AN APPRAISAL OF
INTEGRATED HEALTH SERVICES OF
ST. LOUIS AT GRAVOIS
ST. LOUIS, MISSOURI
FOR
INTEGRATED HEALTH SERVICES, INC.
AS OF MARCH 1, 1994
<PAGE> 2
(LOGO) VALUATION COUNSELORS GROUP, INC.
Princeton Pike Office Park, CN30
Princeton, New Jersey 08543-0030
(609) 896-0300
(Fax) 896-1849
March 30, 1994
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills Corporate Campus
Owings Mills, Maryland 21117
Attention: Mr. Daniel J. Booth
Director of Project Finance
Gentlemen:
In accordance with your request, we are pleased to submit this appraisal report
covering the value of the leased fee interest in the property comprising:
INTEGRATED HEALTH SERVICES OF ST. LOUIS AT GRAVOIS
10954 KENNERLY ROAD
ST. LOUIS, MISSOURI
The primary purpose of this valuation is to estimate the market value as of
March 1, 1994.
For the purpose of this report, "MARKET VALUE" is defined 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:
a) buyer and seller are typically motivated;
b) both parties are well informed or well advised and
each acting in what he considers his own best
interest;
c) a reasonable time is allowed for exposure in the open
market;
<PAGE> 3
Integrated Health Services, Inc.
March 30, 1994
Page 2
d) payment is made in terms of cash in U.S. dollars or
in terms of financial arrangements comparable
thereto; and
e) 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.
Integrated Health Services of St. Louis at Gravois is a 167 licensed bed
nursing and rehabilitation facility which operates with 148 beds. The facility
provides skilled nursing care and complex care including ventilator and wound
care medical specialty units. We have appraised the property on a leased fee
basis which is defined as follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with the
right of use and occupancy conveyed by lease to others; usually
consists of the right to receive rent and the right to repossession at
the termination of the lease.
We understand the facility is being acquired by Crescent Capital for $8,500,000
and leased to Integrated Health Services, Inc. at a base rent amount of
$922,250 in the first year with additional rent provisions in subsequent years
based upon various factors including increases in the consumer price index and
incremental net operating income. We have been informed the terms of the lease
is ten years with two option renewal periods of ten years.
This appraisal investigation included: a visit to the facility, discussions
with Management, a study of financial data, analysis of other data and research
of the market.
This appraisal was prepared in accordance with Uniform Standards of
Professional Appraisal Practice (USPAP) requirements.
Based upon the procedures outlined in this report, it is estimated that the
market value of the leased fee interest in the assets comprising Integrated
Health Services of St. Louis at Gravois, as of March 1, 1994, is reasonably
represented in the rounded amount as follows:
$8,500,000
==========
In arriving at the opinion expressed in this report, it is assumed that the
title to the property is free and clear and held under responsible ownership.
This report considers estimates, assumptions and other information developed
from research of the market, knowledge of the industry and discussions during
which Management and Management's representatives have provided us with certain
information. Management is assumed to be competent and professional healthcare
providers.
<PAGE> 4
Integrated Health Services, Inc.
March 30, 1994
Page 3
Some assumptions inevitably will not materialize and unanticipated events and
circumstances may occur; therefore, actual results achieved may vary from the
forecasts and the variations may be material. We have not, as part of this
valuation, performed an examination or review in the accounting sense of any of
the financial information used and, therefore, do not express an opinion or
other form of assurance with regard to the same. We have no responsibility to
update our report for events and circumstances occurring after the date of this
report. The information furnished to us by others is believed to be reliable,
but no responsibility for its accuracy is assumed.
This appraisal report consists of the following:
o This letter outlining the services performed;
o A Statement of Basic Assumptions and Limiting
Conditions;
o A Summary of Salient Facts and Conclusions;
o Subject Photographs;
o A Narrative Section detailing the appraisal of the
enterprise;
o Certification;
o An Addendum containing the business enterprise
schedules; and
o An Exhibit Section containing supplementary data.
Neither the whole, nor any part of this appraisal nor any reference thereto may
be included in any document, statement, appraisal or circular without
Valuation Counselors Group, Inc.'s prior written approval of the form and
context in which it appears.
<PAGE> 5
Integrated Health Services, Inc.
March 30, 1994
Page 4
A copy of this report and the working papers from which it was prepared will be
kept in our office files for eight years.
Respectfully submitted,
VALUATION COUNSELORS GROUP, INC.
/s/ G. Allen Houpt, III
-----------------------
G. Allen Houpt, III
Managing Director
<PAGE> 6
Integrated Health Services, Inc.
March 30, 1994
Page 5
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
Number
<S> <C>
Statement of Basic Assumptions and Limiting Conditions
Summary of Salient Facts and Conclusions
Subject Photographs
Introduction 1
Property Identification 1
Purpose of the Appraisal 1
Function of the Appraisal 1
Scope of the Appraisal 1
Asset Rights Appraised 2
Effective Date of the Appraisal 2
Definition of Value 2
Compliance 3
Competency 3
Sale History 4
Reasonable Exposure Time 4
History and Nature of the Business Environment 6
Regional and Market Analysis 14
Neighborhood and Site Description 20
Real Estate Tax and Assessment Analysis 22
Improvements Description 25
Highest and Best Use 28
Valuation Methodology 31
Income Approach 32
Cost Approach 40
Correlation of Value 58
Certification 59
ADDENDUM
Business Enterprise Schedules A- 1
EXHIBIT SECTION
Exhibit A - Legal Description E- 1
Exhibit B - Building Descriptions E- 2
Exhibit C - Land Improvements Description E-11
Exhibit D - Professional Qualifications E-12
</TABLE>
<PAGE> 7
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
The appraisers assume:
1. That the subject property is marketable and that the property is free
and clear of all liens, encumbrances, easements and restrictions
unless otherwise noted.
2. No liability for matters legal in nature.
3. That ownership and management will be in competent and responsible
hands. We have not been engaged to evaluate the effectiveness of
Management and we are not responsible for future marketing efforts and
other Management actions upon which actual results will depend.
4. That the property will not operate in violation of any applicable
government regulations, codes, ordinances or statutes. It is assumed
that all required licenses, certificates of occupancy, consents or
other legislative or administrative authorization from all local,
state or national governmental or private entities or organizations
have been or can be obtained or renewed.
5. Unless otherwise noted, that there will be no changes in reimbursement
or tax regulations.
6. That there are no concealed or dubious conditions of the subsoil or
subsurface waters including water table and floodplain. We further
assume that there are no regulations of any government entity to
control or restrict the use of the property unless specifically
referred to in the report.
7. That there are no significant changes in the supply and demand
patterns as indicated in this report. It is emphasized that this is
not a study of market feasibility, rather an appraisal of the property
under market conditions as observed as of the date of our market
research. These market conditions have been researched and are
believed to be correct; however, the appraisers assume no liability
should market conditions materially change because of unusual or
unforeseen circumstances.
The following limiting conditions are submitted with this report:
1. All of the facts, conclusions and observations contained herein are
consistent with information available as of the date of valuation.
Value is affected by economic conditions, local and national. We,
therefore, assume no liability for any unforeseen precipitous change
in the economy.
<PAGE> 8
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
2. The valuation applies only to the property described herein and was
prepared for the function stated in this report and should not be used
for any other purpose.
3. The appraisers have made no survey of the property. Any and all maps,
sketches and site plans are assumed to be correct, but no guarantee is
made as to their accuracy.
4. Information furnished by others is presumed to be reliable, and where
so specified in the report, has been verified; but no responsibility,
whether legal or otherwise, is assumed for its accuracy, and it cannot
be guaranteed as being certain.
5. The signatories herein shall not be required to give testimony or
attend court or be at any governmental hearing with reference to the
subject property unless prior arrangements have been made with
Valuation Counselors Group, Inc.
6. Disclosure of the contents of this report is governed by the bylaws
and regulations of professional appraisal organizations. Neither this
report nor any portions thereof shall be disseminated to the public
through public relations media, news media, advertising media, sales
media or any other public means of communication without the prior
written consent and approval of the appraisers and Valuation
Counselors Group, Inc.
7. No responsibility is taken for changes in market conditions after the
date of valuation, or for the inability of the property owner to find
a purchaser at the appraised value.
8. The legal description shown herein has been included for the sole
purpose of identifying the subject property. The figures have not
been verified by a licensed surveyor or legal counsel and should not
be used in any conveyance or any other legal document.
9. We were not aware of and the report does not take into consideration
the possibility of the existence of asbestos, PCB transformers, or
other toxic, hazardous, or contaminated substances and/or underground
storage tanks containing hazardous material. The report does not
consider the cost of encapsulation treatment or removal of such
material. If the client/property owner has a concern over the
existence of such conditions in the subject property, the appraisers
consider it imperative to retain the services of a qualified engineer
or contractor to determine the existence and extent of such hazardous
conditions. Such consultation should include the estimated cost
associated with any required treatment or removal of hazardous
material.
<PAGE> 9
STATEMENT OF BASIC ASSUMPTIONS AND LIMITING CONDITIONS
10. The report, the final estimate of value and the prospective financial
analyses included herein are intended for your information. Neither
this report nor its contents nor any reference to Valuation Counselors
Group, Inc. may be included or quoted in any offering circular,
registration statement, prospectus, sales brochure, appraisal, loan
document or other document without Valuation Counselors Group, Inc.'s
prior written permission.
11. The estimate of the market value stated herein is the value of the
subject property as a single entity. No consideration was given to a
bulk sale or group purchase of properties. In the event that this
appraisal is used as a basis to set a market price, no responsibility
is assumed for the seller's inability to obtain a tenant or purchaser
at the value reported herein.
12. It is assumed that there are no outstanding issues related to fraud
and abuse statutes under the Medicare/Medicaid program which would
impact value.
13. It is assumed that the business has an adequate insurance plan.
14. A copy of this report and the working papers from which it was
prepared will be kept in our office files for eight years.
