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Home My WebLink About01-14-04 (3) 857976.7.0101/12/44:26 PM ESTATE OF LOY T. HEMPT Deceased : IN THE COURT OF COMMON PLEAS : CUMBERLAND COUNTY, PENNSYL VANIA ORPHANS' COURT DMSION TRUST CREATED UNDER ITEM FIFTH OF THE WILL NO. 21-77-231 PREHEARING MEMORANDUM OF GERALD L. HEMPT. TRUSTEE OF THE RESIDUARY TRUST UNDER WILL OF LOY T. HEMPT I. STATEMENT OF FACTS The facts appear in the Trustee's Reply to Objections, especially Pages 2 - 5, 11, 13, 15, 16,27,29 - 33, and in the Trustee's Accounting, especially Pages 28 - 31,41 - 44(c), and 166- 170, all of which is incorporated herein as iffully set forth. II. STATEMENT AS TO PRINCIPAL ISSUES 1. Did the Trustee abuse his discretion in distributing income and principal from the Trust to Jean Hempt? Suggested Answer: No 2. Did the Trustee abuse his discretion by dividing the Trust into three trusts? Suggested Answer: No 3. Did the Trustee abuse his discretion in valuing three family businesses for purposes of dividing the Trust into three trusts. Suggested Answer: No r III. SUMMARY OF LEGAL ISSUES REGARDING ADMISSIBILITY OF TESTIMONY, EXHIBITS, OR ANY OTHER MATTER, AND LEGAL AUTHORITIES RELIED UPON. Kalbach Obiectors' Motion in Limine to Preclude Attorney Expert Testimony on Legal Issues. The Kabach Objectors seek an order prohibiting e. Thomas Work, Esquire, from testifying as an expert witness because he is an attorney testifying on a legal subject. The Trustee has responded to this Motion arguing that the testimony should not be excluded and that the Auditor has the discretion to admit Mr. Work's expert testimony. IV. IDENTITY OF WITNESSES TO BE CALLED 1. Gabriel F. Nagy, AS.A 2. William F. Rothman, IRAS 3. Gerald L. Hempt 4. C. Thomas Work, Esquire 5. Robert L. Freedman, Esquire 6. Robert Abel, CPA V. LIST OF EXHIBITS 1. Appraisal Report of Gabriel F. Nagy, AS.A 2. Appraisal Report of William F. Rothman, IRAS 3. Letter of Robert L. Freedman, Esquire, regarding valuation of stock of C. A. Hempt Estate, Inc. dated August 24,2001 4. Expert Report ofe. Thomas Work - 2- VI. SETTLEMENT DISCUSSION None ~~c Ivo V. Otto, III Attorney ill # 1. 11'-" Mattson Deardorff Williams & Otto 1 0 East High Street Carlisle, P A 17013 - 3 - Dated \ \ \ ,\ \ . ,2004 ~ ~,. CONADENl1AL COMPASS ~ r::>- CAPITAL PARTNERS, LTD. CONRDENTlAl -t' December 7, 2001 Mr. George Hempt President Hempt Brothers, Inc. 205 Creek Road Camp Hill, PA 17001-5019 Dear M,r.. H.empt: ~ You have asked us to render an opinion of the fair market value as of a current date of a minority block of the common stock (the II Shares ") of Hempt Brothers, Inc. (the II Company II ) . The valuation will be restricted in scope and purpose to that of establishing the fair market value of Shares for your use in making an offer to buyout a minority shareholder of the Company. Our opinion ,will be presented, at, your request, as a Summary. Appraisal Report as defined in the Uniform Standards of Appraisal Practice of the Appraisal Foundation. We have reviewed with you our methodology and calculations and have retained all our workpapers and underlying information in our files. Compass Capital Partners, Ltd. ("CCP") is an investment banking firm regularly engaged in the valuation of businesses and significant interests therein. The credentials of the undersigned are attached as Appendix I. This report was prepared by the 259 N. Radnor-Chester Road, Suite 220 · RadnoI; PA 19087-5289 Phone: 610.293-0210 . FAX: 610-293-0211 I ~, f. ; j:." /l~.,.t: CONFIDENTIAL LdNFiDENTIAL Mr. George Hempt December 7, 2001 Page 2 undersigned, with research assistance from Senior Associate Kristin Van Dusen. Neither CCP nor any of its officers or employees has any interest in the Company and all of such persons are independent with respect to the valuation discussed herein. CCP's compensation for services rendered is not contingent on any action or event resulting from our opinion. ~ This valuation is prepared in conformance with the ethics and standards of the American Society of Appraisers and the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation. Limitinq Conditions In forming our opinion, we have relied on (i) the Company's audited financial statements for the fiscal years ended February 28, 1997 thrc:n.lgh 2001; (ii) internally prepared financial statements for the six months ended August 31, 2000 and 2001; and (iii) a description of the Company's business from materials sent to us by the Company, as well as information derived from a visit to the Company's Camp Hill headquarters by the undersigned. Discussion The Company is engaged in two major activities: h~ghway construction and sales of aggregate materials from its quarries. It 2 j l ,/::..<;" ~..'..,..':.:: CONFIDENTIAL CONFIDENTIAL Mr. George Hempt December 7, 2001 Page 3 also has a farm operation with extensive land holdings but minimal contribution to cash flow. The Company's historical balance sheets are summarized at Exhibit 1. The Company's summary results of operations for the 1997 through 2001 fiscal years as well as for the latest twelve months ended August 31, 2001 (IILTM 200111) are set forth in Exhibit 2. ~ Exhibit 2.1 sets forth the calculation of LTM 2001 results. In performing our valuation analysis, we reviewed the financial and market information of six companies engaged in business we deemed to be reasonably comparable to the Company's businesses and that had common stock that was publicly traded. Our analysis of their operational, financial and market trading characteristics are set forth at Exhibits 3, 4, 5, and 6. We calculated the valuation ratios which in our experience are most frequently referenced in the valuation of the securities of private companies: the Total Capital to Revenues Ratio (TC/Rev) i Total Capital to EBIT Ratio (TC/EBIT)i Total Capital to EBITDA Ratio " (TC/EBITDA) i and Total Capital to Assets (TCjAssets) ..Total Capital is equal to Market Equity plus Total Debt. In Exhibit 7, we selected the lowest EBITDA multiple from each range for each of the Company's two principal lines of business. We selected the low end of each range because of the disparity between the guideline companies' projected earnings growth rates and the 3 CONFIDENTIAL L,jNF1DENTIAL Mr. George Hempt December 7, 2001 Page 4 Company's recent earnings history and the Company's lower earnings margins than the earnings margins of the comparables. We then we weighted the selected EBITDA multiples by the current revenue contribution of the Company's two lines of business to arrive at a weighted EBITDA multiple to apply to the Company's normalized EBITDA. .., We applied the multiple calculated in Exhibit 7 to the Company's financial information in Exhibits 8.1 and 8.2. Private company acquisitions are most often valued on the basis of EBITDA multiples; we have accordingly chosen that indicated multiple to capitalize the Company's earnings. In Exhibit 8.1, we applied the calculated EBITDAmultiple to LTM 2001 EBITDA. We deducted debt, and added the fair market value of (i) the assets used in farm operations and (ii) the Company's miscellaneous land holdings. Since the resulting value is negative, we did not consider this calculation to be meaningful. In Exhibit 8.2, we prepared the same calculation as in Exhibit .,- 8.1, using normalized earnings, rather than the Company'l s latest earnings. To determine the normalized earnings of the Company, we calculated weighted average EBITDA for 1997 through LTM 2001, resulting in weighted average EBITDA of $2,166,404. 4 . ' 'CONFIDENTIAL CONFIDENTIAL Mr. George Hempt December 7, 2001 Page 5 Based on the calculations in Exhibit 8.2, the fully distributed equity value of the Company is $13,170,700, or $1,3]',6. 02 peJrsh~re. In order to recognize the effect of the illiquidity of the Shares, it is appropriate to apply a mar:ke~ability 4~scount. Our indicated equity value, being based on trading in minority blocks of ~tock in the public markets, of $1,316.02 per Share represents a mqrketable minority value and needs to be adjusted for the lack of a market for the Shares. In assessing the appropriate discount to reflect such lack of control and lack of marketability, therefore, we look to the studies of discounts from freely traded values paid for restricted shares of public companies. 1 Such an examination should yield a discount that should be no lower than the median discounts recorded since liquidity in those cases is assured within two years; liquidity for the Shares cannot be assured in that time frame, lThree such studies, chos~n for this report because of the availability of detail in their presentation, are Insti- tutional Investor Study Report of the Securitiiis and Exchanqe Commission, H.R. Doc. No. 64, Part 5, 92d Congo 1st Sess. (1971), pp. 2444-2456; Moroney, "Most Courts Overvalue Closely Held Stocks", Taxes (March 1973), pp. 154 - 5; Emory, "The Value of Marketability as Illustrated in Initial Public Offerings of Common Stock", Business Valuation News and Business Valuation Review, September 1985, December 1986, June 1989, December 1990, December 1992, March, 1994, and December 1995. 5 , CONFIDENTIAL CuNFIDENTIAL Mr. George Hempt December 7, 2001 Page 6 because we are advised by management that there is no intention of selling the Company and it has no prospect of going public. All of the summaries of the studies cited in footnote 1 above enable one to draw conclusions as to size and trading market of the companies in which restricted stock was sold, and the pre-IPO study differentiated between sales (in which money changed hands) and options (where no cash was involved). Making the intuitive assumption that restricted stock of the smaller, earlier stage and more thinly traded companies would require the largest discounts, the published summaries of such studies yield the following analysis: SEe Institutional Investor Study (1971): Type 0 f Company . Weiqhted Averaqe Discount at Upper End of Ranqe OTC .(Non-reporting) $100,000 or less revenues 55% (38 of 112) 58% (18 of 66) Moroney Study (March 1973) : purchaser2 Averaqe Discount at Upper" End of Ranqe 66% (1 of 4) 37% (2 of 6) . 75% (J of 10) 54% (8 of 32) 55% (9 of 35 ) Bayrock Growth Fund Diebold Venture Capital Fund Enterprise Fund New America Fund ValueLine Development Capital 2The names of the selected Funds indicate that they invest in the smaller, early-stage companies rather than established market performers. 6 CONFIDENTIAL vONFIDENTIAL Mr. George Hempt December 7, 2001 Page 7 ValueLine Special Situation Fund 51% (10 of 38) Robert Baird & Co. Studies (December 1992 - December 1995): Type of Transaction Averaqe Discount from IPO Price Sale prior to IPO 46% (43 sales) The foregoing studies are by no means the only ones dealing with this subject3. However, the results cited above are believed to be representative. Based on the studies cited, the benchmark discount for lack of marketability from the freely-traded value of the stock of a public company which: (i) is growing with proven management; (ii) is weaker and less well known than larger public companies; (iii) does not pay a dividend and where small blocks of shares have no control; and (iv) will have to be held for 2 - 3 years before full marketability, would seem to be between 37% and 75%, with a median of 55% of the average discounts cited above.; Contrasted to these stocks, the Shares have no--prospect of becoming publicly traded and can be converted into cash (Qther than by sale to the Company) only upon sale of the Company. However, 3See Pratt, Reilly & Schweihs, Valuinq a Business, 3d ed. (pp. 3 3 5 - 348). 7 CONFIDENTIAL . . ' ~ ClJl~FIDENTIAL Mr. George Hempt December 7, 2001 PageS management has advised us that there are no present intentions of selling or liquidating the Company. Therefore, we are of the opinion that .p.'~O;% 4iscqunt to the indicated e~it;:yvp.lue of $1;316.02 per Share arrived at by the guideline companies analysis isa~'B?~9,~%4tte. That 40% is at the lower end of the range of the discounts cited. Application of that discount yields an indicated value of.,'$:7~9.6'1 per Share. We considered the book value of the Company. However, book value as a measure of value is only relevant if such a value can be realized by shareholders. As indicated above, there is no current intention of selling or liquidating the Company; accordingly, asset values cannot be realized by minority shareholders, since they cannot force the Company to sell or liquidate. Therefore, we do not consider book value in and of itself to be relevant in arriving at our opinion of the fair market value of the Shares. In Exhibit 9, we spread the available information about acquisitions of reasonably comparable companies and calculated multiples. The information available was insufficient. for us to be able to derive any meaningful valuation ratios. We understand from the Company that it has been advised by counsel that the Shares are subject to a Shareholders' Agreement dated Oct.o}j~r. 20, 1'964 (the !J Agreement !J). We have reviewed a copy of the Agreement. The Agreement requires that a shareholder offer 8 .' CONFIDEN11AL CuNFIOENT\AL Mr. George Hempt December 7, 2001 Page 9 shares to the Company and other shareholders at book value before selling them. Book value is defined in the Agreement as tangible book value as of the date of the offer as determined by the Company's regular independent auditors. If the;i.;~:\8~~Bw::.anq. the '.; ',.,- ...