2-SAMPLE APPRAISAL 1_FAS1-17-2701.pdf

FIRST

APPRAISAL

S E R V I C E S

An Appraisal Report for the Valuation of a Commercial Retail Building

Owned by

DSR Tucson, LLC

Prepared by:

Timothy A. Haskins, ASA Arizona Certified General

Real Estate Appraiser #30668

First Appraisal Services, PLC 3420 E. Shea Boulevard, Suite 200 Phoenix, Arizona 85028

602.264-0011 info@azfas.com

Location of Property to be Appraised:

Ajo Way east of Mission Road 1335 W. Ajo Way Tucson, Arizona 85713

Report Dated:

June 7, 2017

Effective Date:

May 4, 2017

Prepared for:

Arizona Department of Transportation Right of Way Operations Section 205 S. Seventeenth Avenue Room 331, Mail Drop #612E Phoenix, Arizona 85007

Reference:

FAS 1.17-2701.00

Highway: Nogales – Tucson Highway Section: I-19 – Ajo Way TI (Jct SR86) Parcel: 10-01869

Tim Typewriter I, Timothy A. Haskins, performed the primary appraisal analyses and determined the final valuation and compensation conclusions in this submitted appraisal report.

FIRST

APPRAISAL

S E R V I C E S

3 4 2 0 E . S h e a B o u l e v a r d , S u i t e 2 0 0 | P h o e n i x | A r i z o n a | 8 5 0 2 8 6 0 2 . 2 6 4 - 0 0 1 1 | i n f o @ a z f a s . c o m

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Mr. Jim Walcutt Review Appraiser Arizona Department of Transportation Right of Way Operations Section 205 S. Seventeenth Avenue Room 331, Mail Drop #612E Phoenix, Arizona 85007

RE: PROJECT: H846702R

HIGHWAY: Nogales – Tucson Highway SECTION: I-19 – Ajo Way TI (Jct SR86)

PARCEL: 10-01869

Dear Mr. Walcutt:

In accordance with your request and authorization, I have prepared an appraisal of the property referenced above. I am pleased to present the narrative Appraisal Report transmitted by this letter, containing pertinent data related to the valuation of the property appraised.

The subject property is comprised of a 9,164 square foot commercial retail building built on a 0.972-acre tract of land. A physical inspection of the property was made on May 4, 2017, without representatives of the property owner present.

The purpose of this appraisal is to estimate the market value of the property identified herein. This value will be used to establish a basis for the compensation due the owners of the property resulting from a partial acquisition from the property. The intended use of this appraisal is to assist the Arizona Department of Transportation in making improvements to the Interstate 19 traffic interchange at Ajo Way and related improvements. The effective date for this appraisal assignment is May 4, 2017.

This appraisal report has been written in accordance with the Uniform Standards of

Professional Appraisal Practice (USPAP) adopted by the Appraisal Standards Board of the Appraisal Foundation, the Code of Ethics of the American Society of Appraisers, the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute, the Federal Highway Administration (FHWA) Uniform Act, 49 CFR Part 24, and the guidelines and standards of the Arizona Department of Transportation.

Mr. Jim Walcutt Arizona Department of Transportation

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The opinion of market value as defined and expressed herein is subject to the Underlying Assumptions and Limiting Conditions set forth in this report, as well as the appraiser’s certification. There have been no extraordinary assumptions made for this appraisal assignment. The appraisal of the subject property is made with hypothetical conditions which are discussed on page 6 of the appraisal report. The use of these hypothetical conditions might have affected the assignment results.

As a result of my investigation and study, I am of the opinion that the market value of the property to be acquired, as of May 4, 2017, is:

FORTY-ONE THOUSAND TWO HUNDRED DOLLARS

$41,200.00

Thank you for the opportunity to be of service to you. If you have any questions or if we may be of any further assistance in this matter, please do not hesitate to call or write this office.

Respectfully submitted, FIRST APPRAISAL SERVICES

Timothy A. Haskins, ASA Arizona Certified General Real Estate Appraiser No. 30668

Table of Contents

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Letter of Transmittal ....................................................................................................................................................... i Table of Contents..........................................................................................................................................................iii Summary of Salient Facts and Conclusions .................................................................................................................. v Aerial Photograph ......................................................................................................................................................... vi Regional Map .............................................................................................................................................................. vii

INTRODUCTION

PURPOSE AND SCOPE OF THE APPRAISAL

Purpose Scope of Work Limiting Conditions

FACTUAL DATA

IDENTIFICATION OF THE REAL ESTATE

Determination of the Larger Parcel

OWNERSHIP AND OCCUPANCY

Ostensible Owner Occupancy

REGIONAL ANALYSIS

Location and Climate Population Economic Trends Real Estate Market Sectors

NEIGHBORHOOD ANALYSIS

Location Transportation Land Use Patterns Amenities Trends

REAL PROPERTY DESCRIPTION

Site Plan Site Data Improvement Data Zoning Easements and Restrictions Taxes and Assessments Division of Real and Personal Property

VALUATION ANALYSIS

HIGHEST AND BEST USE

As If Vacant As Improved Summary and Conclusion

VALUATION METHODOLOGY

SALES COMPARISON APPROACH

Introduction Land Value Analysis Conclusion of Land Value Improved Sales Analysis Indicated Value from the Sales Comparison Approach