<PAGE> 10
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
<TABLE>
<S> <C>
GENERAL DATA
Effective Date of Value March 1, 1994
Date of Inspection March 16, 1994
Property Identification Integrated Health Services of St. Louis at Gravois
Property Location 10954 Kennerly Road, St. Louis, St. Louis County, Missouri
Assets Appraised Tangible and Intangible Assets
Interest Appraised Leased Fee Estate
Number of Licensed Beds 167
Number of Operating Beds 148
Land Size 6.816 Acres
Improvement Description Two total story plus basement, Class C, masonry and steel framed nursing home
consisting of 49,719 gross square feet, built in 1966, 1975 and 1987 with
renovations in 1993/1994. There are also two residences located to the east of
the nursing home.
INDICATIONS OF MARKET VALUE
Income Approach $8,500,000
Market Approach N/A
Cost Approach $7,600,000
Final Estimate of Market Value $8,500,000
REASONABLE EXPOSURE TIME Twelve Months
</TABLE>
<PAGE> 11
SUBJECT PHOTOGRAPHS
(Photo)
NORTH (FRONT) ELEVATION LOOKING SOUTHEAST FROM
ACROSS KENNERLY ROAD
<PAGE> 12
SUBJECT PHOTOGRAPHS
(Photo)
EAST ELEVATION LOOKING WEST AT WING FROM
INTEGRATED HEALTH SERVICES OF
ST. LOUIS AT GRAVOIS
<PAGE> 13
SUBJECT PHOTOGRAPHS
(Photo)
REAR ELEVATION OF
10910 KENNERLY ROAD FROM NUMBER 7 KENNERLY MANOR ROAD
<PAGE> 14
SUBJECT PHOTOGRAPHS
(Photo)
FRONT ELEVATION OF
NUMBER 1 KENNERLY MANOR ROAD WHICH IS
SCHEDULED TO BE TORN DOWN
<PAGE> 15
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property, known as Integrated Health Services of St. Louis at
Gravois, consists of a 167 licensed bed nursing and rehabilitation facility
located at 10954 Kennerly Road, St. Louis, St. Louis County, Missouri. For
title reference and legal description, see the Exhibit Section. The
improvements consist of a 49,719 square foot building located on a 6.816 acre
site. The improvements also include two residential structures.
PURPOSE OF THE APPRAISAL
The purpose of the appraisal is to estimate the market value of the leased fee
estate as of the date specified within this report.
FUNCTION OF THE APPRAISAL
This report is to be used in connection with financing.
SCOPE OF THE APPRAISAL
This appraisal engagement has been conducted using applicable standard
appraisal techniques and in conformity with the Uniform Standards of Appraisal
Practice as set forth by the Appraisal Foundation. This appraisal entails the
collection, analysis and description of data pertaining to physical, legal and
economic conditions that affect the use and value of the subject property and
any other relevant data that would pertain to the appraisal of a healthcare
facility. In our valuation of the subject property, we have conducted the
Income and Cost Approaches to value. The Income Approach entailed a present
value analysis of lease income. The Cost Approach involved the estimation of
the depreciated replacement cost of the improvements based upon national cost
publications, which was added to the value of the land as if vacant. The
Market Approach has not been utilized due
1
<PAGE> 16
INTRODUCTION
to the dearth of transfers involving like interests in nursing facilities. We
believe the lease payments include a return on assets beyond the real property.
In accordance with Uniform Standards of Professional Appraisal Practice
(USPAP), an attempt must be made to estimate the value of the real property
from the value of other assets which may exist. However, an attempt to
ascertain the contribution of the various assets to income is nearly impossible
since the value of the tangible property is highly interrelated to the business
enterprise. Accordingly, as allowed by the departure provision of USPAP, we
have not provided an allocation of value between the real property and other
assets which may exist.
ASSET RIGHTS APPRAISED
The property rights appraised herein is the leased fee interest in the
property.
The interest is defined by the Appraisal Institute as follows:
LEASED FEE ESTATE: The ownership interest held by a landlord with the
right of use and occupancy conveyed by lease to others; usually consists
of the right to receive rent and the right to repossession at the
termination of the lease.
EFFECTIVE DATE OF THE APPRAISAL
The date of this appraisal is March 1, 1994.
DEFINITION OF VALUE
For the purpose of this report, market value is defined 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:
2
<PAGE> 17
INTRODUCTION
a) buyer and seller are typically motivated;
b) both parties are well informed or well advised and each acting in
what he considers his own best interest;
c) a reasonable time is allowed for exposure in the open market;
d) payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
e) 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.
COMPLIANCE
To the best of our knowledge, the analyses, opinions and conclusions that were
developed in this report, have been prepared in conformity with the Uniform
Standards of Professional Appraisal Practice (USPAP) of the Appraisal
Foundation and the Appraisal Institute.
COMPETENCY
From our understanding of the assignment to be performed, which we have
addressed in the Scope of this Appraisal, it is our opinion that we are fully
competent to perform this appraisal, due to the fact that:
a. The appraiser has full knowledge and experience in the nature of this
assignment.
b. All necessary and appropriate steps have been taken in order to
complete the assignment competently.
c. There is no lack of knowledge or experience that would prohibit this
assignment from being completed in a professional competent manner or
where an unbiased or misleading opinion of value would be rendered.
3
<PAGE> 18
INTRODUCTION
SALE HISTORY
The real estate currently has as its fee titled owner a partnership by the name
of Gravois Health Care, Inc., with the business enterprise doing business as
Integrated Health Services of St. Louis at Gravois. The operating company is
called Integrated Health Services, Inc. who has operated the facility since
1987.
According to public records, the subject property has not transferred in the
past five years. We understand the facility is under agreement for sale to
Crescent Capital for $8,500,000 and will be leased back to Integrated Health
Services, Inc.
REASONABLE EXPOSURE TIME
Reasonable Exposure Time, for the purpose of this report, is defined as: "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 upon an analysis of past events assuming a competitive and open
market."(1)
The concept of reasonable exposure encompasses not only adequate, sufficient
and reasonable time, but also adequate, sufficient and reasonable effort. This
concept also takes into consideration the type of property being appraised,
supply/demand conditions as of the effective date of the appraisal and the
analysis of historical sales information (sold after exposure and after
completion of negotiations between the seller and buyer). The reasonable
exposure period is, therefore, a function of price, time and use, not an
isolated estimate of time alone.
- ------------------------
1 Uniform Standards of Professional Appraisal Practice, 1993 Edition,
Washington, DC: The Appraisal Foundation, 1991, page 63 (SMT-6).
4
<PAGE> 19
INTRODUCTION
Reasonable exposure time is always presumed to precede the effective date of
the appraisal and differs for various types of real estate and under various
market conditions. Our estimate of exposure time is, therefore, based on the
subject property's determined Highest and Best Use as a healthcare facility in
a market where there is evidence of demand for such services.
The estimate of reasonable exposure time is not a predication, but rather, is
only a judgment made by the appraiser based on market conditions preceding the
effective date of the appraisal.
Based upon the determination of the subject's Highest and Best Use, with
consideration given to the overall condition and physical characteristics of
the subject, it is estimated that a reasonable exposure time preceding the
actual sale of the property and thus implicit in our value estimate is twelve
months.
5
<PAGE> 20
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
INDUSTRY OUTLOOK
The elderly care segment of the healthcare industry includes such providers as
nursing homes, personal care facilities and retirement centers. Demand for
elderly care services continues to increase with the growth of the elderly aged
segment of the United States population.
The sixty-five and over aged portion of the population is forecasted to grow an
additional 11% between 1990 and 1995. During 1990, the elderly aged sixty-five
years and over comprised 13.3% of the total United States population, as
compared to 11.3% as of the 1980 census report. Furthermore, the sixty-five
and over aged portion of the population is forecasted to increase to 14.1% of
total population by 1995.
United States population statistics and forecasts are provided on the following
table.
<TABLE>
<CAPTION>
FORECASTED UNITED STATES POPULATION
(THOUSANDS)
PERCENT CHANGE
1980 1990 1995 1980 TO 1990 1990 TO 1995
<S> <C> <C> <C> <C> <C>
Total U.S. 226,546 249,958 260,788 10.3% 4.3%
65 Years + 25,549 33,184 36,828 29.9% 11.0%
Percent of 11.3% 13.3% 14.1%
Total U.S.
75 Years + 9,969 14,257 16,935 43.0% 18.8%
Percent of 4.4% 5.7% 6.5%
Total U.S.
Source: Donnelley Demographics
</TABLE>
6
<PAGE> 21
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Another factor which has contributed to growth in demand for elderly care is
the increased life expectancy of the United States population.
As the average life expectancy for both men and women continues to increase, as
illustrated on the following table, the probability of an elderly person
requiring some form of healthcare service also increases.
<TABLE>
<CAPTION>
UNITED STATES LIFE EXPECTANCY
MEN WOMEN
AT BIRTH AT AGE 65 AT BIRTH AT AGE 65
<S> <C> <C> <C> <C>
1900 45.6 11.4 49.1 12.0
1910 50.2 11.4 53.7 12.1
1920 54.6 11.8 56.3 12.3
1930 58.0 11.4 61.4 12.9
1940 60.9 11.9 65.3 13.4
1950 65.3 12.8 70.9 15.1
1960 66.6 12.9 73.2 15.9
1970 67.1 13.1 74.8 17.1
1980 69.9 14.0 77.5 18.4
1990 72.3 15.1 79.9 19.9
2000E 73.4 15.7 81.1 20.8
Source: United States Bureau of the Census
</TABLE>
7
<PAGE> 22
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
While most major healthcare providers will benefit from the graying of America,
the nursing home industry will be the chief beneficiary. According to the
United States Commerce Department, long-term care spending for nursing home and
home care services during the 1988 to 2003 period is expected to increase twice
as quickly as the rate of growth of those receiving the services. Demand for
retirement centers and personal care facilities has also increased due to the
aforementioned demographic factors coupled with the fact that the majority of
young couples are employed full-time and unable to care for elderly parents at
home.
