Mps appraisal file brief (Complex 3 appraisals reviewed)

14.001587 RK Group; AFB 09/08/2014 Chevron. C-Store & Retail, N. Lauderdale, FL

EXECUTIVE SUMMARY

AFB (APPRAISAL FILE BRIEF*) Borrower: Property Address: Property Description:

Loan Amt: $2,981,715 RK Group Investments - Special Assets 1833 S. State Road 7, North Lauderdale, Broward Co., FL 33068

Prior Appr. Rept. Date: Prior Date of Value:

10/11/2013 9/25/2013 8/21/2014 8/5/2014

File No: 14.001587

C-store gas station/convenience store w/retail rental spaces Beshears & Assoc.

Ordered by Wells Fargo

$ 1,960,000 Going Concern Inspection: $ 1,780,000 Real Estate Interior/Exterior Current Appr. Rept. Date: Beshears & Assoc. $ 3,800,000 Going Concern Inspection: Prior Date of Value: Ordered by Capital Bank $ 2,790,000 Real Estate Interior/Exterior CMR/AFB Requested: +$1,010,000 ☒ Yes ☐ No RE Value ▲(2013 to 2014): AFB Completed: 9/10/2014 Asset Mgr. Terry McGinnis ☒ Yes ☐ No Requested by: Terry Spurlock Prepared by: Michael Sprouse, MRICS FL Certified General Real Estate Appraiser #1005 Appraisal Review Dates w/Accepted Values in File:

8/25/2014

Review of 10/11/2013 Beshears Report Review of 2014 Beshears Report

Not released by Wells Fargo

$1,960,000

Signatory: John Accornero

$3,800,000

Items of Mention: An expanded CMR was prepared for a 3-way analysis of two 2013 appraisals and one 2014 appraisal. This CMR, labeled RIMS 14.001007, was uploaded into RIMS on 06/26/14 and is made a part of this discussion by its inclusion as an Addenda in this AFB document which is located in RIMS 14.001587. Subsequent to the Recommendation to order a new appraisal, such was completed and this report is the latter of the two appraisals being considered in this AFB. The RIMS 14.001007 CMR is made a part of this Appraisal File Brief by reference in the Addenda.

Significant Issues: The significant change in real estate component values from the same appraiser for the period Sept. 25, 2013 to Aug. 5, 2014 is the single issue of the Appraisal File Brief.

Appraisal dated 10/11/2013: Beshears Report: The 10/11/2013 appraisal by Beshears was developed using acceptable methodology for a special purpose property, including the identification of the separate component values.

In summary, based on the market evidence at that time, the value conclusion of the 2013 Beshears’ appraisal was sufficiently supported and I considered it to reasonably estimate the subject property’s “as-is” going concern value at $1,960,000 as of September 25, 2013.

Appraisal dated 8/21/2014: Beshears Report: The 8/21/2014 appraisal by Beshears was developed using acceptable methodology for a special purpose property, including the identification of the separate component values.

In summary, based on the market evidence at that time, the value conclusion of the 2014 Beshears’ appraisal was sufficiently supported and I considered it to reasonably estimate the subject property’s “as-is” going concern value at $3,800,000 as of August 5, 2014.

An Appraisal File Brief is prepared for the exclusive use of Bank Management and is an executive summary of the reliability of real estate collateral valuation opinions. It is intended as a “file brief” regarding immediate dissemination of summary information typically contained in a more detained CMR (Confidential Management Report). It can be relied upon for bank decision-making purposes.

14.001587 RK Group; AFB 09/08/2014 Chevron. C-Store & Retail, N. Lauderdale, FL

Causes for the changes between the two reports: Cost Approach: In the more recent appraisal, the land was valued at $16.50 per land square foot, or $1,030,000.

With regards to the higher land value, this is a result of utilizing newer land sales and making slightly lower adjustments for the subject’s overall location and access. Given the subject’s higher income figures, the previous adjustments may have been a little too large. Also, given the subject’s significantly higher income projections based on historical figures, no external obsolescence was indicated. Additional changes to the more recent report included utilizing a slightly lower effective age (7 years vs 8 years), adding the cost of the generator system of $60,000 (which was not included in the first report), and slightly increased cost new for the car wash and retail tenant bay building. Lastly, after reviewing Marshall Valuation Services and discussions with the owner, the appraiser increased the estimated cost new of the subject’s c-store equipment, deli equipment, and the car wash equipment. Of these three changes, the biggest increase was to the deli/food equipment, which we increased to $100,000 (of which part of this figure is intended to account for much of the $40,000 that will be spent to re-open the food service area).