INCOME CAPITALIZATION APPROACH

Introduction Direct Capitalization

Table of Contents

FAS 1.17-2701.00 FIRST APPRAISAL SERVICES iv

COST APPROACH

Introduction Cost of Improvements Analysis Indicated Value from the Cost Approach to Value

RECONCILIATION OF VALUE

RIGHT-OF-WAY VALUATION

DESCRIPTION OF THE ACQUISITION

Construction of the Project in the Manner Proposed Acquisition from the Property

VALUATION OF THE PART TO BE ACQUIRED

Fee Right of Way Temporary Construction Easement Improvements within the Acquisition Summary

REMAINDER VALUATION ANALYSIS

EFFECTS OF THE ACQUISITION

Highest and Best Use of the Remaining Property

VALUATION METHODOLOGY OF THE REMAINING PROPERTY

VALUATION OF THE REMAINDER AS A PART OF THE WHOLE

SALES COMPARISON APPROACH – REMAINING PROPERTY

Land Value Analysis Improved Sales Analysis – Remaining Property

INCOME CAPITALIZATION APPROACH – REMAINING PROPERTY

Direct Capitalization

COST APPROACH – REMAINING PROPERTY

RECONCILIATION OF VALUE – REMAINING PROPERTY

DAMAGES AND BENEFITS TO THE REMAINING PROPERTY

Severance Damages Special Benefits

FINAL CONCLUSIONS

Auditing Breakdown

CERTIFICATION

ADDENDA

A Underlying Assumptions and Limiting Conditions

B Subject Photographs C Maps

Neighborhood Map Assessor’s Parcel Map Zoning Map Flood Map

D Exhibits Owner Contact Letter Right of Way Title Report ADOT Contract Modification

E City of Tucson Ordinance Section 4.7.21: Commercial Zone (C-2) Section 4.8.6: Permitted Uses: Commercial and Mixed Use Zone Section 4.9.9: Retail Trade Use Group

F Acquisition Information Preliminary Right of Way Plans

G Comparable Land Sales Data H Comparable Improved Sales Data I Comparable Lease Data J Qualifications and Resume of the Appraiser

Summary of Salient Facts and Conclusions

FAS 1.17-2701.00 FIRST APPRAISAL SERVICES v

Client Arizona Department of Transportation

Client Reference Highway: Tucson – Nogales Highway Section: I-19 – Ajo Way TI (Jct SR86) Parcel: 10-01869

Date of Report June 7, 2017 Limiting Conditions See Addendum A Report Format Appraisal Report Certification See Page 86

Intended Use Assist in the acquisition of a portion of the subject property Intended User(s) Arizona Department of Transportation and Federal Highway Administration

Property Information

Ostensible Owner DSR Tucson, LLC

Location of Property Ajo Way east of Mission Road Street Address 1335 W. Ajo Way County Pima Tucson, Arizona 85713 Section/Township-Range 35/4S-13E Map Reference 107-227QM

Assessor Parcel Number(s) 120-01-001M

Site Area 42,323 square feet Zoning District(s) C-2

0.972 acres City of Tucson

Flood Zone Zone X

Present Use Freestanding Retail Building

Building Area 9,164 square feet Year Built 2013

Highest and Best Use: Before the Acquisition: After the Acquisition:

As If Vacant:

As Improved:

Land Investment Present Use

Land Investment Present Use

Valuation Information Effective Date May 4, 2017

Extraordinary Assumptions None The use of the hypothetical conditions and extraordinary assumptions stated in this report might have affected the assignment results. Hypothetical Conditions See page 6

Valuation Summary Before the Acquisition After the Acquisition

Sales Comparison Approach .... $1,832,800.00 $1,832,800.00 Income Approach ..................... $1,803,000.00 $1,803,000.00 Cost Approach .......................... $1,659,000.00 $1,649,000.00

Fee Simple Interest Conclusion of Value $1,830,000.00 $1,830,000.00

Acquisition Information Type of Acquisition Partial Total Interests to be Acquired Fee Simple Interest Easement Interest

Fee Simple Land Area: 1,720 sf Estimated Value: $14,700.00 TCE Land Area: 3,393 sf Estimated Value: $240.00/month

Improvements Acquired $8,600.00

Severance Damages Yes No Cost to Cure $17,900.00 Special Benefits Yes No Not Measured

Market Value of the Acquisition ................................... $41,200.00

Aerial Photograph

FAS 1.17-2701.00 FIRST APPRAISAL SERVICES vi

© Google

S U B J E C T

Regional Map

FAS 1.17-2701.00 FIRST APPRAISAL SERVICES vii

© Arizona State Land Department Parcel Viewer

FAS 1.17-2701.00 FIRST APPRAISAL SERVICES 1

INTRODUCTION

Introduction Purpose and Scope of the Appraisal

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Purpose and Scope of the Appraisal

Purpose

The purpose of this appraisal is to estimate the market value of the property identified on page 8, hereinafter referred to as the “subject property”. This value will be used to establish a basis for the compensation due the owner of the property resulting from a partial acquisition. The intention of this appraisal service was that it was to be performed in such a manner that the results of the analysis, opinion, or conclusion would be that of a disinterested third party.