During the late 1980s, the growth of total facilities or number of units per
facility in the retirement industry increased significantly. In a survey
conducted by Contemporary Long-Term Care (CLTC), 72% of the fifty largest
retirement operators reported an increase in their total number of facilities
in 1988. The growth had slowed in 1989 with 55.6% of fifty-four operators
surveyed reporting increases in total facilities and number of units per
facility. The average number of units per facility increased from 84 to 122
units in the same survey.(2)
Growth in the retirement industry is forecasted to continue, but at a much
slower rate in regards to the growth exhibited during the 1980s.
United States healthcare costs have increased dramatically over the past few
years. From 1950 to 1990 healthcare expenditures have grown from 4.4% of gross
national product to 12.2% and are forecasted to grow to 16.4% by the year 2000.
Total federal government outlays for healthcare have increased from $24 per
capita in 1965 to $753 in 1990, with forecasts to increase to $1,810 by the
year 2000. Furthermore, health insurance premiums had increased 1,195% between
1970 and 1990.
- ---------------------------
(2) "Growth Slows But Continues", CLTC, June, 1990.
8
<PAGE> 23
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
The current fiscal policy of the United States Government has left many states
responsible for providing services the federal government previously provided.
This has led to a fiscal crisis in many states. The direct impact of these
changes is seen in reduced Medicaid budgets. The problem is compounded by the
fact that Medicaid has grown faster than any other major state expenditure.
Currently, Medicaid covers slightly less than 50% of total patient days in
nursing homes. In 1989 Medicaid accounted for an average of 14% of the state
budget, compared to 9% a decade ago. A recent survey by the National
Association of State Budget Office indicates that a total of twenty-eight
states face budget deficits and thirty-two states expect Medicaid spending to
exceed current forecasts.(3)
Escalating costs and the faltering reimbursement system has forced many states
to consider decertification and withdrawal from the program. In addition,
long-term care providers in several states have turned to the courts in an
effort to receive fair reimbursement from the Medicaid system. Consequently,
widespread healthcare cost containment may exhibit downward pressure on the
value of long-term care facilities with a high reliance on Medicaid patients.
Long-term care by source of funds from 1960 to 2000 is presented on the
following table.
- ------------------------
(3) Pallarito, Karen, "Budget Deficit Threats to Shut Out Medicaid
Benefits", Modern Healthcare, April 22, 1991.
9
<PAGE> 24
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
<TABLE>
<CAPTION>
Long-Term Care Expenditures Aggregate, Per Capita and Percent Distribution,
By Source of Funds: Selected Calendar Years 1960-2000
THIRD PARTIES
GOVERNMENT
DIRECT ALL PRIVATE OTHER STATE
PATIENT THIRD HEALTH PRIVATE AND
YEAR TOTAL PAYMENTS PARTIES INSURANCE FUNDS TOTAL FEDERAL LOCAL MEDICARE MEDICAID
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1960 100.0% 80.0% 20.0% --- 1.0% 1.0% 1.0% 1.0% --- ---
1970 100.0% 46.9% 51.0% 0.0% 4.1% 46.9% 28.6% 18.4% 4.1% 28.6%
1980 100.0% 43.5% 56.5% 1.0% 3.0% 52.5% 30.5% 22.0% 2.0% 48.5%
1985 100.0% 49.5% 51.6% 1.2% 2.1% 48.4% 28.4% 20.0% 1.8% 44.6%
1990 100.0% 45.0% 55.0% 1.1% 1.9% 52.2% 32.4% 19.8% 4.7% 45.4%
1995 100.0% 42.9% 57.0% 1.3% 1.9% 53.8% 33.1% 20.7% 3.7% 48.1%
2000 100.0% 45.0% 55.0% 1.7% 2.0% 51.4% 31.7% 19.6% 3.4% 45.8%
Note: 0.0 denotes values less than $50 million.
Source: Health Care Financing Administration. Office of the Actuary. Office of National Health Statistics. Baltimore,
Maryland: December, 1991.
Forecasts: Sonnefeld, Sally; Waldo, Daniel; Lemieux, Jeffrey; McKusick, David, Projections of National Health Expenditures
Through the Year 2000. Health Care Financing Review, Fall 1991, Vol. 13, No.1. Health Care Financing
Administration. Baltimore, Maryland: October, 1991.
</TABLE>
<PAGE> 25
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
As indicated, healthcare facilities currently derive most of their revenue from
government sources such as Medicaid, Medicare and the Veterans Administration
and from private sources such as personal funds and insurance programs. The
Medicaid program, which accounts for over 45% of the United States nursing home
revenues, typically pays rates significantly lower than Medicare or private
rates.
Medicaid covers the skilled or intermediate nursing home costs of qualified low
income residents for an unlimited period. Medicare only pays part of the
skilled nursing home costs incurred by qualified residents during a limited
period. In addition, nursing homes must meet strict federal guidelines in
order to qualify as Medicare certified for reimbursement. Therefore, only a
low percentage of nursing home patients qualify for Medicare coverage relative
to Medicaid. However, nursing homes that attract a higher percentage of
Medicare or private pay patients typically have higher operating margins than
similar facilities with a higher Medicaid census.
Competition is increasing among nursing homes for the more lucrative Medicare
and private pay patients. For example, many nursing homes have been developing
new services such as multiple levels of care, retirement facilities,
Alzheimer's and ventilator programs and other specialized services for niche
markets.
In addition, as acute care hospitals have experienced lower reimbursement
levels and declining occupancy rates, many have expanded into skilled nursing
services to boost revenues. According to a 1986 survey conducted by the
American Hospital Association, Chicago, approximately 19% of hospitals own or
operate skilled nursing facilities, 14% operate swing bed programs (use empty
acute care beds for long-term care) and 12% own or operate intermediate care
facilities. Competition from swing bed programs is likely to intensify as more
hospitals qualify for Medicare reimbursement under this program.
11
<PAGE> 26
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
Although nursing facilities benefit from increasing demand and changes in
Medicare reimbursement, widespread healthcare inflation concerns will keep
downward pressure on nursing home revenues. Federal, state and local
governments, along with insurance companies and other third party payers, are
continually seeking ways to contain healthcare expenditures. The focus on
acute care cost containment is spreading to all types of healthcare facilities.
CONCLUSION
Although the healthcare industry, as a whole, has experienced good growth over
the past several years, the news is not all good. An estimated thirty-eight
million Americans have no health insurance coverage at all with children
accounting for 36% of this total. Currently, as many as another fifty million
Americans are believed to have inadequate coverage. The percentage of total
healthcare costs of the United States gross national product (GNP) continually
increases every year and it is estimated that it will consume 28% of the GNP by
the year 2010.
There are currently a number of proposals before the Senate and House of
Representatives' committees to change the current structure of the healthcare
industry. Some of these proposals call for a form of national healthcare with
others leaning towards a heavily regulated form of a free-enterprise system.
All the proposals currently being debated have a great number of controversial
issues, which makes the passage of a new healthcare system very unlikely in the
foreseeable future. This plan and the speculation around it suggests the
possible merging of the Medicare and Medicaid programs, putting spending
capitalizations at an 8% level, making greater utilization of managed care and
managed competition and the creation of a National Health Care Board to oversee
the creation of Healthcare Insurance Purchasing Cooperatives (HIPCs). It is
generally felt by the lawmakers like Congressman Stark, that there will be no
interference or cutbacks on long-term care. It is
12
<PAGE> 27
HISTORY AND NATURE OF THE BUSINESS ENVIRONMENT
believed that the current problems will reach a severe crisis level before some
action by Congress will occur.
Escalating costly regulation and inadequate reimbursement from Medicaid and a
shortage of qualified nurses have squeezed industry profits. In an effort to
remain profitable, many providers have diversified into medical specialty
units, which tend to be more profitable than typical nursing care. In any
case, the elderly care segment of the healthcare industry continues to evolve
in response to profound social and economic influences.
13
<PAGE> 28
REGIONAL AND MARKET ANALYSIS
The subject property is located in St. Louis, St. Louis County, Missouri. The
St. Louis Consolidated Metropolitan Statistical Area (CMSA) is a bistate region
consisting of the city of St. Louis, the four Missouri counties of St. Louis,
St. Charles, Franklin and Jefferson and the five Illinois counties of Clinton,
Madison, Monroe, St. Clair and Jersey. The St. Louis Primary Metropolitan
Statistical Area (PMSA) consists of the city of St. Louis, the Missouri
counties of St. Louis, St. Charles, Franklin and Jefferson and the Illinois
county of Monroe.
The St. Louis metropolitan area is located near the geographic and population
centers of the United States. According to Sales and Marketing Management, the
St. Louis PMSA is ranked twentieth in population, twentieth in number of
households and twenty-second in effective buying income. In median household
effective buying income, the St. Louis PMSA is ranked seventy-third, ahead of
other areas such as Atlanta, Indianapolis, Oklahoma City and Tulsa.
The area's location in the center of the United States and on a waterway system
has made the region a leading industrial and transportation center. The port
of St. Louis is the busiest inland port in the nation, with the St. Louis
district constituting the second largest railroad terminal in the country,
surpassed only by Chicago. St. Louis is served by fourteen trunk-line
railroads and five switching lines, with Amtrak providing passenger service to
a variety of cities in the nation. Trucking service is available with more
than 200 common carrier truck lines and numerous local lines operating in the
area. Four interstate highways serve the area, with I-70 linking Washington,
D.C. with the west, I-55 running from Chicago to New Orleans, I-44 connecting
St. Louis with I-40 at Oklahoma City and I-64 traveling inland from Virginia
to St. Louis.
Airline service is available from Lambert-St. Louis International Airport.
Eleven scheduled passenger airlines, eight commuter lines, one all-cargo
airline, two air freight cartage agents and fourteen air freight forwarders all
operate from the airport.
14
<PAGE> 29
REGIONAL AND MARKET ANALYSIS
The St. Louis metropolitan area enjoys a well diversified economy being a major
financial, manufacturing, telecommunications and trade and distribution center
serving the central United States. The area's largest employer is the
McDonnell Douglas Corporation, with approximately 33,000 St. Louis area
employees. In addition to design and manufacturing facilities for military and
aerospace equipment, McDonnell Douglas is headquarters for McAuto, one of the
nation's largest data processing centers. The area is home to two of the
nation's largest shoe manufacturers, Interco, Inc. and Brown Group, Inc., and
to Southwestern Bell, a major telecommunications firm. Other firms
headquartered in St. Louis include Monsanto Company, Ralston Purina Company,
Pet Inc., Peabody Coal Company, Seven-Up, General Dynamics, Graybar Electric
and Emerson Electric. In addition to headquarters, research and chemical
manufacturing facilities, Monsanto Company also has silicon chip manufacturing
facilities in the metropolitan area.