~.:.., ,'.... C'" .."....' ,"'-,.-_q ;.,n ','" , oth~F ~ij~:lt~gt#~d~~9i'~~91*'~~';H:&;~;;i:f>tf..e.:r::r the. selling sl:1areholdeI:' miilY s e;Ll. tl1;~..i~~l3.~:~~(.tHB,'d!J.;t:~~~~)B_~~~~\.p:~', . filly. t>r ice '."f.' l~iai~~'f"~~~~'i;i$I!8:::!f$s, cont;'inue . to b~Sl~j,l;<t:.~.ttQ t;;he A@reement . The Company has every inGent iye to buy share-sat book value becc3.usepuch a transaction is financially positive for the other shareholders. We note that the Company's farm operations assets and miscellaneous real estate alone are worth more than the entire reported book value of the Company's assets. An arm's length purchaser of the Shares would have every expectation that he could not resell the Shares except to the Company at book value. Therefore, he would have no incentive to pay more than book value. Conversely, a seller would have no incentive to sell at less than book value when the Company stands ready to ... buy at book value. At August 31, 2001, book value was.$b,440,OOO, or~643.49 per share. We note that our calculated value of the fair market value of the Shares-$789.61-is approximately 23% more than book value per Share. So long as the Agreement continues to be in force and 9 " CONAOENT1Al . JONFIDENTIAL Mr. George Hempt December 7, 2001 Page 10. management decides not to sell or liquidate the Company, per Share book value trumps any per Share calculated value. Opinion of Value Based on the foregoing, it is our opinion that the fair market value of the Shares as of August 31, 2001 is $643.49 per Share. '" COMPASS CAPITAL PARTNERS, LTD. Byl c;;,~ ~,A)1} rGabriel F. Nagy, A.S~A. i President ! 10 CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL APPENDIX I GABRIEL F. NAGY President, Compass Capital Partners, Ltd. EXPERIENCE Responsible for engagements in the following areas: Valuations - Valuation of business entities and significant blocks of corporate securities, both public and private, in connection with acquisitions, estate plamring, employee benefit plamring, raising capital, and litigation. Corporate financial consulting - Advising corporate clients on transactions and structuring fmancings involving bank financing, public securities markets, and mergers and acquisitions. Recent valuation and rmancing assignments have included: Valuation for employee stock ownership plans of companies ranging from $20 million to over $100 million in revenues. Fairness opinion to shareholders of a private company being acquired for stockofa public company. Advising a public company with undervalued shares on raising additional capital at acceptable price levels. Structuring a management buyout of a closely held petroleum products distributor. Retained as expert witness in litigation involving securities and business interest valuation issues. Assignments have included: .~ Valuing publicly traded shares in light of materially misleading information issued by the issuer. Valuation of dissenting shareholder I s Securities in a freeze-out merger. Testimony in court as to value of a minority interest held by the ousted president of a closely held business. Testimony in a contested divorce as to value of husband r s shares in family company. CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL PROFESSIONAL AFFILIATIONS AND ACTIVITIES Accredited Senior Member - American Society of Appraisers; reaccredited 1999. Formerly registered principal and registered options principal - National Association of Securities Dealers; formerly allied member - New York Stock Exchange Member of the Bar - Pennsylvania and Federal Courts Author - "Corporate Finance," a monthly column in Lawver's Digest Speaker and moderator of professional seminars on: o Takeover legislation o Securities laws .t 0 - Employee Stock Ownership Plans o Family limited partnerships o Estate planning for business owners PREVIOUS EXPERIENCE From 1984 to 1992, ff.()w~tq; t'a-ws()n.&, Go., most recently as Partner and Director of .-. .'" '-'.' '. Valuations. Responsible for valuations, corporate fmance, consulting, and expert witness engagements in this investment banking firm of fifteen professionals. From 1982 to 1984, Vice President - Corporate Finance in the Philadelphia office of Prudential-Bache Securities. Responsible for development of regional corporate investment banking activities, including public offerings and private placements. Provided valuation services to privately held companies. From 1977 to 1982, General Counsel and, from 1978, General Partner and Partner-in-Charge of corporate fmance of Elkins & Co., a Philadelphia-based regional securities firm. Also acted as chief compliance officer and supervisor of tax sheltered investment department. From 1975 to 1977, Chief Counsel of the Pennsylvania Securities Commission. Responsible for all legal matters relating to the regulation of securities transactions in the. Commonwealth. From 1967 to 1975, Attorney with Morgan, Lewis & Bockius, Philadelphia, specializing in corporate, securities, banking, mergers, and business law~ EDUCATION Princeton University - (A.B. 1963 - Political Philosophy) - Magna Cum Laude Harvard Law School - (LL.B. 1966) - Emphasis on business and international law .. .. .. ... w A :ll :a ~ .:: '" .. .. 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CONFIDEN~:':AL ., ..,. - ,~ "~->t"( f.:;, ( Description CONFIDENTIAL Exhibit 8.3 HEMPT BROTHERS, INC. Other Assets Analysis Fair Market Value Farm Operations Assets (1) Other Real Estate Total $6,501,848 $798.216 $7,300,064 (1) Includes real estate, cattle, aircraft and aircraft hangar. List of assets and fair market values provided by management. CONFIDENTIAL ., .... ~.. LIMITED SUMMARY APPRAISAL REPORT -+- VALlEY LAND CO., INC. 97.67 TRACT EAST PENN DRIVE EAST PENNSBORO TOWNSHIP CUMBERlAND COUNTY ENOLA, PENNSYlVANIA 17025 FOR MR. GERALD L HEMPT 205 CREEK ROAD CAMP Hill, PA 17011 DATE OF REPORT JANUARY 1, 2002 " . PREPARED BY RSR APPRAISERS & ANALYSTS 308 EAST PENN DRIVE ENOLA, PA 17025 (717) 763-1212 '- "-.. .)1 --' ... RSR ~praiSerS analysts April 12,2001 Mr. Gerald L. Hempt 205 Creek Road Camp Hill, PA 17011 RE: 97.67 Acres w/o Improvements East Penn Drive East Pennsboro Township Cumberland County Enola, PA 17025 Our File # 01-89R Dear Mr. Hempt, At your request, RSR Appraisers & Analysts have completed a Limited Summary Appraisal Report on the above referenced property. William F. Rothman, IFAS, prepared the report and inspected the subject site. The date of the report is January 1, 2002. The site consists of 97.67 effective acres, without improvements, and the land lays aloog the recenUy built East Penn Drive. The report that follows provides a" sunmary desaiption of the property, and the basis upon which the estimated values have been developed. In this report, we have provided value estimates developed through a LImited Summary assignment and Is subject to the Departure Provision of Uniform Standards of Professional Appraisal Practice. The value opinions reported is qualified by certain definitions, limiting conditions and certifications that are set forth at the end of this report. The property rights appraised in this report are the fee simple interests. The report that follows provides a summary description of the property and the basis for the estimated market values. 308 East Penn Drive - Enola, PA 17025 - ~one (717) 763-1212 -Fax (717) 763-1656 . ~ .1 Mr. Gerald l. Hempt April 12,2002 Page - 2- Therefore, based on our inspection of the subject property, the investigation and analysis undertaken, and subject to the "Underlying Assumptions and Limiting Conditions" noted in the addenda to this report, it is our opinion that the estimated market value of the fee simple interest in the subject property in its "as is" condition, as of January 1, 2002 is: *.* * FOUR MILLION SEVEN HUNDRED THOUSAND DOLLARS * * * ($4,700,000) . This report has been prepared in accordance with. the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation, and the Code of Ethics and Standards of Professional Practice of the Appraisal Institute. The report conforms to the regulations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This report has been developed as if the property were free and clear of any liens or encumbrances. We have assumed that there are no hazardous materials on site. The discovery of such materials will necessitate re-evaluation of the property and this appraisal will be void. This report was not requested with a minimum valuation, a specific valuation, or the approval of a loan. Our compensation is not contingent on the value estimate and we will be available to discuss the findings of the report at your request and convenience. Res~ctfully submitted, RSR~~~ ic}c (- (~ - William F. Rothman, IFAS Pa. Certified Ge'Reral Real Estate Appraiser No. GA 0OO303-l 3 , , REAL ESTATE APPRAISAL REPORT SUMMARY Property Type: Undeveloped land' Owner's Name: Valley land Co., Inc. Location: East Penn Drive East Pennsboro Township Enola, PA 17025 Tax Map. Parcels: 09-17-1040-038 Effective Date of Appraisal: January 1, 2002 Date of the Report: January 2, 2002 Property Rights Appraised: Fee Simple Interest Site: The subject site consists of 97.67 effective acres. Existing Improvements: None Zoning: Office Apartment (30%) approximate Professional Offices (70%) approximate Utilities: All Public Utilities Available - Water not yet extended, but available at either end of tract. Highest & Best Use as Improved: Office Park Development Value Estimates: Sa~sComparisonApproa~: Cost Approach Final Value Estimate Value $4,900,000 N1A N1A Interest Fee Simple Fee Simple Fee Simple Effective Date 1/1/02 1/1/02 1/1/02 4 ". _ A SUbject Property - Viewing North Subject Property - Road Frontage VieWing North 5 . ,) -- Subject Property - Viewing South Subject Property- Road Frontage Viewing South 6 . tl .. Subject Property- Creekside Rd. Frontage .......... --- 7 ... Subject Property- Creekside Road Frontage 8 ~) . LIMITED SUMMARY APPRAISAL REPORT This is a Limited Summary Appraisal Report, which is intended to comply with the reporting requirements set forth under Standards Rule 2-2(b) of the Uniform Standards of Professional Appraisal Practice for a Summary Appraisal Report. . . The Limited Summary Appraisal Report, which follows, presents only summary discussions of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser's opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraiser's file. The depth of discussion contained in _ this report is specific to the needs of the client and for the intended use stated below. The appraiser is not responsible for unauthorized use of this report. Appraisal Development and Reporting Process: The appraisal process included an inspedion of the subjed property by William F. Rothman, IFAS, January 1, 2002 and April 11, 2002. The development of research and coIledion of data on comparable sales in the subjad's neighborhood; verification of all information with buyers, sellers, brokers, public records, andlor with other knowledgeable sources; analysis of market conditions,-. locational fadors, physical attributes and other pertinent fadors. . In this appraisal report, ,.the Sales CQmparison Approach was used to value the subjed property. This approach "is considered the most reliable in appraising a property like the subjed's that is regularly bought, sold in the market. However, due to the employment of the Departure Provision of USPAP, only one approach was utilized in estimating the market value, which was viewed as most relevant, has been presented in this report. This Umited Summary Appraisal Report is a brief recapitulation of the appraiser's data, analyses," and conclusions. Supporting ~ocumentation is retained in the appraiser's file. Client: Valley Land Co., Ine. C/O Gerald L Hempt 205 Creek Rd. Camp HilI, PA 17011 RSR Appraisers & Analysts WiOtam F. Rothman 308 East Penn Drive Enola, PA 17025 Appraiser: Subject: Pareel# 09-17-1040-438 Land unimproved East Penn Drive, East Pennsboro Township Cumberfand County Enola, PA 17025 Owner: Valley Land Co., Ine. 9 It Intended Use of Report: This appraisal report will be used in the valuation determination for marketing purposes. . Purpose of the Appraisal: The purpose of this appraisal is to arrive at a supportable estimate of the market value of the subject property (land value) as of the effective date of this report, June 5, 2001, the date of the inspection. Effective Date of Value: The effective date of the appraisal is January 1, 2002, a date which establishes the context for the market value. Date of Report: The date of the appraisal report is January 1, 2002. the date on which the subject site was physically inspected. The date of the report indicates the perspective from which the appraisers' are examining the market. Property Rights Appraised: The property rights under appraisal in this report are the Fee Simple ownership in the subject property. Fee Simple ownership is defined as "absolute ownership unencumbered by any other interest or estate, SUbject only to the limitations imposed by the gov~mmental powers of taxation, eminent domain, police power, and escheat.. Definition of Market Value: Market value is the major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined. A current economic definition agreed upon by federal financial institutions in the United States is: -rhe most probable price which a property should bring in a competitive and open market under aU conditions requisite to a fair sale, the buyer and seller each acting PNdently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of ~ from seller to buyer under conditions whereby: i) buyer and seDer are typically motivated; ii) both parties are well infonned or well advised and acting In what they consider their best interest; iii) a reason8ble time is allowed for exposure in the open market; iv) payment is made in tet'l'nS of cash In UnIted States doRars or In tenns of financial arrangements compatible thereto; and v) 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. t Marketing Time: Discussions with various real estate professionals indicated a 6-12 month period of time to market the subject. . Exposure Time: Exposure time is also estimated at 6-12 months based on similar discussions and the sale history of the comparable properties based in this report. 