Intended Use and User The intended use of this appraisal is to assist the Arizona Department of Transportation in making improvements to the Interstate 19 traffic interchange at Ajo Way and related improvements. The Arizona Department of Transportation and the Federal Highway Administration are the intended users of this appraisal, although it is anticipated that a copy of the report could be provided to the property owner at the discretion of the client.

Definition of Value The decision of what value is being estimated is determined, at least in part, by the function of the appraisal and affects the scope of the appraisal. Different types of value that may be considered include market value, value in use, going-concern value, investment value, assessed value and insurable value. In light of the purpose of this appraisal, market value will be estimated in this appraisal and is defined as follows:

For the purposes of this article, “market value” means the most probable price estimated in terms of cash in United States dollars or comparable market financial arrangements which the property would bring if exposed for sale in the open market, with reasonable time allowed in which to find a purchaser, buying with knowledge of all of the uses and purposes to which it was adapted and for which it was capable.

Arizona Revised Statute 28-7091 [Title 28 Chapter 20 Article 6]

Exposure Period The definition of exposure time used in this report is in accordance with the Appraisal

Standards Board of the Appraisal Foundation. Exposure time is a retrospective opinion based on an analysis of past events assuming a competitive and open market, and is defined by the Appraisal Board as the, estimated length of time that the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal.1

Based upon an analysis of the general market area and sales of similar property types in the area, normal exposure time for properties similar to the subject appears to be within a twelve month time period.

1 Uniform Standards of Professional Appraisal Practice, 2016-2017 Edition, The Appraisal Foundation

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Date of Valuation The significant dates utilized in this report are summarized in the table to the right. The effective date of this appraisal, which is the date of valuation, is the most recent date of physical inspection by the appraiser.

Property Rights Appraised In the appraisal of real property, there are many concepts that must be understood and applied. One of these concepts relates to the rights inherent in the ownership of real property.

Real property appraisal involves not only the identification and valuation of a variety of different rights, but also the analysis of the many limitations on those rights, and the effect that the limitations have on value.2

The fee simple title is regarded as an estimate without limitations or restrictions. Partial interests are created by selling, leasing, or otherwise limiting the “bundle of rights” in the fee simple estate, resulting in something less than the complete fee simple estate. An appraisal assignment may require the appraisal of fee simple title or a partial interest such as a leasehold estate or an easement.

The three most common types of property rights involved in the appraisal process are defined below. 3

Fee simple estate absolute ownership unencumbered by any other interest or estate; subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat.

Leased fee estate the ownership interest held by the lessor, which includes the right to receive the contract rent specified in the lease plus the reversionary right with the lease expires.

Leasehold estate the right held by the lessee to use and occupy real estate for a state term and under the conditions specified in the lease.

The appraisal of the fee simple interest in the subject property is being presented in this report, subject to “Schedule B” of the right of way title report prepared for the subject property.

The lease on the property creates both leased fee and leasehold estates, but any value these interests in the property may have is beyond the scope and purpose of this appraisal. No attempt has been to place a value on either the leased fee estate held by the property owner or the leasehold estate held by the tenant.

2 The Appraisal of Real Estate, 14th ed. (Chicago: Appraisal Institute, 2013) p70 3 The Dictionary of Real Estate Appraisal, 6th ed. (Chicago: Appraisal Institute, 2015) p90 and p128

Effective Date: .............. May 4, 2017

Date of Inspection: ........ May 4, 2017

Date of Report: .............. June 7, 2017

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Scope of Work

The appraisal process is an orderly set of procedures that is undertaken to solve a problem concerning the value of real estate. These procedures help direct an appraiser to identify the particular appraisal problem and lead to reporting its solution to the client. The initial step in this process is the definition of the appraisal problem. This is accomplished through the identification of the real estate, the date of value to be utilized, the property rights to be appraised, and the type of value sought to be estimated.

After the appraisal problem is identified, general data on the market and the subject property is collected. This data includes information about the state, county, city, neighborhood, and the subject site and improvements. This information is then examined to conclude a highest and best use of the property being appraised. It is also during this stage in the process that any potentially applicable comparable cost, rental and sales market data is collected for analysis in the valuation of the subject property.

Area Analysis Research during the preparation of this appraisal included a regional analysis as well as analysis of the more immediate area surrounding the subject property. Primary sources of information are cited within the body of this report and include the United States Census Bureau, the United States Department of Labor and Center for Business Research, the Arizona Department of Commerce, the Arizona Department of Economic Security, the Arizona State University Center for Real Estate Theory and Practice, and various local and regional business publications.

Neighborhood data was gathered from the City of Tucson, as well as from a physical inspection of the area. Specific data pertaining to the metropolitan Phoenix land market was provided by the University of Arizona, CB Richard Ellis, Cushman & Wakefield | Picor, and real estate agents and brokers active in the market.

Property Description Primary sources of information regarding the description of the subject property include a physical inspection of the property by the appraiser on May 4, 2017, and several other dates.

Zoning information and information relating to the availability of utility infrastructure was provided by the City of Tucson. Title information is based upon the Right of Way Title Report provided by the client. Other sources of information utilized in this appraisal include the Office of the Pima County Recorder, Pima County Treasurer and Pima County Assessor, and the Federal Emergency Management Agency.