According to Donnelley Demographics, St. Louis County had approximately 392,675
residents in 1991 as compared with the 1980 census level of 453,085. This
represents a 13.3% decrease from 1980 to 1991. Population is estimated to
decrease further to 364,925 in 1996. The portion of the county's residents
over age sixty-five was 18.8%, or 73,847 residents in 1991 as compared with
17.6%, or 79,920 residents in 1980. While the percentage of elderly residents
has increased, the number of elderly residents has decreased approximately 7.6%
from 1980 to 1991. The county's elderly population is expected to decrease to
67,180 in 1996 representing 18.4% of the estimated 1996 forecasted population.
15
<PAGE> 30
REGIONAL AND MARKET ANALYSIS
The following tables present selected demographic data for St. Louis County.
<TABLE>
<CAPTION>
TOTALS AND MEDIANS
1980 1991 % CHANGE 1996
CENSUS ESTIMATE 1980 TO 1991 FORECAST
<S> <C> <C> <C> <C>
Total Population 453,085 392,675 -13.3% 364,925
Total Households 178,048 166,041 -6.7% 160,042
Household Population 443,305 382,920 -13.6% 355,170
Average Household Size 2.5 2.3 -7.4% 2.2
Average Household Income $14,723 $27,332 85.6% $33,443
Median Household Income $11,713 $20,545 75.4% $24,641
Source: Donnelley Demographics
</TABLE>
16
<PAGE> 31
REGIONAL AND MARKET ANALYSIS
<TABLE>
<CAPTION>
POPULATION BY AGE
1980 CENSUS 1991 ESTIMATE 1996 FORECAST
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
AGE
<S> <C> <C> <C> <C> <C> <C>
Total 453,085 100.0% 392,675 100.0% 364,925 100.0%
0 - 4 32,361 7.1% 28,677 7.3% 26,007 7.1%
5 - 9 30,768 6.8% 27,173 6.9% 25,370 7.0%
10 - 14 32,148 7.1% 25,918 6.6% 24,574 6.7%
15 - 19 39,676 8.8% 25,989 6.6% 24,664 6.8%
20 - 24 44,626 9.8% 27,800 7.1% 24,612 6.7%
25 - 29 38,121 8.4% 31,169 7.9% 24,051 6.6%
30 - 34 26,653 5.9% 33,980 8.7% 27,162 7.4%
35 - 39 19,472 4.3% 30,414 7.7% 30,111 8.3%
40 - 44 17,875 3.9% 22,251 5.7% 27,515 7.5%
45 - 49 19,712 4.4% 16,562 4.2% 20,448 5.6%
50 - 54 23,227 5.1% 15,049 3.8% 15,306 4.2%
55 - 59 25,003 5.5% 16,048 4.1% 13,793 3.8%
60 - 64 23,523 5.2% 17,798 4.5% 14,132 3.9%
65 - 69 23,803 5.3% 18,904 4.8% 15,805 4.3%
70 - 74 21,474 4.7% 17,363 4.4% 15,971 4.4%
75 - 79 16,927 3.7% 15,479 3.9% 13,687 3.8%
80 - 84 10,207 2.3% 11,568 2.9% 10,669 2.9%
85 + 7,509 1.7% 10,533 2.7% 11,048 3.0%
< 15 95,277 21.0% 81,768 20.8% 75,951 20.8%
65 + 79,920 17.6% 73,847 18.8% 67,180 18.4%
75 + 34,643 7.6% 37,580 9.6% 35,404 9.7%
Median Age 31.7 34.4 36.0
Median Age Adult 46.1 43.1 43.9
Population
Source: Donnelley Demographics
</TABLE>
17
<PAGE> 32
REGIONAL AND MARKET ANALYSIS
An area map is provided on the following page.
18
<PAGE> 33
REGIONAL AND MARKET ANALYSIS
AREA MAP
(PHOTO - MAP)
19
<PAGE> 34
NEIGHBORHOOD AND SITE DESCRIPTION
NEIGHBORHOOD ANALYSIS
The subject property is situated in the southwest quadrant of Highway 20 and
I-270 on Kennerly Road approximately ten miles from downtown St. Louis. Access
to the property is very good. The major artery serving the area includes I-270
which intersects all the major highways and interstates serving St. Louis in
all directions.
The area consists mainly of single family homes with numerous new developments
of $200,000 homes to many over $400,000 in value, scattered older homes on
large tracts and small individual commercial tracts.
Adjoining the property to the north is vacant land, to the east and south
single family homes and to the west new single family homes and the Friendship
Village Retirement Center.
A location map is provided on the following page.
20
<PAGE> 35
NEIGHBORHOOD AND SITE DESCRIPTION
LOCATION MAP
(PHOTO - MAP)
21
<PAGE> 36
NEIGHBORHOOD AND SITE DESCRIPTION
ZONING
The subject land sites are all zoned R-1, Residence District, by the county of
St. Louis, Missouri. This zoning requires a minimum site size of one acre
except those tracts of record prior to April 8, 1965 containing less area.
This would apply to the one lot adjoining the west side of the nursing home
site on Gravois Road which contains 1.88 acres.
Use of the property for a nursing home requires a CUP, Conditional Use Permit
under the April 8, 1965 zoning regulations of St. Louis County. The nursing
home met these requirements under its grandfather clause for the original
home, which was subsequently razed in 1987 and the 1975 addition, which secured
a building permit prior to 1965. In 1972, the nursing home wanted to expand
and a conditional use permit was approved zoning 6.816 acres for nursing home
use. This includes the nursing home and the two residential homes: 7 Kennerly
Manor Drive and 10910 Kennerly Road. The conditional use permit requires all
improvements on the 6.816 acre site be used in conjunction with the nursing
home operations. A subdivision permit is required to separate the two
residential improved sites out of the CUP zoning. It is assumed that the
subdividing could be reasonably obtained upon appropriate application to the
St. Louis County Planning Commission.
REAL ESTATE TAX AND ASSESSMENT ANALYSIS
The subject property is assessed a total of $766,280, which is comprised of
$55,120 for the land and $711,160 for the improvements. The city and county
tax rate in 1993 is 5.475 (plus 1.700 surcharge on the nursing home property)
per $100 of assessed value. Taxes in 1994 are estimated as follows:
22
<PAGE> 37
NEIGHBORHOOD AND SITE DESCRIPTION
<TABLE>
<CAPTION>
1994 Taxes
Parcel Number Parcel Number Parcel Number
28M540245 28M530059 28M540256 Totals
(4.22 Acres) (0.716 Acres) (1.88 Acres) (6.816 Acres)
<S> <C> <C> <C> <C>
Land $ 40,510 $ 5,680 $ 8,930 $ 55,120
Improvements 698,050 --- 13,110 711,160
Total $ 738,560 $ 5,680 $ 22,040 $ 766,280
1993 Taxes $52,991.68 $310.98 $1,206.69 $54,509.35
</TABLE>
SITE DESCRIPTION
The appraised land consists of a total 6.816 acre site. The nursing home is
situated on a 4.22 acre (183,823 square foot) site fronting about 1,088 feet
along Kennerly Road on the north and east lines which includes 10910 and 10980
Kennerly Road. The topography is generally level at street grade along the
frontage with a slight slope to the west and downward to basement floor grade
at the rear. The slope is then steeper to the rear south and west lines. The
shape is rectangular with an angled east line.
Residence 7 Kennerly Manor Drive (formerly Ozarkdale Drive) has frontage of
about 150 feet along the curve of the street and is a part of the total 6.816
acre CUP nursing home zoning. The grade is gently sloping from the street to
the front of the building and drops off to basement level at the rear and
continues downward to the north. This site contains 1.88 acres and is also CUP
zoned. The site is adjacent to the east line of the two acre excess land site.
23
<PAGE> 38
NEIGHBORHOOD AND SITE DESCRIPTION
The residence at 10910 Kennerly Road is also a part of the CUP zoned site and
is located in the extreme southeast corner of the overall tract fronting along
Kennerly Road on its east and southeast lines and along Kennerly Manor Drive on
its south line. The site grade is gently sloping from the street frontage to
the front of the building and drops off to basement level at the rear and
continues downward to the north. The vacant land at 10980 Kennerly Road
consists of 0.716 acre and is zoned R-1. It follows the terrain of the main
facility and is presently wooded.
Subject management has advised us that the Residence 7 Kennerly Road, which is
presently unoccupied, is scheduled to be torn down and the parking lot
expanded. As such the residential improvements at 7 Kennerly Road have not
been considered in this valuation. In addition, the residence at 10910
Kennerly Road is expected to be converted to house the nursing home business
offices. Therefore, all sites were considered operating acres.
The overall land configuration is very irregular with a slope downward from all
side street frontages to the center of the property then continuing downward in
a natural watershed runoff ravine to the west.
<TABLE>
<CAPTION>
Summary of Land Sites
Facility Zoning Acres
<S> <C> <C>
Nursing Home R-1, CUP 4.220
7 Kennerly Manor Drive R-1, CUP 1.880
10910 Kennerly Road R-1, CUP 0.716
Total Land Area 6.816
</TABLE>
24
<PAGE> 39
IMPROVEMENTS DESCRIPTION
IMPROVEMENTS DESCRIPTION
The site is improved with a two story plus basement, 49,719 square foot 167
licensed bed nursing home which operates with 148 beds. Constructed in 1966,
with additions in 1975 and 1987 and renovations in 1993/1994, this building has
brick and block exterior walls over a foundation consisting of concrete piers
and grade beams and is supported by a steel frame. The roof structure consists
of wood and steel rafters with plywood and rigid insulation. The roof is
covered by asphalt shingles.
The floor structure consists of steel joisted concrete. Floor coverings
consist of terrazzo throughout; carpeting in the offices; sheet vinyl in the
east wing; and exposed concrete in the laundry and maintenance shop.
