND

Definition of Market Value The objective of the appraisal assignment is an opinion of market value. The definition of market value used in conjunction with this appraisal assignment is as follows: “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

 Buyer and seller are typically motivated;  Both parties are well informed or well advised, and acting in what they consider their best interests;  A reasonable time is allowed for exposure in the open market;  Payment is made in terms of cash in U.S. 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.3

3 (Dictionary of Real Estate Appraisal, 4th Edition, 2002) as provided by 12 C.F.R. Part 34.42(g); 55 Federal Register 34696, August 24, 1990, as amended at 57 Federal Register 12202, April 9, 1992; 59 Federal Register 29499, June 7, 1994

Fountain Plaza, 100 S. Main St., Minot, ND

Ownership Rights & Relationships (Fee Simple, Leased Fee, and Leasehold Relationships & The Bundle of Rights) In the case when market rents equal contract rents then the following relationship typically holds true;

 VLEASED FEE = VFEE SIMPLE

If market rents are less than contract rents then typically;

 VLEASED FEE ≥ VFEE SIMPLE and VLEASEHOLD is positive

If market rents are greater than contract rents then typically;

 VLEASED FEE ≤ VFEE SIMPLE and VLEASEHOLD is negative

When discussing real property ownership and interests, the bundle of rights concept should be understood. The concept of the bundle of rights in regards to property ownership is often compared to a "bundle of sticks". Each individual stick within the bundle represents a separate right or interest inherent in property ownership. Each individual right may be separated from the bundle by means of sale, lease, mortgage, donation, or some other means of transfer. A complete bundle of rights includes the following:

 The right to sell an interest;  The right to lease an interest;  The right to occupy the property  The right to mortgage an interest;  The right to give an interest away.

In theory, the most complete form of ownership is fee simple which is equivalent to ownership of the complete bundle of rights or sticks. It should be noted that the fee simple interest is subject to the four powers of government which are taxation, eminent domain, police power, and escheat. As an example of varying degrees of property ownership, an owner of a property severs the bundle of rights by leasing the property to a tenant. By leasing the property, in exchange for the collection of rental income plus the reversionary right, the owner has given up their right to occupy. The fee simple interest becomes a leased fee interest. Conversely, the tenant now has a leasehold interest. It is important to note that terms and prevailing market reaction to these terms may cause the sum of values of the leased fee and leasehold interests to be different than the fee simple value as if no lease was in existence.

Fountain Plaza, 100 S. Main St., Minot, ND

Definition of Real Property Estates for the Appraisal Assignment For valuation purposes in this report, three estates are defined below.

 Market value of the fee simple estate to an owner‐user is the worth to this type of buyer via the sales comparison approach. Income generation is not an important factor to this buyer. Property suitability for the buyer's own use is the primary purchasing criteria. Occupancy and lease‐up costs are not relevant for this type of real property.

 The fee simple estate for a multi‐tenant facility is different from the one immediately above. A different interpretation is appropriate for a building designed to generate real estate rental income like a shopping center or apartment building. This estate for this type property is defined as the worth to the most probable buyer assuming the property is already leased to a level of stabilized occupancy at normal market terms including market rent. Lease‐up costs are assumed already paid.

 Market value of the leased fee estate is defined as the worth of real property to its current owner as encumbered by terms specified in one or more leases.

 Lastly, a leasehold estate is defined as one tenant’s interest in real property as defined by a lease.

These definitions are crucial concepts in the valuation for all real property. In this case, leased fee interest was appraised. As a leased fee interest was requested, I researched and formed an opinion of market rents for the subject to ascertain which relationship exists; VLF ≈ VFS, VLF > VFS, or VLF < VFS.

Fountain Plaza, 100 S. Main St., Minot, ND

Scope of Work According to the Uniform Standards of Professional Appraisal Practice, it is the appraiser’s responsibility to determine the appropriate scope of work4. Scope of work can be defined as: “The amount and type of information researched and the analysis applied in an assignment. Scope of work includes, but is not limited to the following:

 The degree to which the property is inspected or identified;  The extent of research into physical or economic factors that could affect the property;  The extent of data research, and;  The type and extent of analysis applied to arrive at opinions or conclusions5.

A shortened summary of scope of work could be what the appraiser did and didn’t do during the course of the appraisal process. Subject Identification I gathered pertinent and relevant subject property information from the client, current owner, public records and physical observation of the subject. Property was identified by physical address, legal description and county assessor’s records.

Subject Observation I observed the subject property on the morning of May 19, 2016. Quantifications of the existing building improvement were obtained from physical measurements and existing leases. Site area quantifications were obtained from county Assessor records and recorded plat maps. The observation of the subject by an appraiser should not be confused with an inspection performed by a licensed and qualified building inspector.

Research Parameters Subject’s market area was defined by analysis of physical and economic linkages, interviews with various market participants and published reports.

Analysis Type & Extent I collected and analyzed the appropriate data by use of appropriate and generally accepted appraisal methodology to arrive at reasonable and supported value opinions. Methodology of each approach was further discussed in its appropriate section.

4 (USPAP, 2014) 5 (Dictionary of Real Estate Appraisal, 4th Edition, 2002)

Fountain Plaza, 100 S. Main St., Minot, ND

Approaches The income approach was the only approach performed in this Performed case. Further discussion of each approach was provided in their respective sections.

Fountain Plaza, 100 S. Main St., Minot, ND

SECTION III – Presentation of Data

Fountain Plaza, 100 S. Main St., Minot, ND

General Market & Neighborhood Data

General Market Data Real property values are influenced and affected by the interaction and relationships between four basic forces that direct human activity. These four forces are; 1. Social trends

2. Economic circumstances

3. Governmental controls and regulations

4. Environmental conditions

Interaction between these four forces influences the value of all real estate in the market. General area and neighborhood data will be analyzed in regards to these four market forces. The Williston Basin constitutes the region or general market area. For purposes of this appraisal, the Williston Basin also makes up the defined subject neighborhood in which the subject property interacts with comparable and competing properties. Emphasis was placed on Ward, Mountrail, Williams and McKenzie Counties along with those counties in North Dakota containing primary population centers. Similar market influences act upon each other within the defined subject neighborhood. Physical and economic linkages exist throughout this area that contribute to the economic interaction experienced in the area. This discussion will provide a summarization, with emphasis on the above referenced counties, of those linkages.