Market Data Information The market data used in this appraisal was collected, in part, from real estate agents and brokers who are knowledgeable of the subject marketplace, local and regional publications, public records, CoStar Group, RealtyRates.com, and the Marshall Valuation Service. The appraiser researched comparable market transactions occurring within the subject market area, and found sufficient data to estimate a reliable value of the subject property under appraisement. The market search for similar properties was specifically concentrated in the southwest metropolitan Tucson area. The analysis of the market incorporated both historic and current data.

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Project and Acquisition Information The project for which the acquisition is being made from the subject property is the replacement of the Interstate 19 traffic interchange at Ajo Way. The project is approximately one mile in length along Interstate 19 generally between Ajo Way and Irvington Road. The primary purpose of the project is to construct a new Single-Point Urban Interchange (SPUI) but will also include drainage improvements, noise walls, and improvements to several local roadways.

The acquisition from the subject property includes only a part of the real property which is the subject of this appraisal. Engineering calculations provided by the Arizona Department of Transportation indicate that the permanent acquisition from the subject property contains 1,720 square feet. A temporary construction easement measuring 3,393 square feet is also being acquired for the project. The subject property is shown on preliminary right of way drawings identified as Drawing No. D-10-T-422, Sheet 6 dated April 2014 (revised February 10, 2017) and prepared by Michael Baker International.

After all the data is gathered, an analysis of the market and subject property is undertaken.

This is done to gain an understanding of the market and subject property so that informed conclusions as to the value of the subject property can be formulated. One of the primary objectives of this analytical process is to assist the appraiser in determining the highest and best use of the subject property, as if vacant and as improved, if applicable. The data and analysis is then applied to the three traditional approaches to value: the cost approach, the sales comparison (or market) approach, and the income capitalization approach, if applicable.

The final step in the appraisal process is the reconciliation or correlation of the conclusions derived from the approaches to value utilized. In the reconciliation, the appraiser considers the relative applicability of each of the approaches and then examines the range provided by the indications of value from each applicable approach to value. The appraiser must consider the strength and weaknesses of each approach and the reliability of each indicator as it relates to the subject property.

The final value estimate may be stated as a single figure, a range, or a combination of both. This appraisal assignment also includes analyses beyond the traditional appraisal process. A discussion of the right-of-way valuation process is found below.

Under Standards Rule 2-2 of the Uniform Standards of Professional Appraisal Practice, an appraiser may communicate the results of an appraisal in either an “Appraisal Report” or a “Restricted Appraisal Report”. The primary difference between the report formats is who may rely on the appraisal. The Appraisal Report format was chosen for this appraisal assignment. The depth of discussion presented in this report is based upon the scope of the appraisal assignment and the stated intended use and users.

The scope of this report includes the accumulation and analysis of pertinent and sufficient market data in order to employ a meaningful and appropriate valuation methodology in the appraisal of the fee simple interest in the property that is the subject of this report. This appraisal report is written in accordance with the guidelines and standards of the Uniform Standards of Professional Appraisal Practice, the Code of Ethics of the American Society of Appraisers, the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute, the Federal Highway Administration (FHWA) Uniform Act, 49 CFR Part 24, and the Arizona Department of Transportation.

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Right-of-Way Appraisal Methodology This appraisal will be used to establish a basis for compensation due resulting from an acquisition involving the property to be appraised. The proposed acquisition by the Arizona Department of Transportation is considered to be a “partial” acquisition since only a portion of the property is needed for the traffic interchange project. As a result, the scope of this appraisal assignment includes an analysis of the subject property both before and after the proposed acquisition. The analysis begins with the application of the appraisal process to the subject property prior to the acquisition. Subsequently, the value of the part acquired is based, in large part, upon the facts and conclusions made in the appraisal of the subject property. The subject property is then appraised as if the acquisition has been made, the project has been completed in the manner proposed, and the extent of any severance damages and/or special benefits is explored based upon the effects of the acquisition upon the remaining subject property after the hypothetical project completion as of the date of valuation.

Limiting Conditions

The underlying assumptions and limiting conditions pertaining to this report are contained in the “Certificate of Appraiser” immediately following the “Auditing Breakdown” section of this report, as well as found in Addendum A. These assumptions and limiting conditions are an integral part of the report and are only placed at the end to facilitate reading of the report, not to minimize their importance.

Extraordinary Assumptions and Hypothetical Conditions The Appraisal Foundation defines an extraordinary assumption as, “an assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser’s opinions or conclusions.”4 There have been no extraordinary assumptions made in the appraisal of the property for this assignment.

A hypothetical condition is, “a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis”, as defined by The Appraisal Foundation5. This appraisal is prepared under the following hypothetical conditions:

1. Project influence on the valuation of the subject prior to the highway project is disregard as required by Arizona Revised Statute 28-7097 which states, “In acquiring property for transportation purposes pursuant to this article, when determining the market value of the property to be taken and the market value of the remainder, if any, in the before condition, a decrease or increase in the market value of the real property before the date of valuation caused by the public project for which the property is to be acquired or by the likelihood that the property would be acquired for the project shall be disregarded.”

2. The “remaining” subject property is appraised as of the date of valuation under the hypothetical condition that the acquisition has been made, the project has been constructed, and the extent of any severance damages and/or special benefits is explored based upon the effects of the acquisition upon the remaining subject property.

