An appraisal is an estimate of value; it is an opinion of value. Its accuracy depends on the basic competence and integrity of the appraiser and on the soundness and skill by which the appraiser processes the data. Its worth is influenced by the availability of pertinent data. The professional appraiser seeks current facts and the appraiser seeks to be practical. The appraiser's opinion must be without bias. As with other types of "markets" the real property appraiser does not make the market but rather interprets the market.

The three traditional approaches to value, namely the Cost Approach, the Income Approach. and the Market Data Approach (Direct Sales Comparison Approach), each discussed separately below, are all comparative approaches in that the basic data comes from direct comparisons in the market, indirect comparisons in the market, and/or appraiser's judgment, which is based on market experience.

In the Cost Approach, the cost to reproduce the property at the date of appraisal, less an appropriate allowance for depreciation (physical deterioration, functional obsolescence, and economic obsolescences) is made by market comparisons of cost and depreciation. The Cost Approach tends to set the upper limit of value since no property can be worth more than it would cost to build another property of equal utility assuming no unreasonable delays.

In the Income Approach, the future operation experience is estimated from comparable market data. Gross rental schedules, vacancy and collection losses, fixed expenses, operating expenses, and reserves for replacements are estimated and result in an estimate of net income. This net incoine is converted to an estiaate of value by a capitalization process. The capitalization rate (interest rate and recapture rate) is based on demonstrated rates to be found in the market. The method and technique at capitalization is determined by the nature of the property in the market.

In the Market Data Approach (Direct Sales Comparison Approach), the subject is compared to sales of similar properties. The sales are analyzed to bring out similar characteristics to common denominators. Such common denominators may include, number of units, number of rooms, square feet, front feet, or a gross rent multiplier. Where necessary, adjustments are made to allow for difference of date of sale, location, size of property, condition of property, and other factors.

In this appraisal, all three approaches will be used as follows:

Cost Approach: Estimated reproduction cost of the building less estimated depreciation.

Value 1: Value of proposed use
Value 2: Value of alternative use (apartment or office)
Market approach:
Value of proposed use
Value of school buildings or other similar buildings sales provided
Value of alternative use - Based on apartment sales and office sales
Income approach:
Value of proposed use: Based on lease and projected income statement.
Income Statement:
Value of alternative use: Based on income as apartment of office less estimated expenses to operate.

The Cost Approach is one of three methods used by real estate appraisers in estimating the value of a property. The Cost Approach is based on the assumption that the reproduction cost new normally sets the upper limit of value, provided the improvement represents the highest and best use. A principle of real property value states that when two or more services with substantially the same utility are available, the one with the lowest price will receive the greatest demand. Also, no man is justified in paying more for an existing property than the replacement cost new of the improvement and land. This assumes that the same utility and desirability is available.

In estimating what a particular building would cost to build today,the appraiser consults with building contractors. The appraiser also refers to building costs manuals which provide replacement costs on a local basis.

As stated above, replacement cost new usually sets the upper limit of value. The appraiser assumes that a newly constructed building has advantages over the existing building. After the replacenent cost new is estimated the appraiser evaluates the deficiencies of the existing improvement compared to the new building. The difference is called depreciation.

Depreciation can be defined as loss from the upper limit of value. Depreciation occurs in three ways:

(1) Physical Depreciation- loss from the upper limit of value caused by deterioration (wear and tear, decay, cracks, structural defects, etc.). Physical depreciation can be broken down into physical depreciation of curable items which would include painting of interior, replacement of carpeting, etc. Physical depreciation of incurable items would be in the bone structure of the building (foundation, floor joists, etc.)

(2) Functional obsolescence- loss from the upper limit of value due to a poor floor plan, mechanical inadequacy or overadequacy, size, style. etc. Functional obsolescence can be curable or incurable.

(3) Economic obsolescence- loss from the upper limit of value caused by changes to the property, such as inharmonious zoning or property uses, legislation, etc.

In summary, we can say that the Cost Approach consists of the tollowing four steps:

1. Estimate the current cost of reproducing the existing improvements.
2. Estimate and deduct depreciation from all causes.
3. Estimate land's value, as if vacant.
4. Addition of land's value and the depreciation replacement cost of tne improvements.


Parts of the calculation are based on the Dodge Reports and Marshall Swift Cost Manual. Example: dormitories- C1ass C, average, section 17, page 15.Base rate 44.86. (Height typical,, perimeter adjustment 1.0).