Fountain Plaza, 100 S. Main St., Minot, ND

Of the linkages that exist, likely the most influential is the Bakken Formation which is a subsurface rock unit located in the Williston Basin. In addition to the Bakken Reservoir, the more recently discovered Elm Coulee Field is found in Richland County, Montana. A more detailed summarization of the Williston Basin, Bakken Formation, and Elm Coulee Field was provided in the Economic Circumstances section. A brief summarization of the general market and neighborhood data were provided. An overview of the above referenced forces were summarized. North Dakota’s primary, core oil‐ producing counties are those in the extreme west‐central and north‐western corners of the state.

Fountain Plaza, 100 S. Main St., Minot, ND

Social Trends The Williston Basin is located on the plains and at the borders of North Dakota, Montana, and Saskatchewan, Canada; it also includes part of the northwest corner of South Dakota. This area encompasses a large number of small and mid‐sized towns and cities. Historically, this area has experienced a declining population base primarily supported by agricultural enterprises, however, in recent years with increased economic activity due to the renewal of the regional oil and gas industries some of the communities here have actually seen net population gains. State and county population trends are as follows:

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2015 Burke County 9,064 9,511 9,998 7,653 6,621 5,886 4,739 3,822 3,002 2,242 1,968 2,308 Ward County 25,221 28,811 33,597 31,981 34,782 47,072 58,560 58,392 57,921 58,975 61,675 71,275 Williams County 14,234 17,980 19,553 16,315 16,442 22,051 19,301 22,237 21,129 19,761 22,398 35,294 McKenzie County 5,720 9,544 9,709 8,426 6,849 7,296 6,127 9,132 6,383 5,737 6,360 12,826 Mountrail County 8,491 12,140 13,544 10,482 9,418 10,077 8,437 7,679 7,021 6,631 7,673 10,331 Divide County 6,015 9,637 9,636 7,086 5,967 5,566 4,564 3,494 2,899 2,283 2,071 2,450 Richland Co (MT) 0 8,989 9,633 10,209 10,366 10,504 9,837 12,243 10,716 9,667 9,746 11,960 Montana 376,053 548,889 537,606 559,456 591,024 674,767 694,409 786,690 799,065 902,195 989,415 1,032,949 North Dakota 577,056 646,872 680,845 641,935 619,636 632,446 617,761 652,717 638,800 642,200 672,591 756,927

Statewide Population Trends 1,200,000

1,000,000

800,000

600,000

400,000

200,000

0 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2015

North Dakota Montana

Fountain Plaza, 100 S. Main St., Minot, ND

Countywide Population Trends 80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2015

Burke County Ward County Williams County McKenzie County Mountrail County Divide County Richland Co (MT)

Fountain Plaza, 100 S. Main St., Minot, ND

Ward County, along with the adjacent Williams, McKenzie, and Mountrail Counties, is one county experiencing recent growth within North Dakota. Eleven counties within the state experienced growth in the decade from 2005 to 2015; the rest of the state experienced a decline in overall population. Much of the growth in northwest North Dakota is attributable to the increased activity in oil and gas exploration. Most of Ward County's population is centered on Minot, the county seat. The remaining population is spread over other much smaller communities and rural dwelling areas. Minot is centrally located in the northwest quadrant of North Dakota and is situated in the Souris River. It is the fourth largest city in North Dakota behind Fargo, Grand Forks, and Bismarck. Minot is a regional trade center for the area extending north into southwest Manitoba, southeast Saskatchewan, eastward into eastern Montana and south toward Bismarck. Minot was founded in 1886 and incorporated the following year. It was a typical western railroad boom town in its early years. In the 1950's Minot/Ward County experienced a large infusion of federal funding highlighted by construction of the Minot Air Force Base. Minot Air Base was originally an Air Defense Command Base that later became a Strategic Air Command Bomber and Minuteman Missile base. The base is located approximately eight miles north of the City and significantly affects the general demographic characteristics of the area. Minot is home to numerous local, regional, state and federal government offices. Trinity Health provides local and regional medical and health care. Trinity Health is a nonprofit, fully integrated healthcare system serving the region. Minot has three Trinity hospitals, 15 clinics, two nursing homes, and a regional eye care network. Trinity's primary hospital campus is accredited by the Joint Commission and serves as the region's only Level II Trauma Center. Hospital campuses include Minot Air Force Base Hospital, Trinity Hospital, and Trinity Hospital‐St. Joseph's. Nursing homes include Edgewood Vista, ManorCare Health Services, and Trinity Homes. Trinity Medical Group includes over 150 physicians who represent 40 primary and specialty care services. Trinity Health is staffed by approximately 2,400 health care professionals. Minot is also home to a higher education institution. Minot State University (MiSU) is a public four year university in the North Dakota University System (it is one of 11 institutions under the jurisdiction of the North Dakota State Board of Higher Education). It was founded in 1913. The University has seen expansion recently as student enrollments continue to grow. Current enrollment is 3,432 full and part time students. The university employs approximately 172 full and part time employees. The University offers both undergraduate and graduate programs along with pre‐professional programs.

Fountain Plaza, 100 S. Main St., Minot, ND

Minot is home to 12 elementary schools, three junior high schools, and four high schools. There are also three private parochial schools. Over recent years, people buying real estate in this area are influenced by the strong economy fueled by the oil and gas industry, high commodity prices, the air base, educational opportunities along with the small community atmosphere. With the technological advent of Internet technology, people can move here and still retain employment anywhere in the country. These influences affect not only residential property, but commercial property as well. However, as petroleum prices have declined and drilling activity has greatly contracted, demand for real estate will also likely contract. Minot International Airport is served by Delta, Allegiant and a number of other smaller carriers. United also provides services to the airport. Amtrak's Empire Builder line stops in Minot for a refueling and crew change at the Minot Amtrak station. Economic Circumstances The Williston Basin area has recently developed into a national hub of economic activity. Increases in oil and gas prices along with instability in the international supply chain greatly increased the desire to locate and utilize domestic resources. Also, given the agrarian attributes of the area, high commodity prices along with several years of good growing conditions have contributed to the economic activity of the area. However, recent volatility in commodities pricing on a world‐wide scale have begun to have a trickle‐down effect on the local economy. Drilling activity throughout the Bakken has all but stopped while major petroleum‐based employers have been instituting large layoffs. Several components comprise the defined subject neighborhood’s economic base. They include but are not limited to health care, government/military, energy, financial, engineering and technical services, agriculture, retail, and wholesale. Agriculture continues to play a role in the Ward County economy. According to the 2007 Agricultural Census there were 946 farms in the county occupying 1,066,242 acres of land. The 2012 Agricultural Census indicated 961 farms on 1,073,283 acres of land with the average size of farms decreasing slightly from 1,127 to 1,117 acres. The estimated market value of products sold from Ward County farms in 2012 was $274,458,000 which represented a 64% increase from five years earlier. Top crop and livestock items consisted of wheat, durum, lentils, forage and barley along with cattle and a small amount of horses and sheep. The following pages consist of a summary of the 2012 Agricultural Census findings and were obtained from the USDA website:

Fountain Plaza, 100 S. Main St., Minot, ND

Numerous banks, credit unions and savings & loan institutions provide financial support to new subdivisions, businesses and consumers. Most lenders offer both conventional and FHA‐VA financing on homes with competitive interest rates and terms. Commercial rates vary as do terms and conditions depending on the lender and borrower. However, numerous commercial loans are made for expanding and new business.

The preceding map is representative of county‐wide unemployment rates as of March 2016; figures are not seasonally adjusted. As indicated on the map, Ward County’s rate was 5.3% which represents an approximately 3% increase over the past six months and currently exceeds the statewide average. Over the past several years, the counties located in the core oil and gas producing counties have exhibited the lowest unemployment rates in North Dakota and in the United States. However, as oil prices are experiencing a rather sharp decline, anecdotal evidence suggests that unemployment rates will respond with upward pressure. The next map exhibits trends in initial unemployment claims based on over‐the‐year numeric changes. Over the past year, initial claims have increased by a total count of 47.

Fountain Plaza, 100 S. Main St., Minot, ND

Ward County unemployment rate is currently higher than the average of the entire state. Given the economic activity generated by the oil and gas industry in the western region of the state, these counties typically display lower rates of unemployment. However, with recent declines in oil prices due to decreased consumption/demand and increased output by OPEC countries along with a strengthening dollar, there is some concern that economic activity will slow even more in the area. This is difficult to predict and time will tell what, if any, effects will be noted. However, drilling activity has all but stopped and major petroleum‐based employers have been instituting numerous layoffs. The following Ward County Economic Profile was obtained from the North Dakota Workforce Intelligence Network. It provides a brief social and economic profile of each county contrasted with the state as a whole. The reader is then able to compare an individual county’s economic performance against the state:

Fountain Plaza, 100 S. Main St., Minot, ND

Extractive and service industries were the top employing industry in the area over the past several years and also posted the largest employment growth and was the fastest growing industry. It also posted the largest share of total wages. Construction and retail had the largest number of worksites. This correlation is likely due to the number of supportive industries for the oil and gas industries. The service industry encompasses a large percentage of this workforce. The Minot Area Development Corporation is based in Minot. Its purpose is to facilitate the retention, expansion, start‐up, and relocation of primary sector businesses in the Minot area in order to grow and diversify the region's economy. Minot Air Base is comprised of two units. The first is the host wing, the 5th Bomb Wing. The second is the 91st Missile Wing. With a related population of 12,800, the Minot Air Base has provided additional stimulation to the area economy since it opened in 1957. The cumulative effects of falling oil prices on the local and regional economies have begun to show. Recent news articles have predicted as many as 20,000 layoffs could occur in the Bakken by late‐2015. Schlumberger has laid off approximately 9,000 employees recently. Anecdotal evidence suggests approximately 3,500 layoffs have occurred in the Williston area. Numerous companies that have worked within the Bakken region have also filed for bankruptcy protection. These include Samson Resources (September 2015), Quicksilver Resources, Sabine Oil & Gas (July 2015), Hercules Offshore (August 2015), Cal Dive International (March 2015), Dune Energy (March 2015), BPZ Resources (March 2015), ERG Intermediate Holdings (April 2015), Saratoga Resources (June 2015), Milagro Oil & Gas (July 2015) and Miller Energy Resources (October 2015). Quantifying the effects of falling oil prices on real property values will take time. It will likely be necessary to experience an extended period of lower crude prices before the effects can be thoroughly quantified. The following graphs chart the numbers of active drilling rigs, Brent and WTI prices along with daily oil production in the Bakken Formation.

Fountain Plaza, 100 S. Main St., Minot, ND

Active Drilling Rigs (As of May 23, 2012‐2016) 250

211

200 185 189

150

100 82

50 25

0 2012 2013 2014 2015 2016

Fountain Plaza, 100 S. Main St., Minot, ND

Daily Production in BBLS/Daily 1,200,000

1,000,000

800,000

600,000

400,000

200,000

0 2012 2013 2014 2015 2016

BBLS/Daily

Crude Prices vs. Williams County Unemployment $120.00 5.0%

4.5% $100.00 4.0%

3.5% $80.00 3.0%

$60.00 2.5%

2.0% $40.00 1.5%

1.0% $20.00 0.5%

$0.00 0.0% 2012 2013 2014 2015 2016

WTI Brent UE

Fountain Plaza, 100 S. Main St., Minot, ND

Governmental Controls and Regulations Property taxes are assessed by individual counties to fund public schools and other public agencies. Montana has an income tax but no sales tax as of this date. Property taxes have been increasing steadily over the years. North Dakota does have a sales tax. The 2016 North Dakota sales tax rate is 5%. Cities and counties are allowed to charge additional sales taxes on top of the State rate which can bring the effective tax rate up as high as 8%. The counties and several of the municipalities have their own zoning requirements to regulate growth and development. There are numerous districts within the area. Districts are administered by a board of directors, or in some cases, by full time employees specializing in the field. Regulating growth and development to prevent inefficient use of open space is their primary concern. Environmental Conditions Minot and Ward County are located on the drift prairie of northwest/northcentral North Dakota. The Souris River flows through downtown Minot. Minot lies in a valley surrounded by plains approximately 150 feet higher. The area is ideally suited for production agriculture and potentially has a vast petroleum resource. Minot and the surrounding area experienced catastrophic flooding in the spring of 2011. Heavy snow‐loads in Canada and the surrounding area proved too much for the Souris River to handle. Much of central Minot experienced high levels of flooding. Final facts and figures regarding the flooding were summarized as follows: 2011 Flood by the Numbers

1,561.72 feet above sea level ‐ Crest of Mouse River on June 26, 2011.