4 Uniform Standards of Professional Appraisal Practice, 2016-2017 Edition, The Appraisal Foundation 5 Uniform Standards of Professional Appraisal Practice, 2016-2017 Edition, The Appraisal Foundation

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FACTUAL DATA

Factual Data Identification of the Real Estate

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Identification of the Real Estate

The first step in the appraisal process is the definition of the appraisal problem, which includes the identification of the real estate to be appraised. There are several ways to identify a property, including by reference (if the property is named), by address and by the identity of a physical entity in a legal description.

Determination of the Larger Parcel

The determination of a larger parcel is important in the highest and best use analysis of the property to be appraised. The larger parcel can be all or part of the entire ownership, or “parent parcel”, and there may be multiple larger parcels within a parent parcel. The Appraisal Institute defines a larger parcel as follows:

In governmental land acquisitions and in valuation of charitable donations of partial interests in property such as easements, the tract or tracts of land that are under the beneficial control of a single individual or entity and have the same, or an integrated, highest and best use. Elements for consideration by the appraiser in making a determination in this regard are contiguity, or proximity, as it bears on the highest and best use of the property, unity of ownership, and unity of highest and best use. In most states, unity of ownership, contiguity, and unity of use are the three conditions that establish the larger parcel for the consideration of severance damages. In federal and some state cases, however, contiguity is sometimes subordinated to unitary use. 6

In this instance, the larger parcel for this appraisal assignment is determined to be the property identified as assessor parcel number 120-01-001M. This parcel comprises the entire ownership of DSR Tucson, LLC, at this location and meets the condition of ownership, contiguity and unity of highest and best use.

The purpose of this section of the report is to identify the property only. A physical description of the property to be appraised can be found later in this report beginning on page 22 of this report. The property that is the subject of this report may be commonly identified as follows:

Location ........................................................ Ajo Way east of Mission Road

Street Address .............................................. 1335 W. Ajo Way

City, State, ZIP ............................................. Tucson, Arizona 85713

Assessor Parcel Number(s) .......................... 120-01-001M

Legal Description7

A portion of the Northwest quarter of the Northwest quarter of Section 35, Township 14 South, Range 13 East, of the Gila and Salt River Base and Meridian, Pima County, Arizona

6 The Dictionary of Real Estate Appraisal, 6th ed. (Chicago: Appraisal Institute, 2015) p127 7 The full legal description is lengthy and included within the Right of Way Title Report, a copy of which is included in the addenda to this report

Ownership and Occupancy

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Ownership and Occupancy

Ostensible Owner

According to public records, DSR Tucson, LLC, an Arizona limited liability company, holds title to the subject property as of the date of valuation.

Five Year Sales History The current vesting of the subject property is established by a deed recorded with the Pima

County Recorder on May 15, 2013, as document number 20131350178. This most recent sale of the subject property sold at a recorded price of $1,790,000, and will be considered in the current valuation of the subject property. A previous sale of the property occurred in October 2012 and involved a transfer of the subject land. This sale is recorded as document number 20122750866 and at a recorded price of $350,000. This sale will also be considered in the current valuation of the subject land as if vacant. The appraiser has not discovered any evidence indicating that the subject property is currently offered for sale.

Owner Contact A letter dated April 14, 2017, was mailed to the owner of record indicating that an appraisal of the property has been requested by the Arizona Department of Transportation, and offering the opportunity to meet with the appraiser at the property and discuss the appraisal. The letter was mailed to the owner at the following address:

DSR Tucson, LLC 2366 Buckingham Lane Los Angeles, CA 90077

A subsequent attempt was made to contact one of the members of DSR Tucson, LLC, Mr.

Dimitri Rapis via email (dimitri355@yahoo.com). The tenant, Dollar General, can be contacted by telephone at 520.789-6794 according to their website. A response from the property was not received. As a result, the appraiser did not meet with the owner during a physical inspection of the property at 12 noon on May 4, 2017.

Occupancy

When analyzing the bundle of rights inherent to the subject property, tenancies of the property must be examined. Tenancy is created when real estate ownership is divided into property interests. This can result from co-ownership of real estate, or when the right to use and occupy a property is conveyed through a lease. The occupancy of the property to be appraised as of the effective date of this appraisal is as follows:

Vacant Land Unoccupied Owner-occupied Tenant-occupied Number of Tenants 1

Tenants: Dollar General

Regional Analysis

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Regional Analysis

Location and Climate

The sunbelt state of Arizona is among the fastest growing in the nation with the majority of new residents moving into the metropolitan Phoenix area.

Known informally as the “Valley of the Sun”, this area covers only eight percent of the state’s 113,909 square miles but encompasses most of the urban core of Maricopa County where 60 percent of Arizona’s population lives. This large population base exerts considerable economic and political influence over the balance of the state and contributes to making metropolitan Phoenix the largest trade center in the southwestern United States.

Geographically, the subject region is located in southern Arizona and can generally be described as encompassing all of Pima County. The region is situated approximately two hours south of the urban core of the metropolitan Phoenix area. The geography of Pima County ranges from low desert in the western portion of the county to more mountainous regions in the eastern part of the county. The Santa Catalina Mountains located on the northeast edge of Tucson includes Mount Lemmon at an elevation of 9,157 feet above sea level. Pima County contains a total land area of 9,189 square miles. The federal government owns or controls 71% (including Tribal lands), the State of Arizona and local governments own or control 17%, with the remaining 12% in private ownership. The City of Tucson is the Pima County seat of government and located in the northeastern portion of the county.