1 Appraisal Foundation, Standards of Professional AoDraisal Practice of the ADoraisallnstitute. 1995 Edition, (Wash. D.C.: 1995) Pages 7-8. 10 .. id - ~/ r1r.\\/,.7/ / L'X ~ REGIONAL MAP ~-) C7'~.J/l~ l..~~ ~ ~ ~~man ~T 1::- \~. _ .- '/'_~'f1 ~ ;ft-._..~;~j~,.. .. ;.J .... I _.. ~- i ~ .. Ir, 7// ~" ....~/ . \ ~-" r ~~ '"""~C~" ~~~' ,1\( \ w) _ ~ "If k ,f ,~g, ~ . Hawk ~11 ~\ C')Jb ",:; rG . If. ~ \~ t-- t;Heig){ts~~~r. uphln.~}l' / ~ - - I-.~ ~ t:.~ ~ ,../ _1fW:lfntr RiWlr yBerrier 1sIa~~ "' "-~ .Slate~ ~~ I l . '~ ~,~?.. .tt~ ~ 7 :~... . u~ .. I L..l~ Jl. , \ J _ I L'-\ _ ~'--J~ . ,d 'II ~~.. ~" .~7~ ':.\~~ __)'7--~~-'~ ;TY'V iR'A~~ ~.n~.... ~!Y'C ( . . -\ - - 11 \i:~~ ~ .Littte ntain__......... .ReState ~meL nds SUBJECT ~ ' · '~Da me . LJ.l ~" ; .MDI - . ~--"- "'~' "~ 1ClIa'f'i "I ~ '< :., \ t ~ ..1..- \ j." 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REGIONAL ANALYSIS The basic forces that motivate human beings within a given marxet area have a direct impact on the area's real estate values. These are usually considered in four major categories: 1) social standards and ideas, 2) economic conditions, 3) government controls and standards and 4) environmental conditions. Below is an analysis in brief, which outlines the general economic condition and Mure trends of the subject area. Regional Overview The subject property is located (3) miles to the west of the City of Harrisburg, in East Pennsboro Township, Cumberland County, Pennsylvania, as shown on the Regional Map on the preceding page. Cumberland County is bordered by Perry County to the north, Franklin County to the west, the Susquehanna River and Dauphin Counties to the east, and York County to the south. East Pennsboro Township, in Cumberland County, is part of the Capital region of Pennsylvania, Dauphin County together with Cumberland County, lebanon and Perry County form the Harrisburg Metropolitan Statistical Area (MSA). At the heart. of the MSA is the City of Harrisburg, the Capital of the Commonwealth of Pennsylvania which is conveniently located 70 miles from Allentown, 80 miles from Baltimore. 90 miles from Philadelphia, 110 miles from Washington D.C. and 200 miles from Pittsburgh. Interstate highway routes 76, 78, 81 and 83 run through the MSA and provide access to these markets. The Harrisburg MSA had a 1990 Census population of 587,986, a 5.7% increase over the 1980 census population of 556.242. As of 1990. the Harrisburg MSA had the fourth highest population out of 14 MSA's statewide. The current 1999 population i~. projected at 615,139 and is expected to grow an additional 1.04-%, to 621,543 by the year 2000. In terms of employment, the Pennsylvania Department of labor and Industry, Bureau of Research and Statistics reported total employment within the MSAof 331,900 as of February 2000. Unemployment for the same month was running at a low 3.2%. well below the statewide and national unemployment rates of 4.7% and 4.4% respectively (unemployment rates are unadjusted). 12 Historically, unemployment rates in the Harrisburg MSA are typically lower than the statewide and national averages due to the large number of state and federal jobs located here. The state government alone has approximately 31,200 employees, and t~e .Iocal and federal govemment has 24,300 and 12,800 respectively. Population The historic population growth (Based on 1970, '80 & '90 Census Data) and projections for the counties within the MSA are summarized in Table 1. Dauphin Cumbertand Lebanon Peny Totals 223,713 158.1n 99.665 28.615 510.170 232.317 179.625 108.582 35.718 556,242 237,813 195.257 113.744 41.1n 587.986 242.901 209.992 120.323 46,327 621,543 -Projections compiled by Pennsytven;a Oept of ErMronmentlll Re.soc.mJs, 1991 Dauphin County is the most heavily populated county in the MSA, while Perry County has experienced the highest rate of growth. Cumberland County has also experienced a high rate of growth and is expected to see the greatest volume increase in population by the year 2000. Lebanon County has been growing at a rate consistent with the overall population grOwth of the MSA. Population growth rates are summarized in Table 2. Dauphfn Cumberfand Lebanon Perry Overall MSA Growth 3.85% 13.56% 8.95% 24.82% 9.03% 2.37% 8.70% 4.75% 15.27% 5.71% 2.14% 7.55% 5.78% 12.52% 5.70% -Projections compiled by ~ Oept of EnvitonmentlII Re.soc.mJ$, 1991 Dauphin County included 44% of the USA's total population in 1970, and is expected to include only 39% of the population by the year 2000. Cumberland County is projected to include 34% of the total population in the year 2000, up from 31% in 1970. Lebanon County's share of the population will remain stable (19%), and Perry County is proj~ed to incfude 9% of the total ------- population in the year 2000, up from 5% in 1970. 13 The 1970-2000-population distribution broken down by county, as a percentage of the total MSA population, is shown on the following charts. MSA Population Distribution 1970-2000 1970 1980 "-'Y Lebanon 5" 20% ~ .... DauphIn ~ '"" CunDr- land 31% Perry Lebenon 1% ''''~",: Cumber- lend 32% 1990 2000 Peny Lebenon 7% 1t% ~ ..DauPhin ~.1% Cu....,- lend 33% Peny '-:=-liiuIt"'=" CIIIIlIMr- lend 304'1(. Within Qauphin County, the City of Harrisburg has experienced the greatest overall decline in population, decreasing 22% from 19rO (68,061) to 1990 (53,430), although the city has reported that its population is now beginning to increase, and home sales in the first quarter of 1997 were up by 43.3% from a year ago. Growth in the surrounding suburban areas, in particular Susquehanna, Swatara and Lower Paxton Townships have offset the population loss in the city in Dauphin County, and Hampden Township in Cumberland County. This outward suburban migration has been the trend in most metropolitan areas since the 1950's, as families move to the suburbs in search of better schools, lower taxes, and less crime. Employment The Harrisburg area employment base has historically been built on the state and federal government, but private sector employment has made strong gains in the 1990's. Overalllabor force growth of 13.86% (1.73"oIYr.) since the first quarter of 1990, has been led by the private sector. The service industries in particular have added 33,400 new jobs resulting in a growth rate of 6.03% per year. 14 . Other noted employment groups adding to the growth include Transportation & Utilities, Finance, and Insurance & Real Estate, which have offset job losses in Manufacturing and Government. Companies have added 43,300 new workers fron:a 1 ~90 through the 3rd quarter of 1998, bringing non-farm employment within the MSA as of August 1998, to 355,600 employees. Table 3 shows the MSA's nonagricultural employment distribution for the years 1990 and 1998. . . . . ~~_. . ~.<-:-.~ '."~- ~~-'_~" .-:: ..... -~~.-:~ :-C-. ...---. -: :'. ....~ .~~.:-:. _~~;,,:_:~; _'_,-::;._~_~ .~~fL~.~_~=._~.~_ o--":~l':;;""i,:~;,::",~...:~....:--,.~-_,~.:...~---:.:...~ ~~:- ; ';~!_'~-'~:'~'..~I~,,;..;~;~-_ :.~: Manufacturing 49,800 45,806 (-1.00) Construction & Mining 14,000 14,000 0.00 Transport. & Utilities 19,600 23,100 2.23 Trade 69,800 80,800 1.97 Fin., Insur. & Rea' Estate 20,700 26,000 3.20 Services 69,200 102,600 6.03 Government 69,200 63,300 (-1.07) Totals 312;300 355,600 1.73 SoUfC8: Pennsylvania Dept 01 Lsbor and IndusIly. Based on 1990 & 1997 Data The growth of the employment base has resulted in an increase in population and a decrease in the unemployment rate. As of May 2001, the Harrisburg MSA had an unemployment rate of 3.2%, the 3rd lowest of all MSA's in the state, just behind Lancaster MSA with an unemployment rate of 2.8% and the State College MSA with an unemployment rate of 2.9%. During the past five years the region has experienced unemployment rates consistently lower than those of the Commonwealth of Pennsylvania and the United States, as shown in Table 4. 1995 1996 1997 1998 1999 4.1% 6.2% 3.2% 5.3% 3.3% 5.0% 2.7% 4.2% 3.3% 4.9% Source: Pennsylvania Dept of Labor and Industry 5.7% 5.1% 4.8% 4.5% 4.8% Major Employers 15 The public sector is led by the state government, which employs approximately 31,200 and continues to expand. A 400,000 square-foot building for the Departrn~nt of Environme~tal Resources was occupied in 1993, and the 350,000 square-foo~ Pf.!nnsylvania Higher Education _ Assistance Agency was occupied in 1994. In July 1996 the Pennsylvania Department of Transportation leased and occupied 145,000 square feet of office space in Harrisburg. In the Spring of 2001, the new Keystone Building (400,00sf) opened at the site of the fonner Transportation Building on the Capital Mall. On the federal government side, several military installations are prominent in the area including the Mechanicsburg Naval Ships Parts Control Center (SPCC) employing 4,900; the New Cumberland Anny Depot, with the massive Defense Distribution Region East facility, employing 4,136; and the U.S. Army War College at Carlisle, with 1,440 employees. The" top 10 private sector employers in the area are led by the electronic company Amp Inc., with 8,000 employees; followed by health insurer Blue Shield with 7,647 employees, Hershey Food~ Corp., which is the headquarters for Hershey candies and other food products, employs 7,300; and Hershey Entertainment, which operates Hersheypark and the world-famous Hotel Hershey, employing 4,151. Within the top 10, there are four health care companies (Blue Shield,- Polyclinic, Capital Health, and Capital Blue Cross) that comprise one of the fastest growing employment segments in the local economy. ~e~ are currently 43 companies in the MSA with 1;000 or more employees; as of 1989, there were only 18 employers in the MSA with 1,000 or more employees. Much of the Harrisburg area's large industrial base has shifted from manufacturing to warehousing, storage, and distribution. The region is a hub for the" distribution of goods due to its proximity to the major metropolitan areas in the mid-Atlantic area including Philadelphia, New York, Washington, and Baltimore. Trucking and transportation make up a strong industry for the area, with Harrisburg becoming a center for motor-carrier truck tenninals. There are approximately 30 terminals and 75 carriers operating in the region. The growth related to these industries has provided economic strength to the area as witnessed by the 3.72% annual employment growth in the transportation sector, in the past 6 years. Organizations such as Capital Region Economic Development Corporation (CREDC), Capital Region Chamber of Commerce, Dauphin County Economic Development and others have 16 played a significant role in attracting new business to the region. With the effort of these organizations and the continued presence of the state government and the military, the Harrisburg MSA should continue to enjoy a stable economic ba~e ~nd growth. I Income The consistent employment growth in the Harrisburg MSA has also brought a corresponding growth in workers income as indicated by the growth in the effective buying income (EBI). EBI is defined as the income atter taxes and other government obligations. The median household EBI for the years 1990-96, is shown in Table 5. -,-v- -,.. ~._....