Building #7- Dormitory
(area of building x base rate) 11,880 sq. ft. x 44.86 $532,836.80
Addition: concrete and landscaping $10,000
Less depreciation: Physical (based on age, life condition) Life of building is 60 years, economic life remaining 40 years. Depreciation* 20/60 or 33%. ($175,836.14)
Add land parcel: $20,000
Indicated value of improvements as converted: $200,000.00
Cost approach value:  $587,000.66

Building #6-Church
3,000 sq. ft. x $60.00  $180,000
Less physical depreciation based on age and condition: (30%)  ($54,000)
Add land parcel $20,000
Cost Approach Value:  $146,000

Building #5- East dormitory
18,030 sq. ft. x $44.86 $808,825.80
Less physical depreciation based on age & condition- (30%)  ($242,647.74)
Add land parcel $40,000
Cost Approach Value:  $606,178.06

Building #4-Library
8,300 sq. ft. x $40.00 $332,000
Less 10% depreciation ($33,200)
Add land parcel $20,000
Cost Approach Value  $318,800

Building #3 - Dining Hall
 5,760 sq. ft. x $40  $230,400.00
Less 30% depreciation  ($23,040)
Add land parcel $20,000
Cost Approach Value $227,360

Building #2-Gym
 22,450 x $25 $1,010,250
Less depreciation ($168,375)
Add land parcel $50,000
Cost Approach Value  $901,875

Building #l- House
6,.160 x $32 $197,120.00
Less depreciation ($39,425.00)
Add land parcel $10,000
Cost Approach Value  $167,695.00

Total Cost Approach Value
Building Value
#7:Dormitory $587,000.66
#6:Church $146,000.00
#5:EastDormitory $606,178.06
#4:Library $318,800.00
#3:DiningHall $227,360.00
#2:Gym $901,875.00
#1:House $167,695.00
TotalCost $2,954,908.72



The Market Approach To Value estimates value by comparing subject property to other similar properties that have sold in the market recently.

The sales used represent sales. These sales vary in value. This is assumed to be based on the broad spectrum of reuse of the buildings. The sales are viewed only as indicating a range of values.

Sale #1- Battle Creek, MI
Yalcin Enterprises, Restaurant- 14.600 sq. ft.
Purchase price. $650,000 or $44.52 per sq. ft.

Sale #2-Pennfield Township
Morgan Road Church of Nazarene- 12,000 sq. ft.
Asking price: $290,000 or $24.17 per sq. ft.

Sale #3-Kalamazoo, MI
 Kalamazoo Intermediate School- 16,100 sq. ft.
(Now used as a school for mentally retarded children.)
 Purchase price: $400,000 or $24.84 per sq. ft.

Sale #4-Sangatuck, MI
Parochial high school and seminary- 158,500 sq. ft.(Converted to medium security prison.)
Purchase price: $4,201,000 or $26.50 per sq.ft.

Sale #5-Warrenton, MO
Seminary and retreat complex- 131,591 sq. ft.
(Converted to Christian education training, distribution, and conference center)
Purchase price: $4,000,000

Sale #6-Auburn, IN
Seminary- 50,000 sq. ft. (Offering to convert to religious residential education center.)
Asking price: $1,300,000 or $26.00 per sq. ft.

Sale #7- Montegomery Cnt. PA
Elementary School- 54,000 sq. ft. (Converted to offices.)
Purchase price: $400,000 or $25.24 per sq. ft.

Sale #8-Western Arkansas
Research center for child behavior- 55,466 sq. ft.
Asking price: $1,450,000 or $25.54 per sq. ft.

Sale #9-Southwestern MN
High School to be converted to industrial use- 72.000 sq. ft.
Selling price: $3.888,000 or $54.00 per sq. ft.

Sale #10-Central Minnesota
Former convent converted to treatment center- 68,000 sq. ft.
Selling price: $3,298,000 Of $48.50 per sq. ft.

Sale #11- Northern Iowa
Former creamery converted to office building- 91,000 sq. ft.
Selling price: $5,573D750 or $61.25 per sq. ft.

Sale #12-Central Iowa
Former packaging plant converted to industrial use-
84,000 sq. ft.
Selling price: $4,620,000 or $55.00 per sq. ft.


The twelve sales are used to demonstrate a wide range of indicated values. These values are influenced by potential change in use, excess ground, zoning, cost to change use, potential of market area, and governing bodies assistance in changing use. Each of the ratios is a value before change in use. This range is general1y from $25.00 to $50.00. with an average for the twelve sales of $37.12.

Building #1- Indicated Value Range
 6160 sqft x $24 = $147,840
 6160 sqft x $46 = $283,360

 Building #2- Indicated Value Range
 22,450 sqft x $24 = $528,800
 22,450 sqft x $46 = $1,032,700

 Building #3- Indicated Value Range
 5760 sqft x $24 = $138,240
 5760 sqft x $46 = $264,960

 Building #4- Indicated Value Range
 8300 sqft x $24 = $199,200
 8300 sqft x $46 = $381,800

 Building #5- Indicated Value Range
 18,030 sqft x $24 = $432,720
 18,000 sqft x $46 = $829,380

 Building #6- Indicated Value Range
 3000 sqft x $24 = $72,000
 3000 sqft x $46 = $138,000

 Building #7- Indicated Value Range
 11.880 sqft x $24 = $285,120
 11,880 sqft x $46 = $546,490

Based on market sales the indicated value is $2,950,000.