Climate is one of the most attractive features of the State and the metropolitan Tucson area, with a year-long average of nearly 78 percent sunshine. The average annual daily high temperature is 83 degrees, and the average annual low is 58 degrees Fahrenheit.

Much of southern Arizona, including the Tucson area, is considered to be arid with and annual precipitation of 11.65 inches. The coldest months are December, January and February, while the hottest months are June, July, August and September.

Although generally moderate, the summer months can become quite hot with temperatures often exceeding 100 degrees Fahrenheit.

Figure 1 – State Map

Figure 2 – Tucson Climate

Month

Avg.

High

Avg.

Low Mean

Avg.

Precip

Record

High

Record

Low

Jan 65°F 42°F 54°F 0.97 in. 88°F (1927) 6°F (1913)

Feb 68°F 44°F 56°F 0.96 in. 92°F (1957) 17°F (1899)

Mar 74°F 48°F 61°F 0.77 in. 99°F (1988) 20°F (1965)

Apr 82°F 55°F 69°F 0.36 in. 104°F (1989) 27°F (1945)

May 91°F 64°F 78°F 0.17 in. 111°F (1910) 32°F (1899)

Jun 99°F 72°F 86°F 0.21 in. 117°F (1990) 43°F (1908)

Jul 99°F 76°F 88°F 2.34 in. 114°F (1995) 49°F (1911)

Aug 97°F 75°F 86°F 2.24 in. 112°F (1993) 55°F (1917)

Sep 94°F 71°F 83°F 1.18 in. 107°F (2000) 43°F (1913)

Oct 84°F 59°F 72°F 0.86 in. 102°F (1993) 26°F (1971)

Nov 73°F 48°F 61°F 0.62 in. 94°F (1924) 19°F (1921)

Dec 64°F 41°F 53°F 0.97 in. 85°F (1939) 10°F (1901)

Annual 83°F 58°F 71°F 11.65 in.

www.weather.com

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Population

Based upon the 2010 decennial census performed by the U.S. Bureau of Census, Arizona has a population of 6,392,017 persons. The population of Arizona increased by 25% over the 5,130,632 estimate made in the 2000 census. Only the population of Nevada grew at a faster rate than Arizona during this decade.

Arizona currently ranks as the 15th largest state. The 2016 Census population estimate for the State of Arizona by the U.S. Census Bureau is 6,931,071.

The U.S. Bureau of Census defines the Tucson Metropolitan Statistical Area (MSA) as both Pima County in southern Arizona. Approximately 91% of the MSA’s population, however, is located in Maricopa County. Based upon U.S. Census Bureau data, Maricopa County is the most populous of Arizona’s counties with a 2010 estimate of 3,817,117 persons and has grown by approximately 24.6% since 2000. The 2016 population estimate for Pima County is 1,016,206.

The greater metropolitan Tucson area is comprised of the cities of Tucson, Oro Valley, Marana, Sahuarita and South Tucson. Tucson is the area’s largest municipality with an estimated 2016 population of 529,989 persons. Marana is the next largest city with a population of 43,752, and Oro Valley follows closely with a population of 43,648. Sahuarita, located on the southern portion of the metropolitan Tucson area, has a population of 28,425 persons.9

8 Source: U.S. Census Bureau, American FactFinder 9 Source: Arizona Department of Administration, Office of Employment and Population Statistics (www.azstats.gov)

Figure 3 – Historical Decennial Population Estimates8

Arizona Tucson MSA

Census Estimates

2010 6,392,017 980,263

2000 5,130,632 843,746

1990 3,665,339 666,880

1980 2,716,546 531,443

1970 1,775,399 351,667

1960 1,302,161 265,660

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Economic Trends

The historical principal industries in Arizona have been agriculture, mining, trade and services. Through the years, there has been a shift in the State’s industrial structure, with significant declines in mining and agriculture in relation to other sectors. Agriculture and mining remain significant forces in the local economy of some parts of rural Arizona. Principal industries of the region include tourism, manufacturing and high-tech industries. The largest employers in the area include Raytheon Missile Systems and The University of Arizona which both employ more than 10,000 people each. The Davis Monthan Airforce Base, Tucson Unified School District and Wal-Mart Stores, Inc. each employ more than 7,000 employees.

The gross state product for Arizona, the counterpart to the national gross domestic product

(GDP), had been increasing prior to 2007. The gross state product is the sum of gross state product originating from all industries in the State. This is a measurement of the State’s output, which was estimated to be $179,260 million in 2000. By 2007, the Arizona GDP had increased to $244,906 million, but decreased to $221,524 million by 2009. The Arizona GDP saw a small increase in 2010 and again in 2011 to its current level of $309,103 million.10 According to the Bureau of Economic Analysis website, Real gross domestic product (GDP) increased in every state and the District of Columbia in the fourth quarter of 2016, according to statistics on the geographic breakout of GDP released today by the U.S.