Market Approach: The sales utilized in the more recent report indicated much higher values on a per RSF, per SPC, and per LSF basis. Lastly, given the significant improved income figures, and higher net fuel and c-store margins, a higher Gallonage Multiplier and a slightly higher Gross Profit Multiplier were utilized Income Approach: An increase in value via this approach was caused by a higher fuel margin in the second report based on the detailed historical data provided by the owner ($0.195 per gallon). Based on the detailed information that was provided to the appraiser prior to the preparation of the second report that indicated historical net cstore margins of over 60% from 40% (annualized) in 2013 (which the owner subsequently confirmed), a much higher net c-store margin in the second report was projected by the appraiser which had a significant impact on the overall pro forma gross income figures.

The more recent report also included projected food sales, which was not included in the first report since there were no plans at that time to reopen and any reported food sales were included in the c-store sales figures. Car wash sales also increased to $50,000 per year based on historical data. Lastly, in the recent report, there was a projected significantly higher other income given that the owner provided more detailed other income information, which included ATM/Air/Vacuum Stations ($2,000 per month), rebates ($1,000 per month), Lotto Cashing Commissions ($2,500 per month), and Bill Payments/Western Union/Money transfer fees of ($1,500 per month). Given these changes, the projected gross income increased to $825,500 per year.

Recommendation: The difference in value estimates between the two appraisals is +$1,010,000 from 2013 to 2014. Based on information in the appraiser’s analyses, the difference (increase) in value is attributed primarily to the owner’s release of subject’s detailed operating income and expenses to the appraiser which was not made available for consideration in the 2013 appraisal report. Also, more recent market data reflecting higher land and improved sale prices, accounted for a portion of this increase.

Therefore, the 2014 appraised value conclusion of $3,800,000 (going concern) and $2,790,000 (real estate) can be utilized for bank decision-making purposes.

An Appraisal File Brief is prepared for the exclusive use of Bank Management and is an executive summary of the reliability of real estate collateral valuation opinions. It is intended as a “file brief” regarding immediate dissemination of summary information typically contained in a more detained CMR (Confidential Management Report). It can be relied upon for bank decision-making purposes.

ADDENDA to 14.001587: 14.001007 RK Group Investments, N. Lauderdale, FL C-Store w/Retail

CAPITAL BANK Confidential Management Request (CMR) Requested By:

Terry Spurlock/Terry McGinnis

Most Probable Purchaser:

Borrower:

RK Group Investments

Loan Amount: $2,998,450

Owner-Operator Tax Parcel ID: 4941-12-34-0010

Property Metrics: An Existing 4,864± Sq. Ft. Multi-tenant C-Store/Retail Center, demised as follows: A 3,344± SF C-Store, 1,520± SF Tenant Bay Space in 2 end-cap units of 760 SF each, constructed in 2005, situated on a 62,231±SF net usable site.

Subject Aerial View Issue:

Car Wash Traffic count along SR 7 was approx. Front View 46,000 vehicles per day.

Review three independent appraisals with different effective dates and report findings to Management.

Appraiser/Firm:

D. Beshears, MAI / C. Kohler

Effective Date of Value: Ordered by: Capital Bank

1/22/2013 Report Type: Self-Contained

Appraisal Scope:

Requested scope of the assignment was “self-contained report, as-is market value, fee simple of the going concern, interior inspection.

Approaches Used:

Cost Approach: ☒

Qualifying Statements:

Extraordinary Assumptions: Yes ☒

No ☐

Report Page Reference:

Pg. 10

Yes ☐

No ☒

Report Page Reference:

Pg. 10

Hypothetical Conditions:

Appraisal #1 (Report Date: 3/19/2013) Beshears & Associates, Tampa, FL Value Conclusion(s):

Market Approach: ☒

Exposure Time: “9 months” (page 19) Appraiser/Firm:

D. Beshears, MAI / C. Kohler

Effective Date of Value: Ordered by: Wells Fargo Bank

9/25/2013

Income Approach: ☒

Marketing Time: “9 months” (page 19)

Appraisal #2 (Report Date: 10/11/2013) Beshears & Associates, Tampa, FL

Report Type: Self-Contained

Value Conclusion(s):

Released to Capital Bank: ☐Yes ☒No

Appraisal Scope:

Requested scope of the assignment was “self-contained report, as-is market value, fee simple of the going concern, interior inspection.