26,000+ cfs ‐ Flow of water, measured in cubic feet per second that came through the gauges near Minot.

4,115 ‐ Homes flooded in Ward County.

11,000+ ‐ People evacuated from their homes.

30 miles ‐ Linear distance of flooding, as it spread across the Mouse River Valley.

11,456 acres ‐ Approximate amount of land in Ward County inundated with water, ranging from 2 to 15 feet deep.

4,800 ‐ Amount of structures in Ward County impacted by flood waters.

Fountain Plaza, 100 S. Main St., Minot, ND

$100 million+ ‐ Damage sustained to City of Minot infrastructure, as a result of the flood. The cleanup and recovery effort added to the robust economic activity experienced in the area over that time period. Conclusion The area is one that has experienced rapid growth and very strong economic circumstances in the previous several years. With the current decline in oil prices along with increased output by OPEC countries, a period of low prices is expected. It is difficult to quantify the effects this will have on the overall local economy. Ultimately, time will tell what impacts will be felt on the local and regional levels.

Fountain Plaza, 100 S. Main St., Minot, ND

General Market Area & Neighborhood Maps

Fountain Plaza, 100 S. Main St., Minot, ND

Subject Property Legal Description Lots 1 and 2, Block 6, Original Townsite of the City of Minot, Ward County, North Dakota.

The preceding legal description was obtained from the most recently recorded quit claim deed on file at the office of the Ward County Recorder.

Physical Address(es) 100 S. Main St. Minot, ND 58701

Taxes/Assessments APN 2015 Land 2015 Building 2015 Full Value 2014 Tax Specials MI24.238.060.0020 $49,000 $601,000 $650,000 $7,705.99 $0

As of the effective date, the subject property taxes appear current and paid in full.

Recorded Parcel ID MI24.238.060.0020 Ownership/History Owner Albertson Rental BB, LLC Grantor Dan & Tanya Albertson Document 2954002 Recording Date 02/20/2013 Consideration N/D Source Ward County Recorder’s Office

No other ownership changes were noted to have occurred within the previous three years. The owner originally acquired the subject property in March 2008 from Ellison Realty Company for $150,000 per MLS #20080119.

Flood Data Flood Panel 38101C0781D Date 01/19/2000 Flood Zone X FEMA Special Flood Hazard No Definition Areas determined to be outside the 500 year floodplain determined to be outside the 1% and 0.2% annual chance floodplain.

It is difficult to ascertain whether the topography and physical features surrounding the subject suggest readily observable flood hazards. I did not perform an independent flood or environmental

Fountain Plaza, 100 S. Main St., Minot, ND

survey in conjunction with this appraisal report. Flood determination was based solely on Interflood’s address placement of the subject.

Census Tract 385367‐0101.00

Zoning

According to a zoning map obtained from the City of Minot GIS website, the subject appears located in the C‐2 zoning district. Chapter 11 of the City of Minot zoning ordinance defines the C‐2 district as the general commercial district. According to the zoning regulations, the purpose of the C2 District is to provide an area of

Fountain Plaza, 100 S. Main St., Minot, ND

service facilities to the motoring public. It is because of the unique character and its dependence upon transient trade and traffic as well as the greater than normal adverse effects created by the uses within the district, that the location of such activities are critical6.

Section 11‐4 lists conditional uses allowed in the C2 District. Professional office are an allowable use. It was specifically assumed that the subject owner/developer has obtained such conditional use permits as to allow the legal development of the subject in its as‐is state with the self‐storage units in the basement.

Easements & A full title search was not performed or commissioned in regard to Restrictions this appraisal as it was beyond the scope of this assignment. No guarantees are made or implied regarding any potential easements encumbering the subject.

Contracts & Listings To the best of my knowledge, the subject is not under contract for sale nor is it actively listed. I performed searches on the Minot MLS system and LoopNet regarding potential listings of the subject property.

I did locate a prior listing of the subject property on the Minot MLS system. MLS #20120917 indicated that the subject was listed on May 21, 2012 for $1,350,000. The listing subsequently expired on July 4, 2015 at a price of $1,275,000 after 1,139 days market exposure.

Leases The ground floor of the subject consists of two demised tenant spaces. The east side was unoccupied as of the effective date and the owner was reportedly contemplating moving his business into the space. The west side was occupied and the lease was summarized below:

SUBJECT LEASE SUMMARY

SPACE 9 & 11 1st Ave SW LESSOR Albertson Rentals BB LESSEE North Dakota Commission on Legal Consel for Indigents

BEG DATE END DATE TERM $/MONTH $/YEAR SIZE $/SF/YEAR 7/1/2015 6/30/2017 24 $4,400 $52,800 3,672 $14.38

LANDLORD Water, sewer, electricity,heat, A/C, trash, taxes, insurance EXPENSES

6 (Minot City Planning and Municipal Zoning Code)

Fountain Plaza, 100 S. Main St., Minot, ND

The subject basement has been converted into self‐storage units. Per the subject owner, there are 20 ten‐by‐ten spaces and 10 ten‐by‐ fourteen spaces. I was not provided with a current rent roll for the self‐storage spaces.

Surrounding Uses

North General commercial East General commercial South General commercial West General commercial

Environmental During my subject observation, I did not note items that could be cause for potential environmental concern. However, as indicated elsewhere in this appraisal report, I am not an expert in environmental contamination or associated matters. The client is advised to retain the services of an expert in this field if they deem necessary.

Again, it is very important for the reader, client, and intended user to understand that I am not an expert in environmental matters and am merely reporting what was observed on my subject visit. The client is highly recommended to obtain the services of an expert in environmental contamination if they deem it necessary. I make no judgments regarding surface and subsurface soil or groundwater conditions in regard to potential contamination.

Environmental contamination can adversely impact real property values and marketability. Should it be found that the subject is

Fountain Plaza, 100 S. Main St., Minot, ND

contaminated to the point that value is affected, I reserve the right to amend the report accordingly.

Fountain Plaza, 100 S. Main St., Minot, ND

Subject Site Number of Parcels 1

Site Area

Parcel Acres Square Feet MI24.238.060.0020 0.16 7,000 The preceding subject site area was obtained from legal descriptions, a recorded plat map and the Ward County Assessor’s Office. The subject site consists of two adjacent city lots each measuring 25 feet wide by 140 feet deep. The two lots are treated as one single tax parcel.

Shape The subject site is rectangular being 50 feet by 140 feet.