The Income Approach to value considers the net income attributable to the total property, capitalized into an indication of value. To deteruine the appropriate net income it is necessary to estimate the gross income the property as capable of producing, then deducting for anticipated losses attributable to vacancy and credit loss. The cost of ownership operations is then deducted from the effective gross income to arrive at a net income. The net income is then capitalized into an indication of value.

The following is an analysis of the significant elements of the Income approach, together with the resulting value indication. Rental data is provided from two general areas, and from the operational estimates of Camel Center.

Income groups:

 1. Income projections from Camel Center prospectus.
 2. Alternative rental. of the Project as office and apartments.
 3. Group home rentals in Lincoln.


The lease sets out 10% of the gross revenue of Camel Center Rehabilition shall be paid to the owners of the real estate. There is no minimum or maximum. The income projections and rental are as follows:
1990 1991 1992 1993 1994
Income $1,800,000 $2,672,000 $3,513,600 $4,536,000 $5,940,000
Lease $180,000 $267,200 $351,360 $453,600 $594,000


The following is an explanation of the operating expenses of the real estate (subject property). The expenses are set out based on appraiser's understanding of the typical terms of the leases now enforced.

The expenses and vacancy of the subject property are based on comparison to known operating expenses, and vacancies of similar properties, together with data relative to known expenses of the subject itself. The following is a summary of these expense items for each planned or potential use.

Expenses based on use
Camel Center Apt. House Office Care Home
Vacancy* 0% 5% 10% 15%
 Taxes 3,150 3,150 3.150 3,150
 Management 5% 6% 5% 5%
 Maintenance&Reserve 0 6% 5% 6%
 Insurance 0 600 600 600
 Heat 0 5,000 5,000 0
 Electricity 0 3,000 3,000 0
 Sewer&Water 0 1.200 1,200 0
 Garbage 0 600 600 0
*Vacancy based on appraiser's knowledge of each expense

Capitalization Rate:

A rate is a ratio utilized to translate net income into a value indication by the Income Approach. In the case of the subject property, the net income will be divided by the overall capitalization rate stated as a percentage, and the resulting sum is considered as the value indication by the Income Approach.

One of the most reliable methods of estimated capitalization rates utilized in recent years is the Band of Investment theory, utilizing a synthesis of mortgage rates and equity return rates. This method of estimating the capitalization rate was considered to reasonable reflect market conditions. However, considering the current high mortgage interest rates, this method is not considered reflective of market conditions. For example, utilizing a 16% interest, 75% loan to value mortgage for a 27 year period, together with a modest 8% equity yield, results in a capitalization rate in 14% range.


As a continuing study, appraiser follows the sales of real estate in Lincoln. This study is made in an effort to follow the currsnt market returns that investors are requiring on their investments. Sales noted show returns of .09 to .13. In appraLser's opinion, because of the age, small town location of subject property, and speculative nature of each use, the capitalization rate is estimated to be .109 for the office and apartment use, .115 Camel Center, and .112 for custodial care home.


Camel Center Apt Office Care Home
Estimated Effective Income $1,846,160 $345,000 $450,000 $324,000
Estimated Expenses 114,358 25,200 20,000 50,000
Net Income to the Real Estate 1,731,802 319,800429,800 274,000


Capita1ization of Income Ratio Value
Each NOI is then capitalized into an indication of value, based on the capitalization rate.

Net Operating to the Real Estate Capitalization Ratio = Indicated Value
John F. Kennedy College  $3,600,000
Apartment House  $2,340,000
Office  $2,110,200
Custodial Care Home  $1,551,000

The final value, based on the Income Approach is  $3,600,000

This is higher, as can be readily observed, than the other alternative uses, but this is because of the speculative nature of the proposed business.

Value for Alternative Uses:

Both the office use and the apartment use require extensive alterations. The custodial care home is again a business and therefore speculation.

The final value is therefore estimated to be $2,950,000.


The three approaches to value have given the following indications of values:
Approach Value
COST $2,954,908.72
MARKET  $2,950,000.00
INCOME  $3,600,000.00

Several approaches and considerations have been included because of the unique nature of this appraisal. The Market Approach is based on the subject buildings as they are today, with the obvious implications for improvements substantially increasing the value of the property.

The Cost Approach sets the lower limit because the property has not reached its potential for a long period of time.

The Income Approach is relied upon the heaviest because the subject property is an income producing property. Invetors but this type of property based on return.

The final value estimated for the property in is proposed use in $3,2000,000.