Partitioning consists of drywall covered metal studs in most areas with ceramic
tile partitioning in the tub rooms and concrete block partitioning in the
mechanical areas. Built-in items include wood handrails, cubicle curtain
tracking, five nurses' stations and an exhaust hood in the kitchen with an
Ansul fire suppression system.
The ceilings are covered by plaster on metal and rock lath with some drywall
and suspended metal grids with lay-in acoustical tiles.
Heating, ventilating and air conditioning are provided via hot water boilers
and chillers. The patient rooms are heated and cooled by radiant floor heat
and ducted cooled air.
Standard plumbing fixtures include fifty-two water closets, fifty-six
lavatories, twenty-six tubs, twelve sit-down shower stalls, six janitor sinks
and five showers. Hot water is heated by commercial gas automatic heaters.
25
<PAGE> 40
IMPROVEMENTS DESCRIPTION
Lighting consists primarily of fluorescent illumination. Other electrical
features include a nurses' call and paging system, a fire alarm system and door
alarms.
Other features include a sprinkler system and two elevators.
There are two residential buildings at the rear of the overall 6.816 acre site
fronting on Kennerly Road and Kennerly Manor Drive. These are briefly
described as:
7 KENNERLY MANOR DRIVE - Brick veneer, one story plus basement single
family residence containing 1,633 square feet with four bedrooms, two
full baths, fully equipped kitchen, attached two car garage, central
air conditioning, full basement with walkout patio doors. This
structure was built in 1962, is in fair condition and is scheduled to
be demolished.
10910 KENNERLY ROAD - Masonry walls, one story plus basement single
family residence containing 1,836 square feet with three bedrooms, one
and one-half baths, fully equipped kitchen, quality interior finishes,
carpeting and drapes, full walkout basement with two car plus garage,
central air conditioning and supplemental furnace. This structure was
built in 1960 and is in fair condition and is scheduled to become
business offices.
Thirty rooms have recently been remodeled and thirty are currently in the
process of being remodeled. Other improvements being considered are painting,
television system, upgrading of employees lounge and upgrading and modification
of dining rooms.
LAND IMPROVEMENTS
Land improvements include, but are not limited to, asphalt paving, concrete
sidewalks, aprons, equipment pads and bumpers, underground utility lines,
exterior lighting, stone retaining wall, concrete retaining wall with fence,
signage and illuminated concrete fountain and fencing.
26
<PAGE> 41
IMPROVEMENTS DESCRIPTION
EQUIPMENT DESCRIPTION
Based upon an inspection of the facility, it appears that the nursing home is
equipped with the normal complement of items necessary to adequately serve the
subject nursing and rehabilitation facility. Upon acquisition of the facility
by Integrated Health Services, Inc. in 1987, new office and lounge furniture
was added. The equipment appears to be in good condition for its age and use.
27
<PAGE> 42
HIGHEST AND BEST USE
The Appraisal Institute defines highest and best use as follows:
The most profitable, likely use to which a property can be put. The
opinion of such use may be based on the highest and most profitable
continuous use to which the property is adapted and needed, or likely
to be in demand in the reasonably near future. However, elements
affecting value which depend upon events or a combination of
occurrences, which, while within the realm of possibility, are not
fairly shown to be reasonably probable, should be excluded from
consideration. Also, if the intended use is dependent upon an
uncertain act of another person, the intention cannot be considered.
The use of the land which may reasonably be expected to produce the
greatest net return to land over a given period of time. That legal
use which will yield to land the highest present value, sometimes
called optimum use.
In estimating the highest and best use, there are essentially four states of
analysis:
1. POSSIBLE USE - Uses which are physically possible for
the site in question.
2. PERMISSIBLE USE (LEGAL) - Uses permitted by zoning
and deed restrictions on the site in questions.
3. FEASIBLE USE - Possible and permissible uses which
will produce a net return to the owner of the site.
4. MAXIMALLY PRODUCTIVE USE - Among the feasible uses,
that use which will produce the highest net return of
highest present worth.
The highest and best use of the land (site) as if vacant and available for use
may be different from the highest and best use of the property as improved.
This will be true when the improvement is not an appropriate use and yet makes
a contribution to total property value in excess of the site.
28
<PAGE> 43
HIGHEST AND BEST USE
The following conditions must be met in determining the highest and best use:
The use must be legal.
The use must be probable, not speculative or conjectural.
There must be a profitable demand for such use and it must return to
land the highest net return for the longest period of time.
In order for the subject site to fulfill its highest and best use, that use
must meet four criteria. It must be (1) physically possible, (2) legally
permissible, (3) financially feasible, and (4) maximally productive. These
criteria are further explained as follows.
PHYSICALLY POSSIBLE
The size, shape, location, utility availability and terrain impose
physical restraints upon the type of uses possible for the subject.
Any use incompatible with the utility capacity or constraints imposed
by the size, shape or terrain would not be considered physically
possible. As mentioned in the land description section of this
report, the subject is irregularly shaped and contains a gross land
area of 6.816 acres. All utilities are available at the site and all
required site improvements are in place. The physical characteristics
of the site in terms of size, shape and topography are favorable for
flexible development. Overall, the physical aspects of the site are
such that they do not impose any constraints which would prevent the
site from being developed to its highest and best use.
LEGALLY PERMISSIBLE
Uses of the land must be permitted by zoning and deed restrictions and
other legal considerations. The subject site is currently zoned R-1
(Residence District) by the county of St. Louis. Nursing home use is
a conditional use in this zoning designation. The present use of the
site for a nursing home is a legal use.
29
<PAGE> 44
HIGHEST AND BEST USE
FINANCIALLY FEASIBLE
Any use of the subject which provides a financial return to the land
in excess of that required to satisfy operating expenses, financial
expenses and capital amortizations is considered financially feasible.
It is our opinion that the subject's current use as a nursing home is
financially feasible based upon the operating performance of the
subject facility.
MAXIMALLY PRODUCTIVE
Among the feasible uses, that use which will produce the highest net
return at the highest present worth. The subject site is improved
with a 142 bed nursing home. The improvements are in good condition
with a significant remaining economic life. Functional utility of the
structure meets the market standards expected of a nursing home and
demand for this type of development is evident in the marketplace.
Based upon the supply and demand characteristics of the nursing home
industry in Missouri, it is our opinion that the highest and best use
of the property, as improved, is its current use as the site of a
nursing home.
On reviewing the conditions and criteria for establishing the highest and best
use of the subject, we have examined the market for the subject services and
the regional and local economy as well as the existing physical and zoning
characteristics of the site. Additionally, we have considered the quality and
condition of the subject improvements amendable for use as a nursing and
rehabilitation facility.
Based upon our review and analysis of the subject market, it is our opinion
that the highest and best use of the site as vacant would be for healthcare
development such as the subject and as improved would be for the continuation
of its current use as that of a nursing and rehabilitation facility.
30
<PAGE> 45
VALUATION METHODOLOGY
There are three generally accepted approaches to estimate the value of an
asset, which are summarized as follows:
INCOME APPROACH: This approach translates earnings, or expected cash
flows, into an estimate of value. It is based upon the premise that
value is determined by the present value of all future expected
income. Thus, forecasted earnings are converted to value through the
application of discount or capitalization rates derived from the
investment market.
MARKET APPROACH: This valuation approach is based upon the comparison
of the subject to the sales of similar assets in the marketplace. Two
methods of estimating value via this approach are the Primary Sales
Comparison Approach and the Secondary Market Approach. The Primary
Sales Comparison Approach entails the analysis of direct asset
transfers, while the Secondary Market Approach involves the analysis
of multiples derived from equity transfers in public secondary markets
or exchanges.
COST APPROACH: This procedure provides an indication of the value of
an asset by reducing an estimate of the current cost to reproduce or
replace an asset by an estimate of accrued depreciation. Depreciation
includes physical deterioration, functional and external (or economic)
obsolescence.
In general, the Income Approach is the most reliable approach to value an
income producing property. It best considers the income potential and risk
characteristics specific to the subject property. The Market Approach has not
been applied due to the lack of transfers of leased facilities. Nursing homes
typically transfer in fee simple estate, with the assets of the operating
company included. The interest considered in this appraisal is that of a
leased fee estate, and we were unable to locate meaningful sales of similar
interests to compare to the subject. The Cost Approach has limitations due to
the difficulty in quantifying the depreciation and obsolescence in the assets.
The Income and Cost Approaches are presented on the following pages.
31
<PAGE> 46
INCOME APPROACH
The Income Approach gives consideration to the net income expectancy from
rental of the property, and to the capitalization of this income in accordance
with prevailing returns on properties or investments of similar risks to
determine the amount at which ownership would be justified by a prudent
investor. Since it is the purpose of this appraisal to estimate the market
value of the leased fee estate, the Income Approach is considered to be the
most reliable method of valuation. The first step involves the estimating of
the subject's potential gross income. For this, we deduct reasonable
allowances for expenses to arrive at the indicate net income which is
capitalized into the value estimate.
ESTIMATE OF GROSS INCOME
Integrated Health Services, Inc. has represented that this facility will be
sold to Crescent Capital and leased back to Integrated Health Services, Inc.
The facility, including land, buildings, equipment and furnishings, will be
leased to Integrated Health Services, Inc. for a ten year period, with two, ten
year renewal options. Although we have not been provided with a copy of the
final lease, Integrated Health Services, Inc. has provided us with a lease
synopsis which indicates that the base rent in the first year will be $922,250.
In the second and third forecast years, contract rent is adjusted 1% annually.
In subsequent years, additional rent has been based upon the terms of the lease
contract which stipulates the subsequent annual increases will be increased by
the greater of 1) 1% of the then-current minimum rent, or 2) the lesser of
either 3.75%, or the greater of either 5% of the incremental net operating
income (before corporate allocations), or 67% the consumer price index from the
preceding period.
