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<br />Happy Harbor Methodist Home <br /> <br />La Porte, Texas <br /> <br />In the Income Approach, two separate techniques arc considered. The first involves direct <br />capitalization. In the direct capitalization technique, income and expenses, as well as a vacancy <br />and credit loss factors, are estimated. 111is provides an estimate of stabilized net operating <br />income for the subject property. After the single year's stabilized NOI is derived, it is capitalized <br />into an indication of value by applying an appropriate capitalization rate. The appropriate <br />capitalization tate is concluded from an analysis of the improved sales. investor surveys and the <br />band of investment technique, which are discussed later in the report. In deriving income and <br />expenses, a number of rent comparables as well as expense comparables have been taken into <br />consideration. In the Expense Analysis, comparisons were made between the expense <br />comparables and the historical expenses for the subject. <br /> <br />The second income technique is the discounted cash flow analysis. This involves the discounting <br />of future income streams to a present value indication. The present value of the future sale of the <br />property is also added to the present value of the income streams for a whole property value <br />estimate. This is also referred to as "yield capitalization". Historically the subject property has <br />operated in the 75% to 85% occupancy levels based upon management. While this is not <br />considered stabilized, the lease-up period was estimated at 12 months. Since the lease-up period <br />is relatively short, this approach was not analyzed. <br /> <br />The sales comparison approach is the third valuation methodology. The sales comparison <br />approach involves sales of similar property types. We have used five sales of similar skilled <br />nursing home facilities located throughout Texas that were compared to the subject property and <br />various adjusunents have been made where appropriate. After the application of these <br />adjustments, the sales comparison approach has provided an indication of value for the property. <br /> <br />The final opinion of the market value for the subject was based primarily on the income <br />approach, with secondary emphasis placed on the cost and sales comparison approaches. <br /> <br />Our scope of work included the following: <br /> <br />· Visited the subject property on February 14, 2007. <br /> <br />· We did not physically measure the building, but relied on area measures provided by the <br />rent roll and the current owner of the subject property. The net leasable area for the <br />subject property is based upon the rent roll provided. <br /> <br />· Interviewed market participants to establish a complete understanding of the operation of <br />the subject property, how the subject property is positioned, and competes in the local <br />market. <br /> <br />· We were not provided a recent surveyor building specifications regarding the <br />construction details of the subject improvements. No environmental studies/reports or <br />property condition assessment reports were available for Our use. <br /> <br />· Obtained demographic and economic infonnation regarding the regional economy, <br />immediate neighborhood and municipality. <br /> <br />The Gerald A, Teel Company, Inc. <br /> <br />2 <br />