__. ~.... .......:--. _. ...--~-~ - -- ""_~__'4_ -,- ,~-~.~_ -~ ...- ~ ... '~I - - . . , ' . -, _!. , .... j: ..........__ ~ . ~____"__........__ ~~~"......).",,~~\: ~~~: .:::--_ _ _ ~__ _l~. ."~:':-._ I 'u_'""" _ Eft. in 1910-86 1990 $28,332 1991 $30,928 1992 $34,835 1993 $3&,317 1994 $37,938 1995 $38,675 1996 $39,410 NA 9.2% 12.6% 4.3% 4.5% 2.0% 1.9% Source: Sales & MaIIc.ling Management Magazine, August 1990-96. Between 1990 and 1~95, the median household ESI increased 41% in the Harrisburg MSA, which depicts a stable, growing economy. During the period from 1990 to 1994 the number of households remained fairly constant, increasing from 231,200 to 234,800. Data from the 1980 & '90 Census indicate that per capita income increased over 90% from $7,502 (1980) to $14,659 (1990), and median household income increased 77%, from $17,891 (1980) to $31,637 (1990). Real Estate Markets The Harrisburg real estate market is loosely defined by the Susquehanna River, which divides the area into two sections, the east and west shores. The east shore includes the City of Harrisburg and townships of Swatara, Susqueha~na, and lower Paxton; the west shore includes Borough of Camp Hill, lemoyne, Wonnleysburg and New Cumberland,. and the townships of East Pennsboro, Hampden, Upper and Lower Allen and Silver Spring. 17 , The Harrisburg MSA continues to improve across all commercial and industrial real estate market segments, with positive absorption in Class A and Class B Office, Retail, and Warehouse space. The glut of speculative space in the market as a resul~ of the building boom of the late 1980's has been absorbed by the expanding local economy, and now new speculative building is occurring especially in the office and warehouse markets. Since 1993, the available supply of space in all markets has dwindled significantly, causing fower vacancy rates and corresponding higher rental and sale prices. Real Estate M"arkets: The following discussion on national real estate trends is taken from . Emeraina Trends in Real Estate 2001, published by Lend Lease Real Estate Investments and Pricewaterhouse Coopers. On a national basis, institutional real estate investors are becoming more cautious, as the prospects of a recession are increasing due to higher interest rates. Another potential drag on real estate investment is the continuing. evolution of e-commerce. The largest negative impact is expected to be felt in the retail market, as the demand for retail space is expected to decrease over time, due to e-commerce. Retail: The best bets in this sector are fortress malls and grocery-anchored neighborhood centers. These properties are viewed as excellent core holdings. The fortress centers are viewed as best positioned to weather the e-commerce threat. Grocery anchored strips offer excellent cash flows and insulation from the on-going shakeout. Essentially, the retail market continues to be over-built. Retail space per. capita increased 34% in 12 years. Redeveloping old regional Shopping centers into 'own centers- with a mix of office, residential and retail space holds some promise. Institutional investors recommend sellng weaker malls as well as most power centers. The main concerns for retail real estate are oversupply, shopper's time constraints, suburban congestion and changing consumer tastes. E-commerce potentially exacerbates the impad of these .issues. Office Markets: It is expeded that properties located in central business districts are the best bet for investment in 2001, while it is suggested that suburban office markets will weaken due to 18 over-building. Vacancy rates are expected to increase marginally as development continues. It is suggested that holders of suburban Class B properties unload these properties while the market is still strong, before the next downturn. Market rents in central business district properties are expected to continue to rise, while those in suburban properties will level off due to the over construction. Industrial Markets: Big box distribution properties continue to be the rage, as demand for these properties with 30 foot ceilings, super-flat floors, efficient loading schemes, sprinklers and enhanced HV AC and lighting offer the flexibility increasingly sought by major manufacturers and shippers. It is expected that the need for this type of space will steadily increase. It is expected that industrial properties as a whole will continue to produce double digit returns with excellent cash flows. Most markets should remain in equilibrium with vacanCies under 10%. Apartments: The strength of this market appears to be in the Class B type space with strong locations. These types of apartments attract people who cannot afford to own a home, and this will especially be the case as interest rates rise. East and West Coast cities are especially attractive, while those in the Sun Belt states should be avoided, due to over building. Declining vacancy rates in these strong locations are expected continue to put upward pressure on market rents. This real estate sector continues to be attractive due to its comparatively strong rates of return, especially compared to offices and warehouses. Since 1987, apartments have averaged a 10.8% annual return, compared with 4.3% for offices and 7.7% for warehouses. The strength of this sector is expected to continue into the. foreseeable future, as many markets are not keeping up with housing demand. Hotels: It is suggested that most properties in this sector are fully priced. Further, occupancies are down modestly, and room revenue growth is slipping. New supply in the development pipeline will combine with a slowing in the overall economy to calm down the industry's robust profit growth rate. . .......... --- 19 This is the one sector that has been constructing new product ahead of its long-term industry average. Upscale properties offer the best prospects for investment inthis sector, while Iimited- service and older midscale properties should be avoided. Harrisburg Regional Real Estate Market Empirical evidence in the local real estate market suggests that the market is quite robust This is based upon the number of transactions publicized in Cumberland and Dauphin County courthouse records. Leasing activity has also been quite brisk, as demand for space in aU asset categories is quite strong. Further evidence of the activity in commercial real estate markets is the record performance in 2000 by Commercial Industrial Realty (CIR). Sizable sales and lease transactions occurred in all types of commercial real estate, including shopping centers, industrial buildings and office facilities. The retail market in the area began its recovery period in late 1994 and is now quite strong, as evidenced by new developments in both Cumberland and Dauphin Counties. This recovery has resulted in the attainment of stabilized occupancy levels throughout the region. Clearly the strongest location for retail space in the Harrisburg region remains in Lower Paxton Township along Route 22. Since the development of Colonial Commons in 1992, there has been significant development along this heavily traveled highway. Recent developments include Builders Square, Dick's Sporting Goods and Media Play. A new power center to be anchored by a 125,000 square foot Taiget store is also now open on the south side of Route 22 in Lower Paxton Township. In Cumberland County, the strongest retail locations are along the Carlisle Pike in Hampden and Silver Spring Townships. The largest new developments here include Circuit City and Home Depot at the old Capitol Products site, next to Kmart in Hampden T:?W"ship. A new 100,000 square foot Kohl's department store was recently constructed at the former Silver Spring Drive- In site on the Carlisle Pike (Route 11). Another 100,000 square foot shopping center anchored by Giant Foods was completed in Summer 1999 in East Pennsboro Township along East Penn Drive. Giant Foods has recently constructed new stores in Silver Spring, Derry, and Upper Allen Townships, and has just opened in Kline Village-Harrisburg. Construction is underway for anew store at the Point Mall in Lower Paxton Township. 20 The office market is also exhibiting substantial strength, with speculative buildings be constructed throughout the region. Vacancy rates for Class A space have been in the 3-4% range for the past three years, while vacancy rates at Class ~ ~nd C buildings are stabilizing below 10% for the first time in years. Market rents appear to be topping the $20 per square foot level at prime locations. Clearly, the Harrisburg region has the strongest office sector in South Central Pennsylvania, followed by York County. Lancaster County is the weakest of the three, but is showing signs of improvement. The strength of the Harrisburg market may be seen in several new developments, including some large projects in the Rossmoyne and Westport Business Centers in Cumbertand County and in areas of Susquehanna Township in Dauphin County. The.industrial sector in the Harrisburg region is quite strong, as evidenced by the amount of new development in the past five years, and current projects in the works. It is clear that market rents have surpassed the highs set previously in the decade before the onset of the real estate recession of the earty 1990's. As a result of the strength in the market, a substantial amount of speculative space is planned. The stabilized vacancy rate for high cube distribution space is currently under 5%. The strength of this market has attracted investment from institutional as well as local investors. With the development of new industrial space resulting in more jobs, the residential sector of the market has been a direct beneficiary of this job creation. Hampden and Silver Spring Townships appear to be the strongest locations for single.-family residential development within Cumbertand County, while Lower Paxton and Derry Townships are the strongest locations in Dauphin County. This sector should continue to benefit from the historically low interest rates pervasive throughout this economic boom. Transportation The major traffic arteries and highway system that run through the MSA provide important links to other primary and secondary markets in Pennsylvania and the northeast. Interstate 76, also known as the Pennsylvania Turnpike, rmks the area with Pittsburgh to the west and Philadelphia to the east Interstate 78 runs from Interstate 81 in Lebanon County, eastward to Allentown and 21 northern New Jersey. Interstate B3 fUns from Harrisburg to Baltimore, and Interstate 81 runs north to New Yorl< State and Canada, and south to Tennessee. Other major roads in the area inclUde U.S. Route 283, Which runs from Harrisburg to lancaster, U.S. Route 11-15, which runs nOl1h to New York Slate and south to Mary/and, and U.S. Route 581, which fUns from Harrisburg westward to the N""a' Ships Parts Control Center in Mechanicsburg. Both of these roads are 4-lane IimftedaCCess highways. A 6-mile elCtenslon 0/ Route 581 is now completed. Since comPletion in the faU of 1995, Route 581 now ties directly into Interstate 81, and couples With POrtions ofJnterslates 81 and 83, fonning a "Beltway" around Harrisburg. Financing Within the CUrrent environment. the rea' estate financing mar1<et has become increasingly COmpefjfjve. Prior to 1996, lenders were Unwilling to finance SpeCulative projects, particularly in the offlce marl<el Since that period of time, lenders have offered e>dremely competifive rates while reducing fees. However, due to the rising market interest rates since late 1998, Investors have been shOCked to hear qUo/es involving g% mortgages. Current financing terms available in the Harrisburg market for the various types of rea' estate are as follows: Catea~ Interest Rat! lly AmortizafiQn Debt Covela9! Retail 7.5-9.5% 65-80% 15-20 years 1.20-1.40 Office 7.5-8.5% 70-80% 15-25 years 1.25-1.40 Industrial 7.75-8.5% 70-80% 20-25 years 1.20-1.30 Apartments 7.5-8.5% 70-90% 15-30 Years 1.20-1.30 Economic Outlook With unemployment below 3.50% and a stable ~, the Harrisburg MSA is OUfJ>erfonnlng the state's lwo largest metroporltan areas. The cost of doing busineSs in Philade/ph/a's Is 10% above the national avetage. In Piltsburgh's its 3% above the national aYeIage. WhIle these areas are home to Iwo-thin:ls of the state's residents, they only ""Plured Of1e-Ihitd of the new Pennsywania BUsiness sites in 1999, "CCOnIlng to a Mellon Bank "'Port. Harrisburg has developed a reputation as a I"",-cost business 'OCatIon as more and more firms outsource bUSiness away from other h/gh/y POPUlated metropolllan areas in the northeast The area appears poiSed for long-term growth. 