Street Frontage The subject fronts South Main Street for approximately 50 feet and 1st Avenue Southwest for 140 feet.

Ingress/Egress Given the subject’s building footprint coverage, no vehicular site access is available.

Topography The subject site slopes slightly to the northeast.

Soils A soils analysis for the site has not been provided. It is a specific assumption that the subject site has adequate soils conditions to support its highest and best use.

Fountain Plaza, 100 S. Main St., Minot, ND

Visibility The subject’s corner location provides good visibility from South Main Street and 1st Avenue Southwest.

Water/Sewer Water City of Minot municipal system. Sewer City of Minot municipal system.

Utilities Electricity Overhead lines. Natural Gas Underground. Telephone/Data Underground.

Traffic Count I was not able to locate any recent traffic count information immediately adjacent to the subject.

Excess/Surplus The subject was reviewed for excess and/or surplus lands. I reviewed Land similarly improved properties in the immediate subject vicinity. Site coverage percentages did not appear to suggest the presence of excess or surplus lands.

Locational The subject is located in downtown Minot. It is surrounded by many Influences similarly improved properties.

Hazards & The subject’s location in downtown Minot potentially exposes it to Nuisances higher traffic loads and vehicular congestion particularly during certain hours of the day. However, this would not be considered an atypical hazard or nuisance.

Summary The subject site is located in downtown Minot at the southwest intersection of South Main Street and 1st Avenue Northwest. It is slightly sloping, however, no topographical impediments to development were noted. The site appears typical of those located in downtown Minot.

Fountain Plaza, 100 S. Main St., Minot, ND

Subject Improvements Property Type Mixed‐use; professional offices and self‐storage units

Number of Buildings 1

Number of Units 2 on ground floor; 30 self‐storage units in basement.

Number of Stories Single story over a full basement

Gross Building Area Main Ground Level Finished 6,885 Sq. Ft. 47.95% Second Floor Storage 545 Sq. Ft. 3.79% Basement 6,930 Sq. Ft. 48.26% Total GBA 14,360 Sq. Ft. 100.00%

Gross building area calculations are inclusive of the entire building structure and were obtained from physical measurements taken with a mechanical measuring wheel.

The main ground level is finished with two separate tenant spaces. The space fronting South Main Street is currently unoccupied and consists of professional offices. The space at the rear of the building accessed from 1st Avenue Southwest is occupied and also consists of professional offices

Tenant Space (Ground Floor) Square Footage % of Level 1 1 (vacant) 3,113 Sq. Ft. 45.21% 2 (occupied) 3,772 Sq. Ft. 54.79% Total GBA (Ground Floor) 6,885 Sq. Ft. 100.00%

The lower basement level was converted into 30 self‐storage units. A conveyor system facilitates in moving storage items between floors. Self‐storage breakdown is below:

SELF‐STORAGE BREAKDOWN

TYPE SIZE UNITS TOTAL 10 x 10 100 20 2,000 10 x 14 140 10 1,400

TOTAL 30 3,400

Fountain Plaza, 100 S. Main St., Minot, ND

Net Rentable/Ground Tenant Space (Ground Floor) Square Footage % Total Floor 1 (vacant) 2,853 Sq. Ft. 43.72% 2 (occupied) 3,672 Sq. Ft. 56.28% Total 6,525 Sq. Ft. 100.00%

Construction Type Class C

Components Foundation The subject building has been constructed on a full concrete basement foundation. It was specifically assumed the foundation was constructed with adequate and necessary footings, rebarring and structural support. Reportedly, the building was constructed to support two additional floors above the existing ground floor. Wall/Roof The subject exterior walls consist of masonry construction. Wall structures were reportedly built to support two additional floors. The roof is a flat structural system. Wall Cover Exterior walls are sheathed in brick and mortar along with stucco. Exterior wall cover appears in good condition. Roof Cover The roof consists of a 50‐year membrane cover. Floor The floors are covered with high‐traffic carpeting Covering and linoleum products on the main level. The basement has exposed concrete flooring. Interior Walls The main level office space has drywall finished walls. Ceilings The main level office space ceilings have been covered with removable grid tiles. Mezzanine None noted. HVAC The building is heated and cooled with central forced air systems. Air conditioner units and air handlers are located on the roof. Electrical Electrical service is assumed adequate for the building’s current operation. Plumbing Plumbing service was assumed adequate for the building’s current operation. Restrooms Restrooms were presumed adequate for the building’s current operation. Security The building is protected and monitored with a centralized security system.

Fountain Plaza, 100 S. Main St., Minot, ND

Elevator The building does not have a passenger elevator. A conveyor system has been installed to facilitate moving storage items into the basement.

Condition Average‐Good

Age Actual Age 53 years Effective Age 15‐20 years Remaining Economic Life 50‐55 years Based on depreciation and economic life comparables, I estimated a total economic life of approximately 70 years.

Parking/Yard Area No onsite parking is available. Street parking is available near and adjacent to the subject.

Site Coverage Site Coverage 99.00% Land to Building Ratio 1.01 : 1

Fountain Plaza, 100 S. Main St., Minot, ND

Flood Map

Fountain Plaza, 100 S. Main St., Minot, ND

Plat Map

Fountain Plaza, 100 S. Main St., Minot, ND

Building Measurement

Fountain Plaza, 100 S. Main St., Minot, ND

Subject Photos

Looking across South Main at subject. Front, Main Street elevation of subject.

Rear of subject from adjacent alley. Basement self‐storage units.

Basement mechanical area. Conveyor system for basement self‐storage units.

Photos taken by Christopher C. Seeve on 05/19/2016.

Fountain Plaza, 100 S. Main St., Minot, ND

Subject Photos

Unoccupied office suite. Unoccupied office suite.

Unoccupied office suite. Occupied office suite.

Occupied office suite. Second floor storage area.

Photos taken by Christopher C. Seeve on 05/19/2016.

Fountain Plaza, 100 S. Main St., Minot, ND

SECTION IV – Analysis of Data & Conclusions

Fountain Plaza, 100 S. Main St., Minot, ND

Highest & Best Use Highest and best use is the reasonably probable and legal use of vacant land or an improved property which is physically possible, appropriately supported, financially feasible and that results in the highest value. The four criteria that highest and best use must meet are legal permissibility, physical possibility, financial feasibility and maximum productivity.7 The four tests can be further analyzed: 1. Physical Possibility. To what use(s) is the site physically adaptable? 2. Legal Permissibility. What uses are permitted by zoning and other legal restrictions or governances? 3. Financial Feasibility. Which physically possible and legally permissible use will produce a net return to the owner of the site? 4. Maximally Productive. Among the feasible uses, which use will produce the highest net return, i.e., the highest present worth?