Bureau of Economic Analysis. Real GDP by state growth ranged from 3.4 percent in Texas to 0.1 percent in Kansas and Mississippi (table 1 and chart 1). Finance and insurance; retail trade; and professional, scientific, and technical services were the leading contributors to U.S. economic growth in the fourth quarter.

Information services grew 6.4 percent in 2016. This industry contributed to growth in 46 states and the District of Columbia. The largest contributions to growth occurred in Washington and California; these states grew 3.7 percent and 2.9 percent, respectively.

10 United States Department of Commerce, Bureau of Economic Analysis;

http://www.bea.gov/newsreleases/regional/gdp_state/2011/xls/gsp0611.xls

Figure 4 – Tucson MSA Population Trends

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Professional, scientific, and technical services grew 3.3 percent. This industry contributed to growth in 44 states and the District of Columbia. The largest contributions to growth occurred in the District of Columbia and Minnesota. The District of Columbia grew 2.4 percent while Minnesota grew 1.3 percent.

Health care and social assistance grew 3.0 percent. This industry contributed to growth in 48 states and the District of Columbia. The largest contributions to growth occurred in Arizona and Montana; these states grew 2.1 percent and 0.2 percent, respectively.11

Labor Force and Employment

11 United States Department of Commerce, Bureau of Economic Analysis, Finance and Insurance Led Growth Across States in the Fourth

Quarter, https://www.bea.gov/newsreleases/regional/gdp_state/qgsp_newsrelease.htm

Figure 5 – Tucson MSA Labor Force and Unemployment Rate

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The preliminary average monthly statewide total civilian labor force in March 2017 was estimated to be 3,324,300 persons with an average unemployment rate of 5.0%12. The average monthly total civilian labor force was 480,627 for the Tucson MSA in March 2017, while the average unemployment rate was 4.4%. The unemployment rate for the greater Tucson area has historically been slightly below that of the state average. The unemployment rates for both the State and Tucson Metropolitan Area have been generally decreasing since mid-2011.

Income and Wages Arizona’s nominal per capita personal income has been increasing since 2011 and reached

$38,536 in 2015, according to the latest preliminary estimates from the U.S. Bureau of Economic Analysis (BEA). National average wage per worker was $57,625 in the fourth quarter of 2016.

Arizona’s per capita personal income rose 3.1% from 2014 to 2015, before adjustment for inflation.

12 University of Arizona, Economic and Business Research Center;

https://ebr.eller.arizona.edu/current-indicators/arizona-us;

https://ebr.eller.arizona.edu/current-indicators/browse-topic/labor-force-unemployment

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Figure 6 – Tucson MSA Personal Income

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Forecast Data

George W. Hammond, Ph.D., EBR Director with the Eller College of Management at The

University of Arizona, reports

The Arizona economy slowed during the fourth quarter of 2016, with jobs rising very little over the year. Job growth was down from third quarter performance and even slower than national gains. New population estimates from the Arizona Office of Economic Opportunity suggest continued slow population increases statewide and in the Phoenix and Tucson metropolitan statistical areas (MSAs). Further, Arizona’s merchandise exports to the world (and to Mexico) declined last year.

Overall, the Arizona economy continues to expand and the prospects for somewhat stronger growth are on the horizon. A modest acceleration of the U.S. economy will help push Arizona’s gains up during the next two years, but it is important to keep the risks in mind at this point. There is currently a high degree of uncertainty surrounding federal tax, trade, immigration and regulatory policy. Further, there is uncertainty about the ultimate impact of Arizona’s new minimum wage requirements. As this uncertainty gradually clears in coming months and years, we will have a better idea of the possible impacts. Stay tuned.

The state outlook depends in part on future national economic performance. The national forecast calls for continued growth, which accelerates in the near term and then tapers off as time passes and demographic forces slow gains.

The forecast calls for real GDP growth to accelerate from 1.6% in 2016 to 2.3% in 2017 and again to 2.6% in 2018. Stronger growth in 2017 is related to easing of the inventory correction and stronger energy sector investment. A policy-related boost to growth is expected in 2017-2018, as tax cuts, increased government spending, and deregulation spur gains. Thereafter, real GDP growth decelerates to just below 2.0% per year by 2026. In contrast, job growth gradually decelerates as the aging of the baby boom generation drives down labor force gains.

One key force driving economic growth is productivity. U.S. productivity gains have been very sluggish since the end of the Great Recession. The forecast calls for productivity to accelerate in the near term, rising to rates similar to past history. Keep in mind that if this does not occur, then the U.S. economy will post slower real GDP growth and likely faster inflation.

On the international front, the U.S. dollar is expected to rise by an additional 5.3% in 2017, against a broad market basket of currencies, before stabilizing in 2018 and then gradually depreciating during the next three years.

Continued national growth sets the stage for Arizona gains during the forecast. The state is forecast to continue adding jobs, residents, and income at pace above the national average. However, growth is expected to remain well below averages rates during the 30 years before the Great Recession.13

13 www.azeconomy.org, First Quarter 2017 Economic Forecast Update

Figure 7 – Tucson MSA Forecast

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Real Estate Market Sectors

The following is a brief summary of the different sectors of the metropolitan Tucson area real estate market.

Single Family Housing Sector The total sales volume of home sales increased from December 2015 to December 2016 as despite a fewer number of listings. The median sale price ended 2016 at $179,000 which is 1.73% higher than in December 2015.