22 It Conclusion The Harrisburg Region continues to be an attractive secondary market for business and industry. Many of the services found in larger metropolit~nareas may be found in the Harnsburg area. Also, Harrisburg is located within two hundred and fifty miles of 25% of the I nation's population. The future outlook is for continued economic growth in the Harrisburg area. Low interest rates and a pent-up demand for real estate should spark new construction in 2001. Commercial, industrial and residential development will expand in response to the expansion and growth in all market segments of the regional economy. which should have a positive influence on the subject property. 23 NMap 24 NEIGHBORHOOD ANALYSIS The neighborhood analysis provides a bridge between the An~a ~alysis and the study of the subject property. As in the Area Analysis, the goal of the Neighborhood Analysis is to determine how the operation of social, economic governmental and environmental factors influence the value of real estate. Geographical Boundaries and Access The subject's neighborhood may be defined as the Condoguinet Creek to the east and west, Highmark (formerly Blue Shield) to the south, and Wertzville Road to north. Adjacent Land Use Description The subject property is surrounded by office development to the south and east, including approximately 50 buildings comprising over 2 million square feet of office space, located in portions of East Pennsboro Township and the boroughs of Camp Hill, lemoyne, and Wonnleysburg. A wide range of building sizes exist within the neighborhood, from small 2 story medical offices of 2,000 to 4,000 square feet, to approximately 20 buildings of 8,000 to 15,000 square feet, to another 20 buildings totaling greater than 20,000 square feet. Highmark. the largest private employer in Central Pennsylvania, is located just south of the subject property, and includes 508,952 square feet, the largest building in the neighborhood. Other large buildings include the Rite Aid Corporate Headquarters Building with 178,000 square feet, the Electronic Data Systems building with 220,000 square feet, and the subject property with 185,000 square feet. Highmark owns the 65 acre vacant parcel just south of the subject. Other development in the neighborhood includes Holy Spirit Hospital ;md several small medical offices that serve the hospital. Adjacent to the hospital is a large high-rise retirement apartment building. Retail development includes a small shopping center located close to the hospital just off Routes 11 & 15, which is anchored by a Weis Supennarkel A new 109,000 square foot strip center Pennsboro Commons opened in 1999 and is 1.5 miles north of the subject. Other retail developments include a small strip center on Erford~ad. There are other small commercial nodes in the neighborhood that include a Texaco a gas station, Perkins, Taco Ben 25 and McDonald's restaurants, a branch office of Fulton Bank and the Camp Hill Post Office. Also located in this vicinity is the Raddison Hotel, an older refurbished hotel along Erford Road and Walnut Street (Rt. 11/15). Demographics The subject's neighborhood is heavily populated (see addendum for demographics). The largest population concentration in the neighborhood is the Camp Hill Borough, located just west of the subject property. East Pennsboro and Hampden townships also contribute heavily to the area's population. lemoyne and Wormleysburg are two smaller boroughs located to the east and south of the subject. As there is little room for further growth in the boroughs, most population growth is project to occur in Hampden and East Pennsboro Townships. East Pennsboro Township had a 1990 population, of 15,185, which was an increase of 8.1%, over the 1980 population of 13,955. The 1990 population represented approximately 7.8% of the total county population. By the year 2000, the Township's population is projected to increase to 16,429. The 1990 median household income in the Township was $33,482, and the median family income was $41,457. Development In the past ten years there has been significant commercial development within the area. The dominant commercial use in the neighborhood is office space, due to its close proximity to Harrisburg and the State Capitol Complex. Most new office development has been focused to the south of the subject neighborhood along Erford Road, and along the south side of the Camp Hill By-Pass in lemoyne Borough. At present, the office market is basically built-out with the subject property comprising one of the few remaining vacant land parcels. A great deal of new residential development has been focused in the immediate area of the subject's neighborhood in both Hampden. and East Pennsboro Townships. New construction includes single family dwellings, townhouses and apartments. The home prices in these new developments range from $80,000 in the townhouse developments to over $300,000 in the single family developments. Some of the developments include: laurel Hills North, Floribunda, Treemont, Penn Valley and logan's Run. 26 These new residential developments have corresponded with the location of large employers within the neighborhood in the past decade. In 1995, there were 32 new subdivisions proposed for review in East Pennsboro Township, second only to Lower Allen Township, which received 34 proposals. There were no new proposals in Lemoyne, Camp Hill, or Wormleysburg boroughs where there is little or no room for further residential development. There has been little development of new office buildings in the neighborhood for approximately 5 years. This has been true throughout the greater Harrisburg area as the market has been continuing to absorb the glut of office space that became available during the late 1980's. A new office building of 24,000 square feet was developed on Erford Road for Post & Schell Law firm about 2 years ago, and another medical office building of similar size was just completed in the same area on Poplar Church Road. In the past 5 years several new restaurants have been developed in the neighborhood including J.C. Dunphy's, Perkins, Taco Bell, and Hot and Now (recently closed). Real Estate Markets The neighborhood's prime location accounts for the relatively high overall office occupancy rate. In Class A space, vacancies are at :1:16 to :1:19 per square foot, based on a gross office lease. These rents are at a level rivaling similar types of Class A buildings in the Harrisburg CBO and office parks in Susquehanna Township. land prices for smaller office sites, are in the range of $125,000 to $150,000 per acre. Conclusion The subject's area is considered one of the premier office locations ..in the region and is well- positioned for future prosperity due to its close proximity to the City of Harrisburg and the State Capital Complex. The strength of the local office market is evidenced by its low vacancy rates and gross rents in the range of $16.00 to $19.00 per square fool The area offers a wide variety of amenities and is convenient to all locations in the Harrisburg region. These characteristics should prove to be a positive influence on the future prospects of the subject properties since people like to live near to where they work. 27 DESCRIPTION OF REAL ESTATE Ownership/History: The subject was acquired January 17, 1~57, by deed 17P, page 178, by Valley land Co., Inc., from Vernon R. Bowman for $16,000. Site Description: The subject tract runs from East Penn Drive on the west to the Condogouient Creek to the west and from the Ricci tract (zoned R-2) in the north to the Highmark tract in the south. The topography is part sloped and there is some flood plain on the eastern portion. Creekside Road forms the effective boundary in this area, (refer to flood map in addendum). Flood Zone: A 9.0 acre +/- portion on the eastern boundary of the subject is located in the flood zone A18, according to HUD Flood map #420359B, dated April 15, 1977 (see addendum). Zoning: The subject is zoned PRO, professional office, and OA, office apartment in the zoning regulations of East Pennsboro Township. A zoning map and the regulations can be viewed in the addendum. Highest and Best Use: The highest and best use of the subject based on the Regional and Neighborhood Analysis, would be for professional office development. The zoning districts of office apartment (OA) and professional office (PRO) are among the highest density allowed in the township. OA allows apartments and restaurants, which are complimentary uses, and allow for maximum financial return, and provide good planning. Improvements: There have been three (3) access points built in conjunction of the East Penn Drive improvement project. These roads have been constructed as to allow limited access to the new road, and will necessitate traffic controls. Sewer is located along Creekside Drive, the eastern boundary of the subject. Public water is . located at the new U.S. Post Office to the north of the subject and at Highmark's office complex to the south. No estimate is available to determine the cost involved in extending this line to the subject. 28 ASSESSMENT AND TAXES In 2000, the subject property was assessed for a total of $2,520 as follows: Building: land: Total: $ 0 ~ $2.520 The 2000 common level ratio in Cumberland County was 6.6%, which represents a market value of the property, of $38,182 ($2,520+ .066). East Pennsboro Township, Cumberland County, and East Pennsboro School system have the following tax rates and combined with the assessment obligation of $402.62 ($2,520 x .15977). 29 LAND VALUE The value of the land is determined by its potential highest and best use as if it were vacant and available for development. There are several methods of estimating land value including: Sales Comparison Allocation Extraction Ground Rent Capitalization land Residual Subdivision Development Of these approaches, the Sales Comparison Approach is the most prevalent, due primarily to . the quantity and quality of available market data. In this analysis, sales of similar sites are researched, analyzed, compared and adjusted to arrive at an indicated value. Adjustments are made for differences in the sales that refled market reaction. In the valuation of the subjed property, the Sales Comparison Approach was used for land valuation. The Sales Comparison method is based on the Principle of Substitution, which states that when several similar commodities, goods, or services are available, the one .with the lowest price will attrad the greatest demand. This method is predicated upon two fadors: 1) there is an adive market for the type of property being appraised and, 2) the data available on comparable properties is adequate. Subject Property The site consists of 97.67 effective aaes, which is the basis of the value estimate. A 9.0 acre portion is located in the flood plain and an area of 7.95 acres is located along the western side of the new East Penn Drive and is .landlocked". These unusable tracts can be included in the .open space. requirements of the zoning and allow for higher density. Units of Comparison Vacant land is typically valued on a price per acre or price per lot or unit basis. In the analysis of the subjed site, the price per aae was chosen as the appropriate unit of comparison. Comparable land Sales Comparable land sales were identified in the regional market A land Comparable Map and five sales are presented on the following pages, are considered to be most comparable to the . . 30 subject property and reflect a similar highest and best use of the subject as if vacant. The sales chosen represent the best available after studying sales from Adams, Cumberland, Dauphin, Berks, and York Counties. Sales of tracts of both multi-fa~i1~ and office/retail uses were considered viable due to the broad range of uses allowed in the zoning. -- .---- 31 . ,.. ......... ~ J (j) __ U~ .~~'-- ,~ . "' ~ '~ ~. ~A ~ ;:" r~, ~~ ~ ~ - ~ 1 J~ l ~ \ ~S P )u' ~~ ~t:~~ ~ ) _~~ n1 ~ .~ ~ ~ ~C). ''''~~", 'r'f"'~"1'l 'T' 'rr \1 114 Y h- - ~ :f! 'I.: hI:....., ~ --~~. ...:., .. ~\ r ~sdala..... L ",.r ~ ,~-,- '\ ,~ r---.:A. ii_"",,\ "-, ~ ~ \V... :J-' _\. 1"'\. If I .. ~ ~ 1 I\ t f:'L>J,.~ ~l:.. ~ '0 I~v "- ~. .'.~ \} I ~ J~ "~~/~;--~l~'f+: ~~~~ 1--1 ~~' ,~asa~ ~ '; J"1 I -1r~ ~---::.::;lf;;;'~\"fI~, ~'200I~IIu,US ....D nc~:Jo~ .... 1 '--( J ~ ~^ /r/\../ 7 ~ ----- COMPARABLELANDSALES~ ~~/ \~ 1 .' . ~S~~ 7' \ , ----l . , 325) ,- _ ..J;J. ,.' ~ ... k-h __,. /.~j ~~ ~ ~koraH .-Jo 'fl. . :--~1' " ~ ~I..... uphi 1.-.1 '-:-.:~ . ue Mountain " /.- ~ qwJuInlUllU;, /l'~~ ~ rt\ ...~- \\ ...-~ .Berrier IsIa~ ........... /. U Stale I'ID 24 _ ~ \..---~ ,11 ~ ...... .\iI)l"'") '" · ""( ~d "-C\.! '-~7 l~ Perdix ~~' / W ..... arys ~,f..J ~~,... ~~ - YW .i\ ~r" Park , 22:Jf b.'r 7'- ~ 311~ Lk .; <J_.. J ~.~ 18SO.r.T" /' '" "\ ~. 'h5P" Fall. ~ ~. ~ :.~ & --. ~-'~~:~~4'( -v L ~ :... y ~ &--,.1 _ /'-~ rg\. ., .;;",.___ L'~ J ~ 1 If ~ ~.<<"" I., ~( ~---t: .~~~meL nds : me _ ~: COMP#lI ~ I1'r ~ l ~ ~ ,~~~ h:l "" JICOMP#2~ SUBJECT . \ ,. ->e.~ t. .-W- ", l (-l ~~A ' ","Va n ..~ \. ?-J. ~ ~. -. ~ - 7 i\r~\ ~ T~~ U~:s: ~ ) - t" W COMPt#3 ~ _ _ est F ~., \'""\.