In theory, highest and best use applies to the land element of the property. Improvement value is contributory; the value they add to the land. An improved property will continue in its current use until the land as though vacant, minus demolition and disposal costs, is more valuable than the property as improved. The subject has been tested using the four criteria of highest and best use; legally permissible use, physically possible use, feasible use and maximally productive use. The test was applied to the land, as though vacant, and the property as improved. In the analysis of highest and best use of land, as though vacant, a series of questions are first posed. The answers may lead to conclusions regarding highest and best use of the property, as though vacant, and finally, highest and best use as improved. The first question is as follows:

 Should the land be developed or left vacant?

If it is found that the land should be developed and not left vacant, a second question is posed:

 What kind of improvements should be constructed?

It is now possible to analyze the highest and best use of the property as improved. The third question posed is:

 Should the existing improvements on the property be maintained in their current state or should they be altered in some manner to make them more valuable?

7 (Dictionary of Real Estate Appraisal, 4th Edition, 2002)

Fountain Plaza, 100 S. Main St., Minot, ND

Theoretically, as long as the value of a property, as improved, exceed the value of the underlying land, as though vacant, the highest and best use remains as improved. However, in cases of redevelopment, an investor or developer may purchase an improved property and remove the improvements even if they contribute to the overall value of the property. In that case, the developer is interested in the underlying land and does not want to wait for the value of the improvements to reach zero. Highest and best use, as though vacant, and as improved will now be discussed.

Fountain Plaza, 100 S. Main St., Minot, ND

Highest & Best Use, As Though Vacant

Physical Possibility The subject site consists of a corner parcel in downtown Minot. The subject is slightly sloping and does not appear located in a designated flood hazard area.

Neither a geotechnical report nor a Phase I environmental audit were provided. I have assumed the soils are stable and the site is clean.

Legal Permissibility The subject is located within the C‐2 general commercial zoning district. Any use that would fall within the zoning and restrictive covenant guidelines would likely be legally permissible. This zoning district tends to suggest general commercial type uses.

Financial Feasibility As noted in the General Market Area section, oil prices have plunged and, at the time of this writing, are at multi‐year lows. Given the large portion of the local economy that is dependent on the extractive industries, it seems reasonable to conclude that at this time real estate development will likely slow.

Maximally Productive Considering prevailing economic conditions at this time, it would appear that the maximally productive use of the subject site, as though vacant, would be to hold for future development. At least in the short term, a better picture of what will transpire in the local economy due to oil price declines should form.

Fountain Plaza, 100 S. Main St., Minot, ND

Highest & Best Use, As Improved

Physical Possibility The subject consists of a mixed‐use, professional office/self‐storage facility in downtown Minot. Given the subject’s physical characteristics and location, a number of uses would be physically possible. The ground floor could be converted into other uses such as retail, or, other tenant configurations. Reportedly, the building was originally constructed with the capacity to add two additional floors, however, I could not confirm. It would also be physically possible to continue the subject’s current use.

Legal Permissibility The subject is located within the C‐2 zoning district. In this case, the subject’s current use is likely allowable.

Financial Feasibility The current use is financially feasible if it creates a positive return on invested equity. Retaining the subject’s multi‐tenant layout is likely the most financially feasible use once stabilized occupancy has been achieved.

Maximally Productive The subject’s present use appears physically possible and legally permissible. It also appears to be a financially feasible use, assuming stabilized occupancy. The current use is maximally productive if demand for a product like the subject would be assumed to exist into the foreseeable future.

Summary Evidence appears to suggest that the continued current use of the subject, at stabilized occupancy, is its highest and best use.

Fountain Plaza, 100 S. Main St., Minot, ND

The Valuation Process The appraisal process is an orderly procedure of gathering information from the market which will lead to an opinion of value. There are three recognized approaches to forming an opinion of market value which can be applied when appraising real property. These approaches are:

 Cost Approach  Sales Comparison Approach  Income Capitalization Approach

Each approach to value is included or omitted based on its applicability to the specific property and/or property type being valued along with the quantity and quality of available information. Cost Approach The cost approach is based on the principles of substitution, contribution and supply and demand. The cost approach estimates the replacement new or reproduction costs of improvements, estimates and deducts all forms of depreciation (physical, functional and economic obsolescence) and adds the opinion of site value as derived from market data.

Sales Comparison Approach The sales comparison approach analyzes various units of comparison between the subject and other properties that have recently sold or are actively listed. These units of comparison are then applied to the subject and conclusions can be drawn about its value based on comparison to similar properties. The sales comparison approach is based primarily on four principles; supply and demand, substitution, balance and externalities.

Income Approach The income approach normally calculates income and expenses associated with the subject property. The appraiser compares his or her findings about the subject with income and expenses of similar properties and draw conclusions about the value of the subject based on income it generates.

The basic tenant of the income capitalization approach is the conversion of future benefits into a present value by capitalization of income. This conversion is accomplished by use of capitalization and yield rates.

In the case of the subject, only the income approach was performed. The subject is an older property located in downtown Minot. Given the subject’s downtown location, reliably

Fountain Plaza, 100 S. Main St., Minot, ND

estimating its underlying land value would be difficult as the general neighborhood is mature and offers few if any recent land sales. Also, the structure is older, but has been extensively renovated. These factors would likely reduce the reliability of the cost approach. I also felt the sales comparison approach would be of little applicability. The subject is a unique downtown property in that it consists of a street‐level office component along with a self‐ storage facility in the basement. I was not able to locate comparable sales of such mixed‐use properties as the subject. The income approach was most applicable. From the standpoint of market participants, this approach would likely be given most weight. It also best reflects the subject’s mixed‐use professional office/self‐storage profile.