32
<PAGE> 47
INCOME APPROACH
In our Discounted Cash Flow forecast, we have assumed an initial ten year
holding period, and have assumed that Integrated Health Services, Inc. will
exercise the two, ten year renewal options. Revenue has been estimated based
upon contract rent comprised of base rent plus additional rent, which we have
assumed to be at market. Because of the scarcity of arm's length leases on
nursing facilities and the multitude of adjustments which would be required to
equate a lease comparable to the subject, revenue has been forecast based upon
contract rent.
The incremental net operating income factor is calculated based upon the
incremental performance of the most recently ended fiscal year as compared with
the preceding year. The increment is then multiplied by a factor of 0.05.
The lease is a net lease with the lessee responsible for operating expenses.
Management costs have been estimated at 4% of revenue. This charge considers
the cost of collection and accounting for rents. We have also estimated
nominal reserves for replacement at $100 per bed, increasing with inflation.
Total expenses in the first forecasted year are estimated at $51,690, or 5.6%
of revenue. Net income is estimated at $870,560 in the first forecasted year,
increasing to $1,065,770 by the tenth year. Schedules A-1 through A-5 in the
Addendum to this report present the subject's historic and prospective
occupancy, payor mix and operating performance of the operating business. The
subject's prospective performance has been estimated based upon information
from Management in conjunction with historic performance. The subject business
enterprise is expected to exhibit a large increase in net operating income in
the first forecast year attributable to an increase in medical specialty unit
census. Medical specialty unit patients are generally of high acuity level,
commanding substantially higher rate levels than skilled nursing and
contributing largely to net operating income. Operating performance of the
business has been analyzed to gauge the potential of the Company to center its
rent obligations and is a factor in estimating additional rent. Forecasted net
operating income of the business enterprise
33
<PAGE> 48
INCOME APPROACH
amount to five and one-half times lease payments in the first forecasted year,
which appears to provide adequate coverage.
DISCOUNT RATE CALCULATION
CAPITALIZATION PROCESS AND DISCOUNT RATE
As the annual cash flow and reversionary values are estimated ten years into
the future, it is necessary to discount these values into a present value
estimate. Present value is today's cash lump sum which represents the current
value of the right to collect the future payments and reversion. It is the
aggregate value of the discounted future payments and reversion.
The discount rate used must reflect a sufficient rate of return for a developer
or owner of property over the holding period. The rate must take into
consideration the time value of money and charges for holding costs. The rate
must also reflect an adequate rate of return for the risk involved when
compared to other types of investments.
When analyzing discount rates, it is important to realize that all investments
are in competition with each other for the investment dollar. The investor has
a choice of: (1) bank rate securities such as government bonds, industrial or
municipal bonds and debentures, (2) stocks and other securities, or (3)
selected enterprises or other real estate investments at varying rates of
return. The acceptable rate of return to the investor is affected by
considerations of risk, burden of management, degree of liquidity and other
factors (including personal preference). The analysis quite often follows the
historical summation of these factors, known as a "built-up" rate.
34
<PAGE> 49
INCOME APPROACH
As an example, an adjustment for risk is added to a safe or minimum risk rate
as an increment to compensate for the extent of risk believed to be involved in
the use of the capital sum. Another adjustment is usually made of nonliquidity
due to the time required to realize cash from the resale of the property. The
resale period may vary with the general marketability of the type of property
and the amount of the cash investment required.
The principle of discounting money to be received in the future is based upon
the fact that today's dollar can be invested to earn a return, while the
expected future dollar not yet generated, cannot. The discount rate must
reflect what is called the opportunity cost of capital. Thus, the investor is
compensated by the discount rate for the current lost opportunity in investing
in alternative assets.
In order to determine the appropriate rate, we have reviewed current monetary
rates as of March 1994.
The following table presents yield rates associated with various types of
government and corporate securities as indicated by the March 1, 1994 Wall
Street Journal.
<TABLE>
<CAPTION>
YIELD RATES AS INDICATED BY THE MARCH 1, 1994
WALL STREET JOURNAL
SECURITY YIELD
<S> <C>
Prime Rate 6.00%
Ten Year U.S. Treasury Bonds 6.14%
Corporate Bonds
Aaa, Aa 6.20% to 7.42%
A, Baa 6.52% to 7.58%
Ba, C 9.44%
</TABLE>
35
<PAGE> 50
INCOME APPROACH
As indicated by the following survey conducted by Real Estate Research
Corporation, required rates of return for commercial grade real estate were
approximately 5.6% to 5.9% above year treasury bonds in the first two quarters
of 1993.
<TABLE>
<CAPTION>
Real Estate vis-a-vis Capital Market Returns*
Fourth Third
Quarter Quarter
1993 1993
<S> <C> <C>
Real Estate Yield (%) 11.7% 12.0%
Moody's Aa Utilities (%) 7.0% 7.4%
Moody's Aaa Corporate (%) 7.0% 7.2%
10 Year Treasuries (%) 5.3% 5.7%
*This survey was conducted in October, 1993 and reflects desired
returns for fourth quarter 1993 investments.
Source: Real Estate Research Corporation
</TABLE>
As the subject property would have less liquidity and more risk than commercial
grade real estate, it is reasonable to expect that the discount rate would be
higher than the real estate yields presented. Several factors which influence
the selection of a discount rate include the following:
o Currently, there are restraints on supply through
licensure requirements which alter normal economics;
and
o The value of the facility is highly related to the
operation of the business which is involved in the
provision of services such as healthcare, dietary and
housekeeping operations which entail a higher level
of Management expertise.
36
<PAGE> 51
INCOME APPROACH
Therefore, given the alternative investments available and taking into
consideration the risks associated with real estate development and the
realization of the additional rent revenue, we believe a 12.5% discount rate
for the subject is appropriate. This return is considered equivalent to
investments with comparable risks available today for the same time period.
FINAL CASH FLOW
The earnings and cash flow forecasts in this analysis only cover a ten year
period. In reality, the property will generate earnings and cash flow well
beyond the five year forecast period. Therefore, the value of this distant
cash flow stream, called a "reversion" value, must be estimated.
We have assumed that Integrated Health Services, Inc. will exercise the renewal
options after the initial ten year lease period. Therefore, the reversion
value has been estimated based upon the capitalization of net cash flow in
forecast year eleven. We have used a terminal capitalization rate of 10% in
calculating the reversion value. According to Real Estate Research
Corporation's Fourth Quarter 1993 Investor Survey, terminal capitalization
rates for multifamily housing averaged 9.4%. Since the risk associated with
the subject is believed to be similar but slightly above that on multifamily
housing, we have added a risk premium to the average terminal capitalization
rate exhibited by multifamily housing. The reversion value has been discounted
to present value at the discount rate of 12.5%.
37
<PAGE> 52
INCOME APPROACH
INCOME APPROACH CONCLUSION
The sum of the annuity and reversion values estimated within the Discounted
Cash Flow Analysis represent the total value of the property. Based upon our
analysis, this value can be represented in the rounded amount of:
$8,500,000
==========
The following schedule presents the earnings forecast and Discounted Cash Flow
Analysis and indicated value.
38
<PAGE> 53
INCOME APPROACH
SCHEDULE A
INTEGRATED HEALTH SERVICES OF ST. LOUIS AT GRAVOIS
DISCOUNTED CASH FLOW FORECAST
<TABLE>
<CAPTION>
Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Minimum Rent $ 922,250 $ 922,250 $ 931,473 $ 940,787 $ 966,000 $ 991,889 $1,018,472
Additional Rent 9,223 9,315 25,213 25,889 26,583 27,295
-----------------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 922,250 $ 931,473 $ 940,787 $ 966,000 $ 991,889 $1,018,472 $1,045,767
-----------------------------------------------------------------------------------------------------------
EXPENSES:
Management Fee 36,890 37,259 37,631 38,640 39,676 40,739 41,831
Replacement Items 14,800 15,392 16,008 16,648 17,314 18,006 18,727
-----------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 51,690 52,651 53,639 55,288 56,989 58,745 60,557
-----------------------------------------------------------------------------------------------------------
NET INCOME 870,560 878,822 887,148 910,712 934,900 959,726 985,209
DISCOUNT RATE 0.8889 0.7901 0.7023 0.6243 0.5549 0.4933 0.4385
PRESENT VALUE 773,831 694,378 623,072 568,553 518,803 473,404 431,977
DISCOUNT RATE 12.5%
TERMINAL CAPITALIZATION
RATE 10.0%
CONCLUSION OF VALUE
ANNUITY 5,166,071
REVERSION 3,369,099
=========
FIXED ASSET VALUE $8,535,170
<CAPTION>
Forecasted Forecasted Forecasted Forecasted
Year 8 Year 9 Year 10 Year 11
<S> <C> <C> <C> <C>
REVENUE:
Minimum Rent $1,045,767 $1,073,793 $1,102,571 $1,132,120
Additional Rent 28,027 28,778 29,549 30,341
------------------------------------------ ----------
TOTAL REVENUE $1,073,793 $1,102,571 $1,132,120 $1,162,461
------------------------------------------ ----------
EXPENSES:
Management Fee 42,952 44,103 45,285 46,498
Replacement Items 19,476 20,255 21,065 21,908
------------------------------------------ ----------
TOTAL EXPENSES 62,428 64,358 66,350 68,406
------------------------------------------ ----------
NET INCOME 1,011,366 1,038,213 1,065,770 NET INCOME 1,094,055
CAP. RATE 10%
TERMINAL VALUE 10,940,547
DISCOUNT RATE 0.3897 0.3464 0.3079 0.3079
PRESENT VALUE 394,174 359,678 328,200 REVERSION 3,369,099
</TABLE>
<PAGE> 54
COST APPROACH
In the Cost Approach, the subject property is valued based upon the market
value of the land, as if vacant, to which the depreciated replacement cost of
the improvements and equipment is added. The replacement cost of the
improvements and equipment is adjusted for accrued depreciation resulting from
physical deterioration, functional obsolescence and external (or economic)
obsolescence.
The cost analysis involves three basic steps:
o Land value estimate.
o Estimation of the replacement cost of the
improvements and equipment.
o Estimation of the accrued depreciation from all
causes.
The sum of the market value of the land and the depreciated replacement cost of
the improvements and equipment is the estimated market value via the Cost
Approach.