Approaches:

Cost Approach: ☒

Qualifying Statements:

Extraordinary Assumptions: Yes ☒

No ☐

Report Page Reference:

Pg. 11

Yes ☐

No ☒

Report Page Reference:

Pg. 11

Hypothetical Conditions:

Market Approach: ☒

Exposure Time: “9 months” (page 20)

Income Approach: ☒

Marketing Time: 9 months (page 20)

Appraisal # 3 (Report Date: 3/25/2014 ) Appraiser/Firm: Effective Date of Value:

Walter Duke, MAI / Michael Anderson 3/7/2014

Report Type: Self-Contained

Clobus, McLemore, and Duke, Inc. Value Conclusion(s):

Ordered by: City National Bank Released to Capital Bank: ☐Yes ☒No Appraisal Scope:

Requested scope of the assignment was “self-contained report, as-is fee simple value”, interior inspection.

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ADDENDA to 14.001587: 14.001007 RK Group Investments, N. Lauderdale, FL C-Store w/Retail

Approaches:

Cost Approach: ☒

Qualifying Statements:

Extraordinary Assumptions: Yes ☒

Market Approach: ☒ No ☐

Income Approach: ☒ Report Page Reference:

Hypothetical Conditions: Yes ☐ No ☒ Exposure Time: “6 to 9 months” (page 66)

Pg. 5

Report Page Reference: Pg. 5 Marketing Time: “6 to 9 months” (page 66)

Findings: For Internal Use Only This CMR Prepared By:

Michael Sprouse, MRICS, FL State Certified General Real Estate Appraiser RZ1005 REAL ESTATE VALUE DIFFERENTIALS

01/22/2013 to 03/07/2014 (13 months):

+$690,000

Analysis Individual reviews of the Beshears and Duke appraisals were completed by the Capital Bank Appraisal Review Department. I have concentrated on the real estate value components as opposed to going concern values as the bank collateral is best supported by the real estate. The major differences in the major component value conclusions are depicted in the three graphics above. The graphics reflect the effective dates of value for the three appraisals. The Beshears’ two appraisals reflect an increase in land only and total real estate values over time, but a slight decline on FF&E as these items typically depreciate over time, which is expected. All three appraisals concluded there was no business intangibles value. The three appraisals were ordered by financial institutions, per regulations, however, each appraisal was ordered by a different bank. Only the Beshears’ 1/22/2013 appraisal was ordered by Capital Bank.

Physical Characteristics: The Beshears’ appraisals based the valuations on an improvement size of 4,864 gross square feet, which reflects a 3,344 c-store and an additional 1,520 SF retail space that is demised into 2 bays of 760 SF each, plus a 1,040 SF free-standing car wash building. Their land value was based on 62,231 SF net usable area.

Duke’s appraisal relies on a 5,000 SF c-store/retail building size, consisting of 3,400 SF c-store and two 800 SF retail bays for an additional 1,600 SF, along with a freestanding 936 SF car wash building. Duke’s land value was based on a 1.428 ac., or 62,204 SF. The sizes used by the two different appraisers are relatively similar, although not exactly the same for valuation purposes when using a per square foot analysis.

Market Conditions/Appraisal Time Line: The two Beshears’ appraisals were 8 months apart (Jan. to Sept, 2013). The changes in values are primarily attributed to changes in market conditions and the increases in land values as well as the real estate as improved values. One would expect a slight decline in FF&E values in the second Beshears appraisal as these items depreciate over time with use, which the appraiser noted by his FF&E estimate. The Duke appraisal, which is the most recent, developed a point value estimate some 6 months after the second Beshears’ appraisal.

Noted barriers to subject sub-market entry: 1) high development costs, and 2) existing competition.

Items of Mention/Comparison: Appraisal Scope/Valuation Scenarios:

Beshears 1/22/2013 No issues.

Beshears 9/25/2013 No issues.

Duke 3/07/2014 No issues.

Methodologies Employed: Highest and Best Use: Physical Units of Measure (SF): Land Value Analysis:

No issues.

No issues.

No issues.

Acceptable: 4 Sales from 2011-2012 were reasonable alternative C-Store sites – all were corner locations w/desirable traffic counts/opined $13.50/SF

No issues.

No issues.

No issues.

Acceptable: 5 sales from 2011-2012 were reasonable alternative C-Store sites w/desirable traffic counts /opined: $17.50/SF

Cost Approach:

Acceptable: opined: $1,600,000 w/detailed external obsolescence discussion and estimate using capitalized NOI shortfall. A discussion of the source of the external obsolescence could have benefitted the reader.