~, ~~ -......., ~ I _.. -- \. .\.... I .:;; ~ 581\. - t .~~ :_ - -~ ~ .. .JCOMPf#4 L ~\-. ~ ~ ~j -"~ ~ · 1 ~ '1f.. \ ~ ~_~ .-t ~ , I ...: tL), PoInt V~C~ ~~. .--A E-4 r-..: ~' ~ .1.- --y ~r!h .. Ha~emar1bsla~ 1"'- A 11 4 .. .... 322 m ~~~.\~ ~.JiC. ~~ - ~~~ WI~. ~~.cC'\ ~ ~~L :(~ '/. 581 -' "\VI" 114 "t 1sI8ndy, .: ..... '" t ~ ~ f 1 j )~ /Ci ,;; 17 ~I ~ ~ IT Lh~ J f 1"-:"1. .1 \. , 1..:....-::12' Run ....: -r .,um$ S Ha" ..~ . " -- ...., ~ _. 1.- I ~ '~, \ \ Ii. ,. ....... .... .,., ,....... I , '. -........... "....., I.' '" \',","'" .,:--:-S"! .. -' '. Ij.: .'" .:':~"~..;.,, : " -,:. "ilt"'" .~...........:.~:?~ '.~ ' .--/ /' \ \.,......-.--.., '. ..\. ::" \ !" .. ... YIL~' ~"l$,'.~' \'1\ \~1','" , '. " ..-.. I "" _ " . , , l I /--- 1-- " \ '. A. rl ~II'- -' - \ .-- 'TI .~ /', ,...... . :" I .! -- \ - , ....- / I ...__\\ "'.. 1_. ',. \ \ - 11 -'- ..................~ = . ",... ...... \ 'fIIl/!IIJIII" .}' '.. \ .. 1'- -- Identification COMPARABLE LAND SALE 1 Development: Paxton Towne Center LocatIon: Lower Paxton Township, Dauphin County, PA Tax Map 35-043, Parcel 008 Park C. Sheesley Trust PTC Holdings, LLC Legal . Description: Grantor: Grant..: Sale Data Sale Price: Sale Date: Property Rlghts: Recorded: Condition of Sale: Verification: Financing: $3,800,000 June 28, 1999 Fee Simple Deed Book 3441, Page 0607 Arm's Length Grantor Rep Cash Physical Description Site Description: Size: Shape: Topography: Utilities: 59.34 acres Irregular-shaped Rolling All Available Commercial General Retail Development Zoning: Proposed Use: Appraisal Measure. Sale Price/Acre: $64.038 Comments , This is the sale of a large retail tract located along Allentown Blvd. (Route 22) in Lower Paxton Township. A-power center- setup was developed with a Kohl's, Target, and Weis Markets being the anchors. There was significant site work needed and wetlands relocation was necessary. 33 . -- I'" ~ '~"'. . _ ""2.h~~ \ ,'._~-,:~~ ,;/... ". --. '.' ,; ..' . "")"':/ j!..\. ,J~.# 1.--- ':",--= - \ ~. ~ ,.. '" -,;. ,- ! J\ --- -. .. . I, ._~-...._........w_11 .,....... \ -----. ---- I,i _ I -r I "- COIIIPARABLE LAND SALE 2 --- ,. ., --. ;~\ . Ident/neatlon Development: Ahold Location: Forsythe Blvd. - NE Intersection of 181 & Wertzville Rd. Hampden Township. Cumbertand County. PA Tax Map 10-13-0995. Parcel 020.021 and 022 Michael Serluco. et al ARP Wertzville Road LLC Legal Description: Grantor: Grantee: Sale Data Sale Price: Sale Date: Property Rights: Recorded: Condition of Sale: Verltlcatlon: F1nanc:Jng: Physical Description $5.002.631 February 5. 2001 Fee Simple Deed Book 0239. Page 0096 Arm's Length Grantor. Michael Ser1uco Cash Site Description: Size: Shape: Topography: Utilities: 64.1 acres Irregular.shaped Roiling Needs extension Zoning: Proposed Use: Commercial OfficeIRetall Appraisal Measures Sale Price/Acre: $78.000 Comments The properties were purchased by the parent of Giant for speculation and were actually three separate tracts. 34 . \ ....--:. .: I"" " , ~.-. ... ~~~ . ,- \ \~I ;.~~/,. · i\.. i .~ " 1_'\., ~.. :~- '/:: -,0''' :;...... . ~~ - ~ I ..;. ._-.. l. ; ~-'-'I '.1'_ ! ....- !\ .: .",..,., -. .. II .-.....-.........-..........1 J -- \ ___ I,i -r=-I ...--.. ........ . I . - . " " ~. ,~' ;'" ,. IdentlflcaUon COMPARABLE LAND SALE 3 Development: Cumberland Technology Park Location: Technology Parkway Harnden Township. Cumberland County, PA Tax Map 10-14-0839. Parcel 029 Mt. Zion Association, LP Pinnacle Health Legal Description: Grantor: Grantee: Sale Data Sal. Price: Sale Date: Property Rights: Recorded: Condition of Sale: Verification: Financing: Physical DescrlpUon $3.700.000 December 1, 1998 Fee Simple Deed Book 0189. Page 0724 Arm's Length Dan Alderman. Broker, CIR - 761-5070 Cash Site Description: Size: Shape: Topography: Utilities: 37 acres Rectangular level All Avaifable including gas Business Park Hospital Zoning: Proposed Use: Appraisal Measures Sale PrlcelAcnt: $100.000 Comments This was sold for outpatient surgery facility for Pinnacle Health (formerly Harrisburg HospitaI), and was completely developed. 35 . ~~ -- . \ ..".,.. '" :. .,'~\\ .....~~..\ " "':.";;, ".: ,~ -- t.;:... . Ii~' ~ I "...-"'- ~""I ~ ~~ ..L- b' ; \:.\ \. \\ : . \\ \~-\ ~\ \ ..,. Identfflc.tJon COMPARABLE LAND SALE" Development: Creekvlew Road Location: Creekview Road Hampden Township, Cumberland County, PA Tax Map 10-1 n-1 031 , Parcel 005 581 Associates LLC Classic Communities, Inc. Legal Description: Grantor: Grantee: Sale Data Sale Price: Sale Date: Property Rights: Recorded: Condition of Sale: Verification: Financing: $1,471,942 December 2000 Fee Simple N/A Arm's Length Sale verified with Grantor Cash Phys/c.l Description Site DescrIption: Size: Shape: Topography: UtlitIes: 23.25 acres Rectangle Gently Rolling to creek AJlAvallable Zoning: Proposed Use: Residential Towne Town homes Appraisal Measures Sale Price/Acre: $63,309 Comments This was the sale of a town home project with an approvals, in place, for 132 units. PrIce range for finished product is $140,000 to $175,000. . 36 . Discussion of Comparable Land Sales In general, an upward adjustment will be made if the comparable is Inferior to the subject for a given element of comparison and downward where the comparable is Superior to the subjed for a given element of comparison. Elements of Comparison Key value elements under scrutiny that may require adjustments are conditions of sale, financing terms, time, location, and physical charaderistics including topography, shape, an~ size. These factors are the primary influences on site prices and tend to affect the differences in price levels. Price adjustments are on a percentage basis and refled price per acre. Conditions of Sale This adjustment is applied if there are any unusual circumstances surrounding the transadion, such as foreclosures, bulk sales, related parties, assemblages and the like. All the sales were arms' length, verified to have taken place under conditions requisite of a market transaction. No adjustments are warranted. Financing Adjustments The comparable sales have been adjusted first for financing terms if applicable. This adjustment renders the sales price to cash equivalent terms. Where favorable (below market rate) financing terms are made available by the seller, the difference between the favorable terms and the market rate terms is estimated. All of the sales were reported to be cash transactions and no adjustments are warranted. Market Conditions (Time) After adjusting the sale comparables for financing and conditions of sale, the sales must be brought current by means of a time adjustment if the market warrants. Real estate professionals in the area indicated that real estate prices have been appreciating in the years since 1990. Since all sales have occurred between December 1998, and February 2001, adjustments were made for the sales factored at 2.0% per year, for sales 1, 3 and 4. This represents data for this period as provided by Central Penn MLS and equals about 2%. Location Adjustments These reflects the increase or decrease in value due to major surrounding neighborhood uses, demographics, compatible properties and similar buyer preferences. The subject and the four (4) sales are similar with the exception of sale #1, which is located in a heavily retailed area along Allentown Blvd. in east Harrisburg. A downward adjustment was warranted for this sale. Visibility and Access Closing aligned with location this adjustment has to do with the proximity to major highway systems and the ability of the pUblic to locate and find the site to do business or to attract employees to a potential site for living, working, or personal services. Sale 1, and 2 are more accessible and visible than the subject and are so adjusted. Physical Characteristics These include topography, shape, terrain, utility availability, wetlandlflood plain condition, and other factors that inhibit. development. There is some wetlanatfload plain located on the subject. Sale #1 involved cutting and filling almost the entire site and the relocation of 37 " wetlands. Sale #2 will necessitate extension of utilities (similar to subjed) and large volumes of excavation. Sale #3 was approved and developed with utilities, at the curb, and finished streets. The final construdion phase required excavation but there was no wetland. Sate #4 was approved but undeveloped and necessitated site work and utility extension. There is some wetland on this parcel. The adjustments can be seen on the a~mpanying grid. Zoning The subjed enjoys office apartment (30%) and professional office (70%) zones. Sale #1 was Commercial General which, is a broaded zone and allows for increased rental rates. Sale #2 is also Commercial and again allows for higher returns, due to increased rents. Sale #3 is similar, and Sale #4 is considered a lower zoning and therefore inferior. All the adjustments can be seen on the grid. Size The size adjustment is applied after all prior adjustments are made to the sales. Normally economies of scale didate that a larger property will sell for a lower unit value than a smaller property. The subjed consists of a parcel with 97. 67acres. All the sales were smaller and needed adjustment to refted this condition. Conclusion Land Value The adjustments to the comparable sa{es are indicated on the Vacant Land Sales Summary shown on the next page. The unadjusted price per acre of land ranged from $63,609 to $100,000. The adjusted price per acre of land ranged from $43,705 to $53,000, with a mean of $48,156, and a median of $47,960. In the final analysis, the greatest weight was placed on the central tendency of the sale comparables. Based on the foregoing analysis, we estimate a price per acre at $48,000. Therefore, the estimated Fee Simple Value of the subjad's land as of January 1, 2002 estimated to be: Acres 97.67 Price/Acre $48,000 Total $4,688,160 Rounded: * * FOUR MIWON SEVEN HUNDRED THOUSAND DOLLARS * * * ($4,700,000) 38 Cumberllind Technology Hampden CumbeItIInd .. , VACANT LAND SALES ADJUSTMENT GRID LAND SALE SALE 1 SALE 2 LOCATION TOWNSHIP COUNTY Puton Towne WertzWle Rd. Loww PuIan Hempden DauphIn CurnbeItInd j~*. _-..it~~7:;':~--... Jun-89 Feb41 $3,800.000 $5,002,831 59.34 64.14 . ~,. ,'.":>.: \ - -:~.. . DATE OF SALE CONSIDERATION ACRES ,;'-A' "'!:;.~"~~'7~-ti~....:",,?.-- "'!..o(..~,,__ ~;~~;:-:~~~ ..-~ ~!' $64.031 $78.000 {,? ~ PROPERlY RIGHTS CONVEYED F.. F.. ADJUSTED PRICE $64.083 $78,000 ':.. '. :'a....... ~~-~ -. F1~ING Cash Cash ADJUSTED PRICE $64,031 $71.000 1 ,', ..-.;r"="'R":~.,":" ''':~:''''';J~.::_~~~+....~_r~ ! r~ CONDITIONS OF SALE Anna LengIh Arms LengIh ADJUSTED PRICE $64.031 $78,000 ~ ...I\,.....~:r.~;;:;~ ~ i",_"'_q~~~~-:;o."........''''' ''7''f,..7~"~\,~ ;~."<~~'~':;"~~""'. '_~~""'),~_' ~~G~';'';;~.....s~F~.~~~~~'!'.~j.:~~:.:.~ ~~~~:::,::,~,; -"";'~ ~"_;:~' ~.:'., '~;'A':;i...~~'i.'~~i TIME 5~ ADJUSTED PRICE $67,238 ;""..,...~ ' .' --.--;J;r.....~. .". ..,... ..... ~ '.~. '!'\J:""'-~"""" "\';';;>..';.'C'i~'W.,,'i~~,.~'"':'''t-;'.t~~)..:;...:.~:.:......_ ~~...~~~.........,.... ...;..\. ..-~.... ADJUSTED PRICE PER ACRE $67.238 ~~~~~~~~/.~~~rr1t;.;;~~~_;~.~:~~~~~::-:. ....:.~~..:. :~..~. 2~ $19,560 .. ":;;,';;~:;',(;J;?rd~l~?~ $19,560 SALE S 0ec>8I $3,700,000 37 $100,000 F.. $100,000 Cah $100,000 ... Anna Length $100.00 '" $108,000 4... $&U45 ~~ ~ -{ ,~-.l .....-..--~~~...i='<~-':""~~~'~'-> I~ .. . tlJ; $108.ciao $64,245 . .. . ....: ."~::~r~:~~~;~~;.;m;"r-~:t~~~t.z, -5~ ~ 0% 0% -10% -~ 0% O~ 0%' 0% ~ -20~ -15~ -15~ O~ 5~ -5~ -5~ -10% -10~ ~;;:~~~~:~~~~~~~~~~~#~~~ -35~ ~ -50% -25% $43,705 $47,731 $53,000 $48,184 LOCATION V1SA81UTY -ACCESS PHYSCICAL CHARATERISTICS ZONING SIZE '1..'1.. ",; _~~=-.F~_ ~~~~_'f~ NET ADJUSTMENT ($IACRE) ADJUSTED PRICE PER ACRE LAND SALES ADJUSTMENT $100,000 $80,000 $80,000 $40,000 $20,000 $0 2 3 .. 39 . PRICE PER ACRE .ADJUSTED PRICE PER ACRE ." p CERTIFICA nON I certify that, to the best of my knowledge and belief: 1. The statements of fact contained in this report are true and correct. 2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, unbiased professional analyses, opinions, and conclusions. 3. I have no present or prospective interest in the property that is the subject of this report, and I have no personal interest or bias with respect to the parties involved. 4. My compensation in not contingent upon the reporting of a predetermined value of direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. 5. My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. 6. I have made a personal inspection of the property that is the subject of this report. 7. No one provided significant professional assistance to the person(s) signing this report. 8. The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in confonnity with the requirements of the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute. 9. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 10. As of the date f this report, I have completed the requirements of the continuing educatio~n :. ra ofj~~Ap~~~ I~___~ _ Signature: X,. _ lllia~ ~. Roth an, IFAS \ PA Certified General Real Estate Appraiser No. GA-000303-l Date: ~r6,()L_ 40 .. ~ ASSUMPTIONS AND UMITING CONDITIONS 1. No responsibility is assumed for the legal descriptions provided or for matters pertaining to legal or title considerations. Title to the property is . assumed to be good and marketable unless otherwise stated. 2. The property is appraised free and clear of any or all liens or encumbrances unless otherwise stated. 3. Responsible ownership and competent property management are assumed. 4. The information furnished by others is believed to be reliable, but no warranty is given for accuracy. 5. All engineering studies are assumed to be correct. The plot plans and illustrative material in this report are included only to help the reader visualize the property. 6. No survey has been made by the appraiser and no responsibility is assumed in connection with such matters. 7. It is assumed that there are no hidden or unapparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility is assumed for such conditions or for obtaining the engineering studies that may be required to discover them. 8. It is assumed the property is in full compliance with all applicable federal, state, and local environmental regulations and laws unless the lack of compliance is stated, described. and considered in the appraisal report. 9. It is assumed that the utilization of the land and improvements is within the boundaries or property lines of the property described and that there is no encroachment or trespass unless noted within the report. 10. The distribution of the total valuation in this report between land and improvements applies only under the stated program utilization. The separate allocations for land and buildings must not be used in conjunction with any other appraisal and are invalid if so used. 11. Acceptance and/or use of this appraisal report constitutes acceptance of the foregoing Assumptions and Umiting Conditions. 12. The appraiser of this property will not be required to give testimony or appear in court because of having made this appraisal. unless arrangements have been previously made. 41 .. . , .. . . -- -: : BOSTON BRUSSELS HARRISBURG HARTFORD LONDON NEW YORK NEWPORT BEACH PARIS PHILADELPHIA PRINCETON WASHINGTON . Dechert Robert L F............ DIrect Tel: 216.894.21568 DlAld Fax: 216.894.6126 robert.freecImM@dechert.com August 24,2001 Gerald L. Hempt 205 Creek Road Camp Hill, P A 17011 George F. Hempt 205 Creek Road Camp Hill, PA 17011 W. Robert Mark 324 9th Street Atlantic Beach, FL 32233 Forrest H. Mark 2833 Sinks Canyon Road Lander, WY 82520 Steven E. Mark 3516 Arbor Lane Minnetonka, MN 55305 Robert H. Kalbach 1 West Lawn Circle Wormleysberg, P A 17043 Re: C.A. Hemot Estate. Inc. Dear Everyone: On June 7, I sent you a draft Shareholders Agreement. At the same time I mentioned that I did not think it fair to present this agreement without also presenting the possibility that if anyone now wants to sell his shares, the Company is in a position to purchase them. I mentioned briefly that there are two extremes of valuation and that somewhere between the two a compromise would have to be found if somebody wishes to sell. Enclosed is a two page analysis I have prepared indicating some possible valuations. The valuations are all based on a recent appraisal of the real estate and improvements, a copy of which is enclosed (there are two appraisals, each for a different portion of the property). You will see from this that all of the real estate and improvements are valued at $5,359,000. The Company also has some other assets, which bring the total value of its assets up to approximately $5.75 million. The Company also has liabilities, and subtracting these from the assets leaves a net asset value of approximately $5,000,000. If someone was going to purchase or sell a minority interest in a closely owned business, they would typically discount it. This means, for example, that if the net asset value of the Company's assets is $5,000,000, a buyer or seller oflet us say 10% of the company stock would not pay $500,000 (l/10th of $5,000,000), but would pay a significantly lower price to reflect the facts that the business is privately owned and therefore the stock cannot readily be sold and to reflect that a minority interest is worth substantially less than control of the business because a minority stockholder can really have no effective control over how the business is run. 754580.1.01 08124101 Law OffIces of Dechert Price & Rhoads 4000 Be" Atlantic Tower '1717 Arch Street. Philadelphia, PA 1.103-27.3. Tel: 215.114."000 . Fax: 215.9....2222 . www.dec:hert.com ... . ., . ,.. George F. Hcmpt, Gerald L. Hcmpt, et at. August 24,2001 Page 2 In the enclosed analysis I have taken a 30% discOlmt for lack of marketability and a 30% disco1D1t for a minority interest, for a combined disco1D1t of 51%. You should know that there is nothing magic about the 30% numbers. In some cases discounts are somewhat higher and in some cases somewhat lower. Using this methodology, the per share value of the stock works out to be approximately $104. This is about the mid range of the three possibilities shown on the enclosed sheets. Another approach is to consider what would happen if the Company were sold or liquidated. In this case the Company would owe capital gains tax because the real estate is worth more than it cost. The federal and Pennsylvania tax on the gain is approximately $1.4 million. If the Company were liquidated the capital gains tax would have to be paid. If the Company were sold, the tax might not have to be paid currently but a perspective buyer would take it into account in figuring out what price to pay. Factoring this tax cost and the possible selling expenses into the equation gives a net value of the Company after capital gains tax and after selling expenses of approximately $3.2 million, which amounts to a per share value of$135. The $135 figure is on the high side, all things considered. The second page of the enclosed analysis shows valuing the dividend stream for 99 years. Assuming one uses a discount rate of 6%, which is about the effective interest rate today, the value of a share of stock would be S83. This means that the right to receive the $5.00 per share dividend, assuming the dividend docs not change, for the foreseeable future is worth approximately $83. It is obviously worth less than the total dividends which would be paid over this time period (S5x99 = $495), because dividends paid in the future are not worth their face amount Roughly speaking, a $5.00 dividend paid one year from now is worth.approximately $4.70 today, and S5.00 dividend paid two.years from now is worth approximately $4.40 today, and one payable 99 years in the future is worth almost nothing on a present value basis. - It seems to me that somewhere between the values of$83 per share and $135 per share lies some acceptable compromise if someone wishes to sell. I suggest using, at least as a starting point, a value of $104 per share. I hope we can conclude this matter in the near future by working out a purchase for those who wish to sell and by obtaining a signed shareholders agreement from all those who do not wish to sell. I urge you to review this matter with your own legal or other advisor. Sincerely yours, Robert L. Freedman RLF/ph Enclosures cc w/enc: bec w/enc: Howell C. Mette Jerry R. Duffie, Esquire David DeLuse Edward C. Myers Dechert .. C.A HEMPT ESTATE, INC. VALUATION Per CPA Statements 12/31/00 Fair Market Value Assets Cash Bonds Fixed Assets, net of depreciation Deferred Lease expense, net 302,309 63,283 1,498,686 25,444 302,309 62,873 * 5,359,000 - 25,444 Total Assets 1,889,722 5,749,626 Liabilities Demand Note {675 ,000) (675,OOO) 1,214,722 5,074,626 Net Asset Value Golno Concern Value Fair Market Value of Assets less Iiablities 5,074,626 Discount for lack of marketability {30%} and minority interest {30%} for combined discount of 51% (2,588,059) 2,486,567 Value Per share value {24,OOO shares outstanding} 104 Sale/Llauldatlon Value Potential gain on sale of real estate (5,359,000 minus 1,498,686) Less: selling expenses (estimated) Potential loss on sale of bonds {62,873 minus 63,283} Net gain Less: PA tax on gain at 9.99% Gain on sale for Federal tax purposes Federal tax @ 35% Fair Market Value of assets less liabilities Less: selling expenses (estimated) PA tax on gain Federal tax on gain Net asset value after sale/liquidation Per share value (24,000 shares outstanding) Salel Liquidation Value Per CPA Statements Per 5/1/01 appraisals 3,860,314 (400,000) (410) 3,459,904 (345,644) 3,114,260 1,089,991 5,074,626 (400,000) (345,644) (1,089,991) 3,238,991 135 . . \ " C.A HEMPT ESTATE, INC. Present Value of $5 per share annual dividend for 99 years Interest Rate 5% 6% 7% ~ Present Value $5 per year/99 years $99 $83 $71 $62 Present Value of $135, payable In 99 years Present Value of $135, payable in 99 years $1 $0 $0 $0 Total Value $100 $83 $71 $62 918708.4.01 01108/04 4:17 PM Report of C. Thomas Work regarding the division of the Loy T. Hempt Residuary Trust pursuant to 20 P.A. C.S. ~ 7191 I have reviewed the document dated April 25, 2002, which divides the Residuary Trust under Will ofLoy T. Hempt (the "Trust") into three separate trusts. I have also reviewed the objections by the Kalbach and Mark families (the "Objectants") to the accounting filed by Gerald L. Hempt as trustee of the Trust (the "Trustee") and the reply of the Trustee to these objections. The division ofthe Trust into three separate trusts under 20 Pa. C.S. ~ 7191 was and is a legally valid division for the reasons discussed below. If any valuation used by the Trustee in making the division is held to be inaccurate, the Trustee should readjust the division to reflect the accurate valuation. 01. Trustee acted in conformity with the terms of the Trust and under the authority of20 Pa. C.S. & 7191. when dividimz the Trust into three separate trusts. Trustee, as sole trustee of the Trust, divided the Trust into three separate trusts on April 25, 2002. The trust division was made pursuant to 20 Pa. C.S. ~ 7191(a), which provides in part: "A trustee may, without court approval, divide a trust into separate trusts, allocating to each separate trust either a fractional share of each asset and each liability held by the original trust or assets having an appropriate aggregate fair market value and fairly representing the appreciation or depreciation in the assets of the original trust as a whole." Because the Trust directs that on Jean Hempt's death the principal shall be distributed 40% to the Hempt family, 40% to the Mark family and 20% to the Kalbach family, Trustee divided the Trust in precisely this way. The fair market value of each new trust is equal to the respective remainder interest of each branch of the family in the Trust. Each new trust also contains a proportionate share of the appreciation of the Trust. For example, the new trust for the eventual benefit of the Kalbach family contains exactly 20% of the fair market value and 20% of the appreciation of the Trust assets. The requirements of the statute ensure total fairness, and Trustee followed those requirements to the penny. The statute allows the non-pro rata division of trust assets so long as each new trust receives the proper proportion of both fair market value and appreciation. Each group of beneficiaries receives its pro rata share of fair market value and its share of potential capital gains tax liability. Trustee determined the fair market value of all Trust assets and meticulously divided them proportionately based on this valuation. Objectants rely on the Official Comment to the 1992 amendment to 20 Pa. C.S. ~ 7191. The 1992 amendment repealed the requirement of the beneficiaries' consent to the division of a trust. The 1992 Comment stated that this administrative change would be useful in the qualification of trusts as qualified shareholders for Subchapter S corporation purposes as well as for generation-skipping tax purposes. I The 1992 Comment is merely an illustration of how the amended statute is useful in light of relatively recent changes in the tax law, not an exhaustive list of all situations in which it may be used.2 1992 Official Comment to 20 Pa. C.S. ~ 7191. 2 Besides, where the statute is clear on its face, it is improper to look to the comment for the meaning of the statute. 20 Pa. C.S. ~ 1921. 