L. W. Hensrud

L. W. Hensrud
Consultation Services


The certification of the appraiser appearing in the appraisal report is subject to the following conditions and to such other specific and limiting conditions as are set forth by the appraiser in the report.

1. The appraiser assumes no responsibility for matters of a legal nature affecting the property appraised or the title thereto. nor does the appraiser render any opinion as to the title. which is assumed to be good marketable. The property is appraised as though under responsible ownership.

2. Any sketch in the report may show approximate dimensions and is included to assist the reader in visualizing the property. The appraiser has made no survey of the property and all improvements are assumed to be within the boundaries.

3. The appraiser is not required to give testimony or appear in court because of having made the appraisal. With reference to the property in question, unless specific arrangements have been previously made therefor.

4. Any distribution of the valuation in the report between land and improvements applies only under the existing
program of utilization. The separate valuations for land and building must not be used in connection with any other appraisal and are invalid if so used.

5. The appraiser assumes that there are no hidden or inapparent conditions of the property, subsoil, or structures. which would render it more or less valuable. The appraiser asaumes no responibility for such conditions, or for engineering which might be required to discover such factors.

6. Information, estimates. and opinions furnished to the appraiser. and contained in the report, were obtained from sources considered reliable and believed to be true arid correct. However, no responsibility for accuracy of such items furnished the appraiser can be assumed by the appraiser.

7. Disclosure of the contents of the appraisal report is governed by the Bylaws and Regulations of the professional appraisal organizations.

8. Neither all, nor any part of the content of the report, or copy thereof (including conclusions as to the property value, the identity of the appraiser, professional designations, reference to any professional appraisal organizations, or the firm with which the dppraiser is connected), shell be used for any purposes by anyone but the client specified in the report, the mortgages or its succeisors and assigns, mortgage insurers, consultants, professional appaisal organizations, any state or federally approved financial institution, any department, agency, or instrumentality of the U.S. or any state or
the District of Columbia, without the previous written of the appraiser; nor shall it be conveyed by anyone to the public through advertising, public relations, news, sales, or other media, without the written consent..

9. On all appraisals subject to satisfactory completion, repairs, or alterations, the appraisal report and value conclusion are contingent upon completion of the improvements in a workman-like manner.

10. The value estimated is in dollars on the basis of the currency exchange prevailing on the date of the appraisal.

11. If this appraisal is used for mortgaye loan purposes, (1) the equity cash reuuirements of the sponsor have not been analyzed, (2) the loan ration has not been suggested, (3) the amortization method and term have not been suggested, and (4) in the case of property to be constructed, compliance with plan and specification is yet to be determined. And further, any reference to loan ration, amortization terms and interest rate included with the report, is made as an estimation of market conditions and not as a requirement of the appraisal.


Definition of market is the highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sales, and 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 specified date and the passing title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in cash or its equivalent; (5) financing, if any is on terms generally available in the community at the specified date and typical for the property type in its locale; (6) the price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs, or credits incurred in the transaction.


Highest and best use is defined as, "the most profitable likely use to which a property may legally be developed."

In estimating highest and best use of the subject property, consideration was given to the condition and usability of the existing improvements. Also given consideration was the adaptability of property for business and the adaptability of the land as if vacant and ready for development for other uses.


The Appraiser Certifies that:

1. The Appraiser had no present or contemplated future interest in the property appraised; and neither the employment to make the appraisal, nor the compensation for it, is contingent upon the appraised value of the property.

2. The Appraiser has no personal interest in or bias with respect to the subject matter of the appraisal report or the participants to the sale. The "Estimate of Market Value" in the appraisal report is not based in whole or in part upon the race, color, or national origin of the present owners or occupants of the properties in the vicinity of the property appraised.

3. The Appraiser has personally inspected the property, both inside arid out, and has made an exterior inspection of comparable sales usted in the report as shown. To the best of the Appraiser's knowledge and belief, all statements and information in this report are true and correct, and the Appraiser has not knowingly withheld any significant informatione

4. All contingent and limiting conditions are contained herein (imposed by the terms of the assignment or by the undersigned affecting the analysis, opinions, and conclusions contained in the report)

5. All conclusions and opinions concerning the real estate that are set forth in the appraisal report were prepared by the Appraiser whose signature appears on the appraisal report, unless indicated as "Review Appraiser". No change of any item in the appraisal report shall be made by anyone other than the Appraiser, and the Appraiser shall have no responsibility for any such unauthorized change.

6. That to the best of my knowledge and belief the statements contained in the appraisal herein set forth are true, and the information upon which the opinions expressed therein are based is correct; subject to the limiting conditions therein set forth.

7. That I have not revealed the findings and results of such appraisal to anyone other than the client, and I will not do so until so authorized by the client, or until I am required to do so by due process of law, or until I am released from this obligation by having publicly testified as to such findings.

L. W. Hensrud

L. W. Hensrud
Consultation Services