Fountain Plaza, 100 S. Main St., Minot, ND

Income Approach The income approach is a set of procedures through which an appraiser derives a value indication for an income‐producing property by converting its anticipated benefits (cash flows and reversion) into property value. This conversion can be accomplished in two ways. One year’s income expectancy can be capitalized at a market‐derived capitalization rate or at a capitalization rate that reflects a specified income pattern, return on investment, and a change in value of the investment. Alternatively, the annual cash flows for the holding period and the reversion can be discounted at a specified yield rate.8 Direct Capitalization  Develop the subject’s potential gross income (PGI) through Steps analysis of the subject’s actual historic income and/or an analysis of competitive current market income rates.  Estimate and deduct vacancy and collection losses to develop the Effective Gross Income (EGI).  Develop and subtract operating expenses to derive the Net Operating Income (IO).  Develop the appropriate capitalization rate (RO).  Divide the net operating income by the capitalization rate for an estimate of market value through the income approach.

Yield Capitalization  Select an appropriate projection period. Steps  Forecast all future cash flows or cash flow patterns (including reversion).  Choose an appropriate Yield Rate (YO).  Convert future benefits into present value by discounting each annual future benefit or by developing an overall rate that reflects the income pattern, value change and yield rate using one of the various yield capitalization formulas available.

Income Capitalization Methodology Direct capitalization was used to convert an estimate of net operating income generated through potential leasing of the entire building based on market derived rates. Research indicated that local investors and market participants typically rely on a direct capitalization method or variation thereof such as analyzing income multipliers when basing their decisions. It was necessary to estimate an appropriate market rental rate for the subject. In order to form an opinion of market rents for the subject, I located a number of comparable and competing rental properties. The office comparables were summarized below:

8 (Appraisal Institute, 2002)

Fountain Plaza, 100 S. Main St., Minot, ND

COMPARABLE EXTRACTED INDICATOR ANALYSIS

PROPERTY/TYPE GLA $/SF/YR EXPENSE BASIS/ITEMS

Subject Occupied Space 3,672 $14.38 Landlord responsible for all expenses 9 & 11 1st Ave SW Minot, ND

T & C Center 1,200 $15.00 Lessee pays base rate plus electricity 1015 S Broadway #37 Minot, ND

Y Commons Building 1,270 $21.00 Lessee pays base rate plus CAM 105 1st St SE #210 Minot, ND

Y Commons Building 1,940 $21.00 Lessee pays base rate plus CAM 105 1st St SE #220 Minot, ND

US Bank 6,528 $17.00 Landlord responsible for all expenses except janatorial. 17 1st Ave SW Minot, ND

Mean $17.68 Median $17.00

Based on the preceding rent comparables, a range of unadjusted market base rents of $14.38 to $21.00 was indicated. Lease areas ranged from 1,200to 6,528 square feet. I employed an adjustment grid to reflect differences between the subject and rent comparables. Discussion of the adjustments and the grid follow; the adjustments applied in the following grid will be reflective of the finished, owner‐occupied space: Transactional Adjustments Conditions of Lease Rent comparables were negotiated and/or listed in the open market; none require an adjustment.

Expense Basis Expense basis vary widely from property to property. In the case of the subject leased space, the landlord/owner is responsible for all expenses associated with the leased space. As no expense data was provided for the comparable rental properties, I was not able to make a quantitative adjustment. Qualitatively, in the regard of expense basis, I weighted the first, second and third comparable most heavily.

Concessions To the best of my knowledge, no adjustments were necessary.

Fountain Plaza, 100 S. Main St., Minot, ND

Market Conditions As market conditions change over periods of time, adjustments become necessary to reflect inflation or depreciation in prices. Each of the comparables were relatively recent requiring no adjustment.

Property Adjustments Location No adjustment was required for location.

Finish Quality In this case, I was not able to reliably reconcile an adjustment.

Condition No adjustment was required.

Building Area In this case, I was not able to quantify an adjustment for differing building area.

Once the adjustments were extracted and derived, they were summarized on an adjustment grid. I reconciled a market rental rate for the finished, owner‐occupied above grade square footage of $14.38 per square foot per year. This rate is reflective of the subject space that is currently leased by the State of North Dakota. I also located a number of self‐storage rent comparables that suggested annual rates of $5.36 to $8.20 per square foot per year. I reconciled an overall rate of $7.20 per square foot per year for the subject self‐storage units. Potential Gross Income POTENTIAL GROSS INCOME SPACE TYPE GLA RATE ANNUAL RENT 1 (vacant) Office 2,853 $14.38 $41,026 2 (occupied) Office 3,672 $14.38 $52,803 Basement Self‐Storage Self‐Storage 3,400 $7.20 $24,480

TOTAL 9,925 $11.92 $118,310

Vacancy & Based on research of the local and regional market for professional Collection Loss office space, a potential range of vacancy and collection loss of approximately 5% to 20% was indicated. Self‐storage rates tended to be lower with rates ranging from 2% to 7%. In this case, I reconciled at an estimated 15% to apply to the subject’s potential gross income estimate.

Expense Estimates Expenses were obtained from tax returns provided by the client. Expense items included property taxes, insurance, an allowance for management, utilities, repairs, maintenance and an allowance for replacement reserves.

Fountain Plaza, 100 S. Main St., Minot, ND

Therefore, expense items deducted to arrive at net operating income include:

NET OPERATING INCOME

% EGI TOTAL POTENTIAL GROSS INCOME $118,310 VACANCY & COLLECTION LOSS 15.0% ($17,747) EFFECTIVE GROSS INCOME $100,564

MANAGEMENT 3.0% ($3,017) PROPERTY TAXES ($7,706) INSURANCE ($3,017) UTILITIES ($12,902) REPAIRS ($3,601) MAINTENANCE ($3,893) REPLACEMENT RESERVES 2.5% ($2,514)

NET OPERATING INCOME $63,914

Capitalization Rate Development Several methods can be used to develop a capitalization rate. The capitalization rate is the factor that converts the stabilized net operating income into a present value. It is the ratio of net operating income to value or sale price. The formula for calculating a capitalization rate from a sale is:

IO ÷ VO = RO In this case, I relied upon review of regional sales of comparable properties to extract an overall rate. I felt there were enough sales to generate a reliable capitalization rate estimate.

Market Extraction Property IO VO RO 2304 11th Ave W, Williston $39,997 $587,500 6.81% 2016 Grand Ave, Billings $108,316 $1,680,000 6.45% 500 20th Ave SW, Minot $43,913 $637,500 6.89% 720 SW Western, Minot $81,739 $961,600 8.50% 325 1st Ave S, Sioux Falls $1,166,192 $15,500,000 7.52%

Fountain Plaza, 100 S. Main St., Minot, ND

Band of Investment

DCR Analysis

Investor Survey I reviewed the PwC Real Estate Investor Survey for the first quarter of 2016. Overall capitalization rates ranged from 3.50% to 9.00% with an average of 6.07% which indicated a decrease of 4 basis points from the last quarter 2015.