2 The comments to the pre-1992 versions of the statute discuss other purposes for dividing a trust, including pursuing different investment policies of the beneficiaries and reducing administrative difficulties where beneficiaries have different rights to invade principal. J In fact, this statute was commonly used where the beneficiaries of separate shares of one trust had different investment objectives. For example, one older beneficiary might want to have his trust invested in bonds to maximize income and another younger beneficiary might want his trust invested in stocks to maximize growth. Pursuing both of these conflicting investment objectives in one trust account would be impossible. Dividing the one trust into two separate trusts allows each trust to pursue its own investment program. Objectants offer no legal basis for confining the statute's use to the two purposes mentioned in the 1992 Comment. Here, the clear language of the statute expressly granted Trustee the authority to divide the Trust. Finally, to the extent Objectants are arguing that Loy Hempt's will specifically directed that the Hempt, Mark and Kalbach families each receive a fractional portion of each asset in the Trust, a review of Loy's will shows Loy never intended the beneficiaries to have such rights. Loy gave his trustees broad discretion to manage the assets of the Trust. He did not give the Trust beneficiaries any vested rights to any of the original property in the Trust. In fact the Trust contains a specific provision giving the trustees the discretionary power to sell assets at anytime during the existence of the Trust and to make distribution in cash or in kind when the J 1949 Official Comment to 20 Pa. C.S. ~ 7191. 3 Trust terminates.4 This specific authorization in the Trust negates any alleged "right" of beneficiaries to demand a distribution of property in kind. Courts have held that a beneficiary has no right to demand an in kind distribution of property where the will contains language granting the trustee discretion to sell-property or distribute it in kind.5 Because Loy Hempt specifically included this language, the beneficiaries are not entitled to demand an in kind distribution of property. II. Section 7191 is clearlv apvlicable to the Trust. Objectants contend that the legislature did not intend the 1999 amendment to 20 Pa. C.S. ~ 7191 to apply to the Trust, because the Trust was created prior to the amendment's enactment; and, therefore Trustee had no legal authority to divide the Trust without Court approval. This argument is erroneous. The original version of ~ 7191 was enacted in 1949 and provided: "The court, for cause shown and with the consent of all parties in interest, may divide a trust into two or more separate trusts." The 1949 Act stated it was effective as of January I, 1950.6 The Act did not expressly specify whether this power to divide was applicable to trusts created prior to the 4 5 Paragraphs (c) and (g) of article NINTH of the will. Abdoe Estate, 20 Fiduc. Rep. 2d 159, 165 (Lawrence Co. Orphans' Court 1999). See also McTague's Estate, 18 A.2d 532,534 (Pa. Super. Ct. 1941). 6 See Act of April 18, 1949, Pub. L. 512, No. 121, ~ 105 (1949). 4 statute's enactment. However, courts, without seeing the need for any discussion, applied this statute to trusts existing prior to the statute's enactment. 7 The only reported case under ~ 7191 was under this 1949 version of the statute, which required all parties in interest to consent to the division and court approval. In Stotesbwy Trust, 3 Fiduc. Rep. 505 (Montgomery Co. Orphans' Ct. 1953), the guardian ad litem (appointed to represent minor and unborn beneficiaries of the trust) objected to the division of the trust. The guardian asserted that the 1949 statute could not constitutionally be applied to a trust created prior to the statute's enactment. The Court summarily rejected this argument, stating: "it would not appear that there is any constitutional objection on account of the retroactive feature of the act as applied to this case because the beneficiaries receive the exact proportion of the property that they would otherwise receive." The guardian conditionally consented to the division, if the Court deemed the statute constitutional; thus, the division was allowed. The Court felt the applicability of the statute to existing trusts was so apparent there was no need for a lengthy discussion of the issue. In 1992 the statute was amended to remove the requirement that all parties in interest consent to the division and instead to require notice to all parties in interest as directed by the court.8 Again, the legislature used the same language regarding the applicability of this amendment - "shall apply beginning with the effective date.,,9 Because the legislature did not 7 See Stotesburv Trust, 3 Fid. Rep. 505, 508 (Montgomery Co. Orphans' Ct. 1953). 8 As amended in 1992, ~7191 provided: "The court, for cause shown, may authorize the division of a trust into two or more separate trusts upon such terms and conditions and with such notice as the court shall direct." 9 See Act of December 16, 1992, Pub. L. 1161, No. 152, ~ 27(e) (1992). 5 specify that the 1992 amendment's applicability was limited to instruments executed on or after its effective date, the amendment's applicability is not related to the date the instrument was executed. ~ 7191, as amended in 1999, provides in part: "(a). A trustee may, without court approval, divide a trust into separate trusts, allocating to each separate trust either a fractional share of each asset and each liability held by the original trust or assets having an appropriate aggregate fair market value and fairly representing the appreciation or depreciation in the assets of the original trust as a whole."JO As in 1949 and 1992, in 1999 the legislature specified that the statute "shall apply beginning with the effective date...." which was December 12, 1999.11 The consistent use of this language after the courts interpreted it to mean the statute applied to existing trusts shows the legislature assumed the meaning of this language was self evident. The fact that there are no other reported cases challenging Stotesbury and the applicability of the 1949 or amended statute to existing trusts further supports the conclusion that this statute has always been regarded as applicable to existing trusts. There is no reason to suppose that the legislature intended the 1999 amendment to apply differently from the 1949 statute or the 1992 amendment. Quite the contrary. Because the legislature made the original version of ~ 7191 applicable to trusts existing prior to its enactment, 10 20 Pa. C.S. ~719I(b) provides: "(b) With court approval. - The court, for cause shown, may authorize the division of a trust into two or more separate trusts upon such terms and conditions and with such notice as the court shall direct." This subsection b is identical to ~ 7191 as amended in 1992. II See Act of October 12, 1999, Pub. L. 422, No. 39, ~ 13(8) (1999). 6 it is reasonable to assume the legislature intended the subsequent amendments also to apply to trusts existing prior to the amendment. The amended statute grants trustees the power to divide trusts, a power previously reserved to the courts. Obviously the drafters of future trusts could include this power in their trust instruments if they saw a need to do so. Consequently the statute is oflittle use for new trusts. But for old trusts the statute can be very useful. The statute was, and has always been, intended as a remedy for circumstances unforeseen when trusts were previously created. The comments to ~ 7191 substantiate this conclusion that the statute was enacted as a remedy to apply to trusts existing prior to its enactment. One of the comments to the 1992 version of ~ 7191, states that the statute is "intended to aid in the qualification of trusts as qualified shareholders for Subchapter S corporation purposes as well as for generation skipping tax purposes.,,12 These instances would normally occur in pre-existing trusts. Trustee divided the Trust into three separate trusts on April 25, 2002, which was after the effective date of the amended statute. Thus, the division of the Trust was a proper exercise of this statutory power by Trustee. Objectants appear to argue that Trustee seeks to use this statutory power retroactively. Objectants state that there is a general presumption against giving a statute retroactive effect.]3 Even though this statement of the law is correct, Objectants misunderstand the application of the law to the facts of this case. 12 1992 Official Comment to 20 Pa. C.S. ~ 7191. 1 Pa. C.S. ~ 1922(3). 13 7 Trustee has not requested that the division of the Trust be made retroactive to the original date of the creation ofthe Trust or any other date prior to the effective date of the statute on December 12, 1999. Rather, Trustee has merely used the statutory power prospectively - on April 25, 2002, which is after December 12, 1999 - to an existing trust. Objectants confuse the use of the terms "retroactively applied" and "prospectively applied" to an existing trust. Objectants' reliance on the law at the time ofLoy Hempt's death is unfounded. 20 Pa. C.S. ~ 7191 is the applicable law regarding the Trust as of the effective date of that statute. The law at the time ofLoy Hempt's death is irrelevant. III. The application of & 7191(a) to the Trust is constitutionally valid. Objectants contend that the application of20 Pa. C.S. ~ 7191(a) to the Trust constitutes a constitutional violation because it is a ''taking of property." Objectants contend that the division of the Trust deprives some of the beneficiaries of a vested right in the trust property. In Estate of Bernardi v. Bernardi,14 the Court noted "one of the stronger presumptions in our law is that an enactment of the legislature is constitutional...." The Court then reiterated the "well established" rule that "the burden of proving clearly and unmistakably the unconstitutionality of a legislative enactment is upon the person so asserting." 15 Objectants aver that they had, prior to the 1999 amendment of ~ 7191, a vested right to have the assets of the Trust maintained intact and to have a fractional share of each and every asset distributed to them upon termination of the Trust. From this premise - which as I 14 22 Fid. Rep. 2d 282, 285 (Cumberland Co. Orphans' Ct. 2001), incorrectly cited by Objectants as 22 Fid. Rep. 282. 15 See id. (citations omitted). 8 explain above does not accord with the law or the terms of the Trust- Objectants conclude that the amendment to ~ 7191, granting the trustee the power to divide the trust without fractionalizing each and every asset, is an unconstitutional taking of their property. In fact, the same "unconstitutional retroactive taking" argument was made against the prior version of ~ 7191 and was rejected. 16 The legislature typically makes statutory changes to matters of trust administration apply to existing trusts and they are not considered "takings." For example, the Principal and Income Act changed the definition of what trust property was "income." In Arrott Estate, 17 the Pennsylvania Supreme Court specifically held that the application of the Act to receipts and disbursements received and made by existing trusts after the enactment of the statute did not result in a constitutional taking of property. "Although enjoying a vested right to income, [an income beneficiary] has no vested interest in a definition or method of ascertaining income." 18 The Court held that the Act only changed the method of ascertaining the beneficiary's specific property interest and did not take away a vested property right. This same result was reached in Catherwood Trustl9 in which the Pennsylvania Supreme Court held that the application of Principal and Income Act to existing trusts was valid and did not result in a constitutional taking of property. The Court made clear that beneficiaries 16 Stotesbury Trust, 3 Fid. Rep. 505, 508 (Montgomery Co. Orphans' Ct. 1953) ("[I]t would not appear that there is any constitutional objection on account of the retroactive feature of the act as applied to this case because the beneficiaries receive the exact proportion of the property they would otherwise receive."). 17 Anott Estate, 421 Pa. 275 (1966). 18 See id. at 282. 9 have no vested property rights "to any particular mode or method of ascertaining what is or is not income.,,20 Consistent with the holdings in Afrott Estate and Catherwood Trust, the legislature has made many other statutory changes to matters of trust administration applicable to trusts existing when the statutory change is made (but only to acts performed after the legislative change), including: 20 Pa. C.S. ~6102 (termination of trusts), 20 Pa. C.S. chapter 37 (apportionment of death taxes21), and 20 Pa. C.S. ~7203 (the prudent investor rule). Section 7191 is constitutionally valid and its application does not result in a taking of property rights of any beneficiary. 19 Catherwood Trust, 405 Pa. 61 (1961). 20 See id. at 74. 21 The Supreme Court held the application of legislation that provided for the apportionment of death taxes among the beneficiaries to an existing trust was an "administrative provision governing the distribution of estates..." and thus was constitutional. Harvey Estate., 350 Pa. 53, 57 (1944). 10