Acceptable: 5 sales from 20112012/opined: $1,410,000 using price per rentable building SF as denominator. Also analyzed using price per land SF, price per simultaneous pumping capacity, gallonage multipliers, and gross profit multipliers. In addition,

Acceptable: opined: $1,960,000 w/detailed external obsolescence discussion and estimate using capitalized NOI shortfall. A discussion of the source of the external obsolescence could have benefitted the reader.

Acceptable: 5 sales from 20112013/opined: $1,950,000 using price per rentable building SF as denominator. Also analyzed using price per land SF, price per simultaneous pumping capacity, gallonage multipliers, and gross profit multipliers. In addition, capitalized tenant

Basic, but acceptable.

No issues.

Basic, but acceptable.

Marginally representative of subject land value as sales were not all potential alternative C-Store sites, resulting in a concluded value that is low for a C-Store site: 5 sales from 2012-2013/opined: $11.50/SF Considered overly aggressive: opined: $2,700,000.

Shortfall; no external obsolescence considered by appraiser.

Sales Comparison Analyses:

Marginally Acceptable: 4 sales from 20122013/opined: $2,360,000 using site areas as denominator to reflect location attributes, no additional analyses included.

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ADDENDA to 14.001587: 14.001007 RK Group Investments, N. Lauderdale, FL C-Store w/Retail capitalized tenant bay income of bay income of $280,000 was added, $320,000 was added, resulting in resulting in $1,950,000. $1,700,000.

Income Approach: Acceptable: Over 100 C-Store operating Acceptable: Over 100 C-Store operating data comparables were considered. data comparables were considered.

Physical items Included for Physical items Included for consideration: consideration: bldg. size, land area, and bldg. size, land area, and SPCs (pumping SPCs (pumping capacity) Limited subject capacity) Limited subject historicals and historicals and market data was used by market data was used by the appraiser to the appraiser to project income and project income and expenses. Projected expenses. Projected net fuel margin for net fuel margin for the subject was 13.5 the subject was 10 cents per gallon. cents per gallon. Operating expenses Operating expenses were projected at were projected at 53.5% of gross profit.

57.5% of gross profit. Capitalizing the CCapitalizing the C-Store EBIDTA Store EBIDTA (projected net earnings) at (projected net earnings) at 13.0% 13.5% ($1,270,000) and adding the ($1,690,000) and adding the capitalized capitalized NOI of the rental bays at 8% NOI of the rental bays at 8% ($280,000) ($320,000) results in $1,590,000. results in $1,970,000.

Reconciliation: Going Concern Value: Reconciliation: Real Estate Value: Reconciliation: FF&E Value: Reconciliation: Business Value:

$1,600,000 $1,400,000 $ 190,000 $ 0

$1,960,000 $1,780,000 $ 180,000 $ 0

Marginally Acceptable: This appraiser based the income approach on market rents for CStores using site size as the denominator.

Subject historicals were not discussed nor considered by the appraiser. The income approach was based solely on marketderived C-Store income and expenses, with no mention of the subject’s operating history (income/expenses/fuel sales) thereby reducing the reliability of this approach. The retail rental bays were included as part of the subject’s size as a C-Store (5,000SF) and not analyzed separately, which would be considered desirable by the appraiser’s peers. This further reduces the support for the income approach value conclusion. Using an OAR of 8.5%, Opined: $2,360,000. $2,360,000 $2,090,000 $ 270,000 $ 0

Conclusions Assuming all 3 appraisals could be utilized by Capital Bank, the Beshears’ 9/23/2013 values would be recommended for use by bank management as this report is the most recent analysis with the best supported valuation analyses. With a release, this concluded 9/23/2013 real estate value of $1,780,000 can be used for bank decision-making purposes.

However, since both Wells Fargo and City National Bank have not responded with releases for Capital Bank to utilize either of these two appraisals which were ordered by the respective financial institutions, at this time I can only recommend the values in the Capital Bank ordered Beshears’ report with an effective date of 1/22/2013 and a real estate component value of $1,400,000. Use of the conclusions/values in the Wells Fargo and City National Bank appraisals for internal decisions of Capital Bank is not recommended at this time until the requested releases are received.

Recommendations for Management: Unless and until Wells Fargo releases Beshears’ 9/25/2013 report, which is the most recent and contains the greatest support for its value conclusions, we should order a new appraisal as the 1/22/2013 report ordered by Capital Bank is beyond the one year acceptable appraisal shelf life. The City National appraisal is the least supportable and I do not recommend it for use by Capital Bank at this time.

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