LAND VALUATION
The appraised property consists of approximately 6.816 acres (296,905 square
feet) of land. The site exhibits approximately 1,088 feet of frontage along
the south side of Kennerly Road.
40
<PAGE> 55
COST APPROACH
Land valuation, as reported herein, assuming the site vacant is based upon the
following steps:
o A comparison with recent sales and/or asking prices
for similar land.
o Interviews with reliable real estate brokers and
other informed sources who are familiar with local
real estate activity.
o Our experience in estimating land values; and when
necessary, due to a lack of other available data,
segregation of purchase price of improved properties.
The following six sales are located within the general market area of the
subject property and are considered to be representative of market activity and
conditions as of the valuation date. To the best of our knowledge, all
property rights transferred were fee simple. The following sales were
considered arm's length transactions and did not include any special or
creative financing, except where noted.
41
<PAGE> 56
COST APPROACH
LAND SALE NUMBER 1
<TABLE>
<S> <C>
Location: 5139 Mattis Road, St. Louis, St. Louis County, Missouri
Date of Sale: February 1, 1990
Sale Price: $300,000
Size: 1.19 Acres (51,856 Square Feet)
Zoning: C-8
Price Per Acre: $252,100
Price Per Square Foot: $4.86
Grantor: Taylor, Morlay Simon, Inc.
Grantee: Anwar Shah
Deed Book/Page Number: 9500/1767
Tax Parcel Number: 29L541183
Comments: Purchaser built a 13,466 square foot eye center in 1991.
</TABLE>
42
<PAGE> 57
COST APPROACH
LAND SALE NUMBER 2
<TABLE>
<S> <C>
Location: Tesson Ferry and Town South Roads, Soppington, Missouri
Date of Sale: February 28, 1990
Sale Price: $415,000
Size: 1.64 Acres (71,438 Square Feet)
Zoning: C-8
Price Per Acre: $253,048
Price Per Square Foot: $5.81
Grantor: Boatmen's Bank
Grantee: Voss Properties
Deed Book/Page Number: 6611/2234
Tax Parcel Number: 29L142010
</TABLE>
43
<PAGE> 58
COST APPROACH
LAND SALE NUMBER 3
<TABLE>
<S> <C>
Location: 4079 Telegraph Road, St. Louis, St. Louis County, Missouri
Date of Sale: January 7, 1993
Sale Price: $300,000
Size: 1.375 Acres (59,895 Square Feet)
Zoning: C-8
Price Per Acre: $218,182
Price Per Square Foot: $5.01
Grantor: Shirley and William Nahn
Grantee: Site Oil Company of Missouri
Deed Book/Page Number: Not Available
Tax Parcel Number: 30H410219
</TABLE>
44
<PAGE> 59
COST APPROACH
LAND SALE NUMBER 4
<TABLE>
<S> <C>
Location: 5423 Telegraph Road, Mehlville, Missouri
Date of Sale: April 27, 1990
Sale Price: $310,000
Size: 1.2 Acres (52,272 Square Feet)
Zoning: R-2 (To Be Rezoned Commercial)
Price Per Acre: $258,333
Price Per Square Foot: $5.93
Grantor: Schnuens Markets, Inc.
Grantee: Union Electric Company
Deed Book/Page Number: 8749/2472
Tax Parcel Number: 31H130800
</TABLE>
45
<PAGE> 60
COST APPROACH
LAND SALE NUMBER 5
<TABLE>
<S> <C>
Location: 12152 Tesson Ferry Road, St. Louis, St. Louis County, Missouri
Date of Sale: December 7, 1990
Sale Price: $302,000
Size: 1.259 Acres (54,885 Square Feet)
Zoning: C-8 (See Comments)
Price Per Acre: $239,873
Price Per Square Foot: $5.50
Grantor: VTF Enterprises
Grantee: Physicians Building Partnership
Deed Book/Page Number: Not Available
Tax Parcel Number: Not Available
Comments: Purchased subject to rezoning from Residential to C-8. Purchaser built a 12,000 square foot brick
medical/office building with a 5,000 square foot basement.
</TABLE>
46
<PAGE> 61
COST APPROACH
LAND SALE NUMBER 6
<TABLE>
<S> <C>
Location: Highway 21, Soppington, Missouri
Date of Sale: February 1, 1990
Sale Price: $415,000
Size: 1.609 Acres (70,132 Square Feet)
Zoning: C-8
Price Per Acre: $257,924
Price Per Square Foot: $5.92
Grantor: Boatmen's Bank
Grantee: William and Loriann Voss
Deed Book/Page Number: 8708/1476
Tax Parcel Number: 29L140463
</TABLE>
47
<PAGE> 62
COST APPROACH
These six sales are summarized below. All are located within the general
market area of the subject property and are considered to be representative of
market activity and conditions as of the valuation date.
<TABLE>
<CAPTION>
Summary of Land Sales
Price Per
Sale Sale Land Area Square
Number Location Date (Square Feet) Zoning Foot
<S> <C> <C> <C> <C> <C>
1 5139 Mattis Road 02/90 51,856 C-8 $4.86
2 Tesson Ferry and Town South Roads 02/90 71,438 C-8 $5.81
3 4079 Telegraph Road 01/93 59,895 C-8 $5.01
4 5423 Telegraph Road 04/90 52,272 R-2 $5.93
5 12152 Tesson Ferry Road 12/90 54,885 C-8 $5.50
6 Highway 21 02/90 70,132 C-8 $5.92
Subject 10954 Kennerly Road, et al. --- 296,905 CUP ---
</TABLE>
ANALYSIS
In analyzing the land sales, certain elements should be considered when making
adjustments to the price of each comparable property. The elements of
comparison are: 1) market conditions (time); 2) location; and 3) physical
characteristics.
48
<PAGE> 63
COST APPROACH
MARKET CONDITIONS (TIME)
The condition of the market may change between the time of sale and the
date of the appraisal and adjustments would have to be made to reflect the
market. Changed market conditions result from various causes such as
inflation, deflation, changing demand, changing supply and changing land
use patterns. The tendency over time is for land values to appreciate.
Based on analysis of the recent economic conditions of the region, there
is evidence that values have increased slightly. The estimated marketing
period for land in the Charlotte area at least one year. The supply of
vacant land is limited and demand was considered good.
LOCATION
An adjustment for location may be required if the locational
characteristics of the comparable properties are significantly different
from those of the subject. A property's location is analyzed in terms of
the relative time/distance relationship between it and all likely
destinations and origins. The relationship is relative because the
location of a property can only be judged in relation to that of others.
PHYSICAL CHARACTERISTICS
Physical characteristics differ between properties. These differences
may require a number of comparisons and adjustments to the subject. An
appraiser may be required to judge the value that is added or lost by the
size and shape, corner influence, utilities, etc. Size and shape can
affect functional utility in relation to optimum size and frontage to
depth ratio. The appraiser must also recognize that smaller tracts of
land typically sell for a higher unit price. Typically, corner influence
creates a higher unit of value due to the frontage on two or more streets.
Also, the availability of utilities influences value.
The six sales, representative of the subject sites, indicate a range of values
from $4.86 to $5.93 per square foot.
All sales were found to be superior to the subject land due to the factor of
topography. Therefore, downward adjustments were applied accordingly.
49
<PAGE> 64
COST APPROACH
In keeping with the theory that smaller lot sizes transact at a higher price
per unit, all the sales were adjusted downward for containing a smaller lot
size.
In addition, all the sales warranted upward adjustments for the factor of time.
The indicated range of values after adjustment is $3.94 to $5.44 per square
foot.
We have concluded on a land value of $4.75 per square foot for the 296,905
square foot (6.816 acres) site. We have summarized the land value as follows:
296,905 Square Feet x $4.75 = $1,410,299
ROUNDED: $1,410,000
==========
Following are a land sales adjustment grid and comparable land sales map.
50
<PAGE> 65
COST APPROACH
<TABLE>
<CAPTION>
Adjustment Grid
Subject Sale Sale Sale Sale Sale Sale Number
Number 1 Number 2 Number 3 Number 4 Number 5 Number 6
<S> <C> <C> <C> <C> <C> <C> <C>
Land Area/Square Feet 296,905 51,856 71,438 59,895 52,272 54,885 70,132
Price Per Unit --- $4.86 $5.81 $5.01 $5.93 $5.50 $5.92
Date of Sale Current 02/90 02/90 01/93 04/90 12/90 02/90
Time Adjustment +8% +8% +2% +8% +7% +8%
Time Adjusted Price $5.25 $6.27 $5.11 $6.40 $5.89 $6.40
Location 0 0 0 0 0 0
Size -15% -10% -15% -15% -15% -10%
Access 0 0 0 0 0 0
Visibility 0 0 0 0 0 0
Zoning 0 0 0 0 0 0
Topography -20% -5% -5% -5% -10% -5%
Other 0 0 0 0 0 0
Total Adjustment -25% -15% -20% -20% -25% -15%
Sale Price $5.25 $6.27 $5.11 $6.40 $5.89 $6.40
Adjusted Value $3.94 $5.33 $4.09 $5.12 $4.42 $5.44
</TABLE>
51
<PAGE> 66
COST APPROACH
COMPARABLE LAND SALES MAP
(PHOTO MAP)
52
<PAGE> 67
COST APPROACH
BUILDINGS AND LAND IMPROVEMENTS VALUATION
The buildings and land improvements have been valued on the basis of
replacement cost less accrued depreciation. The cost new was estimated using
cost factors obtained from the calculation section of Marshall Valuation
Service (MVS), a nationally recognized cost manual. To these costs we have
added soft costs reflecting such items as legal and accounting fees,
feasibility studies, architect's fees and plans, test borings, appraisal fees,
superintending, carrying costs and other contingency costs and an amount
representing entrepreneurial profit, which is not included in MVS's unit costs.
Entrepreneurial profit is a necessary element in the motivation to construct
the improvements and represents an additional amount a developer would expect
to receive for construction of a similar project. The amount of
entrepreneurial profit varies according to the economic conditions and type of
development, but typically ranges from 10% to 20% of total project costs. We
have contacted several developers, contractors and other familiar with real
estate construction. Although each project will vary and each developer
expects a different rate of return, most anticipate a return that falls in the
above stated range. Based on these conversations, we have estimated
entrepreneurial profit to comprise 20% of our estimate of the replacement cost
of the building.