Tucson and Southern Arizona experienced a strong residential housing market in 2016. Increased sales along with less listing inventory resulted in a seller’s market at many price points and a moderate increase in home prices. It’s a function of supply and demand. Low interest rates and improved economic development in the area fueled housing growth and should continue to do so. Buyers may need to act quickly when purchasing and there is a new opportunity for homeowners who may be considering selling.14

Multifamily Housing Sector The vacancy rate for conventionally-operated, stabilized units decreased by 0.35% from the previous quarter, while improving 0.28% from one year ago to 6.52%. The Northwest Tucson submarket posted the lowest fourth quarter vacancy of 5.24%. The submarket with the second lowest vacancy was the Catalina Foothills at 5.45%, followed by East Tucson at 5.50%. The highest vacancy rate of 17.56% occurred in the Southeast Tucson submarket. Eight of Tucson’s 15 submarkets experienced occupancy gains, with the greatest improvements occurring in Tucson Mountain Foothills (-2.12%) and South Tucson/Airport (-2.09%). Overall net absorption in Q1 2017 increased by 472 units. Over a one-year period, Metropolitan Tucson experienced an 808 unit increase in absorption. Northwest Tucson saw the greatest improvement (252 units) while Southwest Tucson suffered the largest decline, with negative absorption of 47 units.

14 Source: Long Realty, Tucson and Southern Arizona 2016 State of the Market Housing Report

Figure 8 – MLSSA Monthly Statistics, April 2017

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The average monthly gross apartment rent without utilities in Metropolitan Tucson was $693 per unit or $0.94 per square foot for the first quarter, representing a $5 or 0.73% increase from last quarter. Thirteen arms-length transactions over 40 units closed in Q1 2017. The average sales price was $42,065 per unit or $72.92 per square foot.

First quarter of 2017 continued to see increased investor interest in the marketplace.

Numerous syndication groups entered the Tucson marketplace intending to build large portfolios over the next few years. Tucson remains one of the more attractive multifamily investment locations due to the increase in quality jobs and higher cap rates. Development of infill properties around downtown Tucson and University of Arizona has surged recently. Investors have been targeting well-positioned assets and fully renovating various properties. Rents have doubled and even tripled at some of these locations.15

Industrial Sector

The Tucson Industrial market ended the first quarter 2017 with a vacancy rate of 7.5%.

The vacancy rate was down over the previous quarter, with net absorption totaling positive 92,644 square feet in the first quarter. Vacant sublease space increased in the quarter, ending the quarter at 53,726 square feet. Rental rates ended the first quarter at $6.71, a decrease over the previous quarter. There was 49,971 square feet still under construction at the end of the quarter.16

Office Sector

The Tucson Office market ended the first quarter 2017 with a vacancy rate of 10.9%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 56,438 square feet in the first quarter. Vacant sublease space increased in the quarter, ending the quarter at 16,954 square feet. Rental rates ended the first quarter at $18.91, an increase over the previous quarter. There was 88,631 square feet still under construction at the end of the quarter.17

Retail Sector

The Tucson retail market did not experience much change in market conditions in the first quarter 2017. The vacancy rate remained unchanged at 6.4% in the previous quarter to the current quarter. Net absorption was positive 235,808 square feet, and vacant sublease space increased by 373 square feet. Quoted rental rates increased from fourth quarter 2016 levels, ending at $14.81 per square foot per year. A total of 9 retail buildings with 235,958 square feet of retail space were delivered to the market in the quarter, with 183,369 square feet still under construction at the end of the quarter.18

15 Source: Cushman & Wakefield | PICOR Marketbeat, Tucson Multifamily Q1 2017 16 Source: CoStar Industrial Statistics, First Quarter 2017, Tucson Industrial Market 17 Source: CoStar Office Statistics, First Quarter 2017, Tucson Office Market 18 Source: CoStar Retail Statistics, First Quarter 2017, Tucson Retail Market

Neighborhood Analysis

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Neighborhood Analysis

Location

The subject property is located along the south side of Ajo Way east of Mission Road within the City of Tucson. Situated approximately three miles southwest of the downtown central business district of the City of Tucson, the location of the subject property is graphically illustrated on the map in Figure 9.

The subject neighborhood is generally bounded on the north by Star Pass Boulevard and the Tucson Mountains, the San Xavier Indian Reservation to the south, Cardinal Avenue to the west, and Interstate 19 to the east. This area encompasses approximately fifteen square miles within the City of Tucson. The boundaries of the subject neighborhood, which represents a portion of the broader market area, encompass an area considered influential on the property to be appraised, given the types, visibility, accessibility, utility and overall consistency and similarity of uses.

Figure 9 – Location Map

© Arizona State Land Department Parcel Viewer

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Transportation

The network of principal and secondary streets throughout the metropolitan Tucson area is well developed and provides the neighborhood convenient access. The primary arterial roadways throughout metropolitan Tucson are based on a grid system, with major arterial roadways placed on one-mile intervals. These major roadways are generally paved multiple lane thoroughfares with traffic control signals as they intersect each other.

The primary north/south arterial roadways through the subject neighborhood are Cardinal

Avenue and Mission Road. Primary east/west arterial roadways are Star Pass Boulevard, Ajo Way (State Route 86), Irvington Road and Valencia Road.