The sales indicated overall capitalization rates ranging from 6.45% to 8.50%. The band of investment and DCR analysis indicated overall rates of 7.53% and 6.79% respectively. The investor survey suggested an average overall rate of 6.07%. Given current market conditions, I felt it prudent to reconcile toward the higher end of the overall range at 8.00% to 8.50%. Based on the estimated potential net operating income of $63,914 and a capitalization rate ranging from 8.00% to 8.50% an opinion of market value by the income approach was derived as follows:

IO RO VO VO / Sq. Ft. GBA $63,914 8.00% $798,925 $55.64 $63,914 8.50% $751,929 $52.36 Rounded 8.25% $775,000 $53.97

In this case, I reconciled a market value opinion of $775,000 by the income approach. The reconciled value opinion of the subject by the income approach was summarized on the following table and is subject to the general assumptions and limiting conditions contained herein: MARKET VALUE OPINION(S) INCOME APPROACH Appraisal Premise Interest Appraised Date of Value Value Opinion As‐Is, Current Leased Fee May 19, 2016 $775,000 Data Compiled by Christopher C. Seeve

Fountain Plaza, 100 S. Main St., Minot, ND

Reconciliation After observing the subject property, gathering pertinent data, and performing the necessary analysis, an opinion of market value was formed. The value opinion formed in the income approach was: MARKET VALUE OPINION(S) INCOME APPROACH Appraisal Premise Interest Appraised Date of Value Value Opinion As‐Is, Current Leased Fee May 19, 2016 $775,000 Data Compiled by Christopher C. Seeve

Final reconciliation analyzes each approach to determine its strengths and weaknesses. A final value opinion is formed that is supported by the approaches. Final reconciliation reviews each approach by the appropriateness of each approach, the accuracy of data for each approach, the quantity of data for each approach and the quality of data for each approach. In this case, only the income approach was performed. Given the subject property type and occupancy profile, I felt this approach was the most applicable. Market participants would give this approach most weight when making decisions regarding the subject. I felt the cost and sales comparison approaches were less applicable. I was not able to locate any mixed‐use sales with a self‐storage component similar to the subject. I also felt the cost approach lacked applicability. The subject is located downtown in a very mature neighborhood. Forming an opinion of market value of the subject site with a high degree of reliability would be rather difficult. Also, the building is older, but has been renovated. Reliably estimating depreciation would be difficult at best. Reconciliation Once the analysis was complete, an opinion of market value of the subject’s leased fee interest was reconciled subject to the general assumptions and limiting conditions found herein. MARKET VALUE OPINION(S) Appraisal Premise Interest Appraised Date of Value Value Opinion As‐Is, Current Fee Simple May 19, 2016 $775,000 Data Compiled by Christopher C. Seeve

Fountain Plaza, 100 S. Main St., Minot, ND

Exposure Time & Marketing Period A distinction must be drawn between exposure time and marketing period. First, the definitions of each were reviewed. According to the Dictionary of Real Estate Appraisal (4th Edition, Appraisal Institute, Chicago, 2002) page 105 exposure time can be defined as: Exposure Time – 1. The time a property remains on the market.

2. The estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal; a retrospective estimate based on an analysis of past events assuming a competitive and open market. Exposure time is always presumed to occur prior to the effective date of the appraisal. The overall concept of reasonable exposure encompasses not only adequate, sufficient and reasonable time but also adequate, sufficient and reasonable effort. Exposure time is different for various types of real estate and value ranges and under various market conditions. (Appraisal Standards Board of The Appraisal Foundation, Statement on Appraisal Standards No. 6, “Reasonable Exposure Time in Real Property and Personal Property Market Value Opinions”)

Market value estimates imply that an adequate marketing effort and reasonable time for exposure occurred prior to the effective date of the appraisal. In the case of disposition value, the time frame allowed for marketing the property rights is somewhat limited, but the marketing effort is orderly and adequate. With marketing the property rights is so severely limited that an adequate marketing program cannot be implemented. (The Report of the Appraisal Institute Special Task Force on Value Definitions qualifies exposure time in terms of the three above‐mentioned values.)9

According to the Dictionary of Real Estate Appraisal (4th Edition, Appraisal Institute, Chicago, 2002) page 175 marketing time can be defined as: Marketing Time – 1. The time it takes an interest in real property to sell on the market subsequent to the date of an appraisal. 2. Reasonable marketing time is an estimate of the amount of time it might take to sell an interest in real property at its estimated market value during the period

9 (Appraisal Institute, 2002)

Fountain Plaza, 100 S. Main St., Minot, ND

immediately after the effective date of the appraisal; the anticipated time required to expose the property to a pool of prospective purchasers and to allow appropriate time for negotiation, the exercise of due diligence, and the consummation of a sale at a price supportable by concurrent market conditions.

3. Marketing time differs from exposure time, which is always presumed to precede the effective date of the appraisal. (Advisory Opinion 7 of the Appraisal Standards Board of The Appraisal Foundation and Statement on Appraisal Standards No. 6, “Reasonable Exposure Time in Real Property and Personal Property Market Value Opinions” address the determination of reasonable exposure and marketing time.)10

To provide support for my estimate of exposure time and marketing period, I reviewed recent sales of commercial office‐type properties within the general market area. I also interviewed local real estate market participants such as real estate brokers, property managers, property owners/investors, developers, and other real property appraisers.

EXPOSURE TIME & MARKETING PERIOD

PROPERTY DOM

1801 SW Burdick Expy Minot, ND 305

317 NW 16th St Minot, ND 123

400 S Broadway Minot, ND 145

1925 N Broadway Minot, ND 195

Mean 192 Median 170 At this time, it appears the majority of actual sales take approximately six to 12 months to sell. It is estimated that the normal exposure time and marketing period in the market area of the appraised property for a property such as the subject are approximately six to 12 months given existing market conditions as of the date of the appraisal.

10 (Appraisal Institute, 2002)

Fountain Plaza, 100 S. Main St., Minot, ND

Qualifications of the Appraiser

Fountain Plaza, 100 S. Main St., Minot, ND

Licenses

Fountain Plaza, 100 S. Main St., Minot, ND

SECTION V – Addenda

Fountain Plaza, 100 S. Main St., Minot, ND