The overall cost for the subject nursing home building was estimated at
$7,282,943 inclusive of all soft costs and entrepreneurial profit. This figure
is equivalent to $146.48 per square foot of gross building area. The residence
at 10910 Kennerly Road was estimated at $138,991. The land improvements have
been estimated at $596,436.
A description and pricing of the cost to replace the buildings and land
improvements is included in the Exhibit Section.
53
<PAGE> 68
COST APPROACH
Depreciation of a structure is its loss in value due to physical deterioration,
functional obsolescence and external (or economic) obsolescence. Economic life
is the period over which the improvements to the real estate contribute to the
value of the property. These terms are defined as follows:
PHYSICAL DETERIORATION: The loss in value due to deterioration or
ordinary wear and tear, i.e., natural forces taking their toll of the
improvements. This begins at the time the building is completed and
continues throughout its physical life.
FUNCTIONAL OBSOLESCENCE: The loss in value within the property due to
poor plan, functional inadequacy, or super adequacy due to size, style,
design or other items. This form of depreciation occurs in both curable
and incurable forms.
EXTERNAL (OR ECONOMIC) OBSOLESCENCE: The loss in value caused by forces
outside the property itself. It can take many forms such as excessive
noise levels, traffic congestion, abnormally high crime rates or other
factors which affect a property's ability to produce an economic income
thereby causing a decline in desirability. Other forms of economic
obsolescence may include governmental restrictions, excessive taxes or
economic trends.
ECONOMIC LIFE: Economic life is the period over which improvements to
real estate contribute to property value. The economic life of a good
quality healthcare facility is typically forty-five to fifty years.
REMAINING ECONOMIC LIFE: Remaining economic life can be defined as the
number of years remaining in the economic life of the structure or
structural components as of the date of the appraisal.
In estimating the overall economic life of the improvements, data on economic
lives, published by Marshall Valuation Service and the American Hospital
Association were considered. The assignment of economic lives assumed that,
except for the building shell and foundation, building components would be
replaced periodically over the life of the building.
54
<PAGE> 69
COST APPROACH
In accordance with the guidelines of the MVS manual, it is estimated that the
building will have a total economic life of forty-five years. As stated
earlier, the subject property was constructed in 1966, 1975 and 1987 with
renovations in 1993/1994. As previously noted, the subject has recently
completed the renovation of thirty rooms with an additional thirty rooms in the
process of being renovated. The subject, which has been well maintained, was
considered to be in good overall physical condition. We estimate that the
building has an effective age of ten years, which equates to a remaining useful
life of approximately thirty-five years. After consideration of all
significant physical factors affecting the subject property, the total physical
deterioration of 25% is imputed to the building.
As stated previously, the improvements have been well maintained, are in good
overall condition and are considered modern and functional in all respects. A
thorough inspection of the subject property revealed that, while typical wear
and tear for a building of this age has occurred, no significant items of
deferred maintenance were noted. Based on this knowledge, it is our opinion
that the subject does not suffer from functional obsolescence. Furthermore, it
is our opinion that the subject property does not suffer from any undue
economic obsolescence. Based upon the previous analysis, total accrued
depreciation from all causes of 25% is imputed to the subject nursing home
building.
As previously noted, the subject property premises includes two residences, 7
Kennerly Manor Drive and 10910 Kennerly Road. Management has indicated that
the residence at 7 Kennerly Manor Drive will be razed in the near future for
the purpose of adding thirty-five additional parking spaces. As such, we have
not considered the value, if any, associated with the current structure.
The residence located at 10910 Kennerly Road, which Management has designated
as office space, appeared in fair condition with a total depreciation estimate
of 56% applied to the residence.
55
<PAGE> 70
COST APPROACH
The elements that make up the land improvements have shorter economic lives
than that of the building. We have estimated the aggregate economic life of
these items to be twenty years with an effective age of fourteen years, which
equates to an average remaining useful life of six years. The amount of
accrued depreciation attributable to the land improvements has also been
calculated on an economic age/life basis, resulting in a 70% depreciation
estimate.
The estimate of the depreciated replacement costs of the buildings and land
improvements is presented as follows:
<TABLE>
<CAPTION>
DEPRECIATED
REPLACEMENT REPLACEMENT
ASSET COST DEPRECIATION COST
<S> <C> <C> <C>
Nursing Home Building $7,282,943 $1,820,736 $5,462,207
Residence 138,991 77,835 61,156
Land Improvements 596,436 417,505 178,931
TOTAL $8,018,370 $2,316,076 $5,702,294
</TABLE>
EQUIPMENT VALUATION
Nursing and rehabilitation facility equipment includes, but is not limited to,
items such as: all patient room furniture; kitchen utensils, appliances,
dinnerware and accessories; office machines, desks, chairs and files;
maintenance and housekeeping machines and tools; laundry appliances; lounge
furniture; audio/visual equipment and chapel furnishings; nursing items
including monitoring devices, chart racks, medication carts; and items for
physical therapy including parallel bars, training steps, pulleys and
hydrocollators. The subject contains various special equipment to accommodate
the specialty units. However, we understand certain items such as ventilator
equipment are leased.
56
<PAGE> 71
COST APPROACH
Depreciated equipment values in nursing homes typically range from $2,000 to
$4,000 per bed. Generally the low end of this range represents equipment in
facilities which is either highly depreciated, low in quality or low in volume
due to smaller common areas and office space. A newer facility, or a facility
which has a high percentage of private patients and a location in an affluent
area, will generally have an equipment value at the high end of the range.
Based on our experience, it is estimated that the value of the equipment in use
can be reasonably represented at $3,500 per bed, which when multiplied by 148
operating beds, indicates a market value for all equipment of:
$518,000
========
CONCLUSION
Based upon the investigation, as previously defined, the results of the Cost
Approach, as of March 1, 1994 are reasonably represented as follows:
Land $1,410,000
Buildings 5,523,363
Land Improvements 178,931
Equipment 518,000
-----------
TOTAL $7,630,294
ROUNDED $7,600,000
==========
57
<PAGE> 72
CORRELATION OF VALUE
Each of the three traditional approaches to value have been considered, and we
have applied the Income and Cost Approaches. The Market Approach has not been
applied due to the lack of sales of similar leased fee estate interests as the
subject. While the approaches are independently developed, the same
fundamental principles of valuation and economics form the logical basis for
each approach. The indications of value by the two approaches are as follows:
Income Approach . . . . . . . . . . . . . . $8,500,000
Market Approach . . . . . . . . . . . . . . N/A
Cost Approach . . . . . . . . . . . . . . . $7,600,000
The Income Approach involved a detailed analysis of the earnings potential of
the property. The Income Approach best considers the physical characteristics,
earnings potential and risk specific to the subject entity. Because of the
limitations inherent in the Cost and Market Approaches, the value estimated by
the Income Approach was considered the best representation of value for the
subject.
The Cost Approach involved a detailed analysis of the individual components of
the property. These costs were estimated using sources which were considered
to be reliable. However, in light of the complexity of estimating the
replacement cost and depreciation of the various components in this approach,
it is not necessarily the most reliable of the value estimates. Furthermore,
the Cost Approach, as performed herein, failed to include such assets as a CON
and going concern value.
Based upon the analysis as presented in this report, it is estimated that the
market value of the leased fee interest in Integrated Health Services of St.
Louis at Gravois, as of March 1, 1994, can be represented in the rounded amount
of:
$8,500,000
==========
58
<PAGE> 73
CERTIFICATION
We certify that, to the best of our knowledge and belief...
o The statements of fact contained in this report are true and
correct, and that this report has been prepared in conformity with
the Uniform Standards of Professional Appraisal Practice of The
Appraisal Foundation and the Principles of Appraisal Practice and
Code of Ethics of the American Society of Appraisers.
o The reported analyses, opinions and conclusions are limited only
by the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions and conclusions.
o We have no present or prospective interest in the property that is
the subject of this report; we have no personal interest or bias
with respect to the parties involved.
o The appraisal assignment was not based upon a requested minimum
valuation, a specific valuation, or the approval of a loan.
o Our compensation is not contingent on an action or event resulting
from the analyses, opinions or conclusions in, or the use of, this
report.
o Gerald L. Huether has personally inspected the property and Wade A.
Collins has provided professional assistance.
/s/ Wade A. Collins
- ---------------------------------------------
Wade A. Collins, Vice President, Healthcare
Valuation Counselors Group, Inc.
/s/ Gerald L. Huether
- ---------------------------------------------
Gerald L. Huether, Staff Appraiser
Valuation Counselors Group, Inc.
59
<PAGE> 74
ADDENDUM
<PAGE> 75
BUSINESS ENTEPRISE SCHEDULES
<PAGE> 76
A-1
SCHEDULE A-1
INTEGRATED HEALTH SERVICES OF GRAVOIS AT ST. LOUIS
COMPARATIVE INCOME STATEMENT DATA
Year End Year End
12/31/92 12/31/93
REVENUE:
Patient Revenue (Net) $6,268,316 $6,396,923
Ancillary & Other 1,215,862 812,491
--------------------------
TOTAL REVENUE $7,484,178 $7,209,414
--------------------------
OPERATING EXPENSES:
General & Administrative 399,183 477,996
Dietary 356,397 358,122
Housekeeping & Laundry 223,171 199,384
Healthcare 2,635,850 2,517,531
Ancillary & Social Services 2,058,298 2,329,156
Property 163,570 136,873
--------------------------
TOTAL OPERATING EXPENSES 5,836,469 6,019,062
--------------------------
NET OPERATING INCOME 1,647,709 1,190,352
(PRE-MGT.FEE)
<PAGE> 77
A-2
SCHEDULE A-2
INTEGRATED HEALTH SERVICES OF GRAVOIS AT ST. LOUIS
OCCUPANCY AND REVENUE ANALYSIS
<TABLE>
<CAPTION>
Forecasted Forecasted Forecasted Forecasted Forecasted