SUMMARY APPRAISAL REPORT

MIXED-USE COMMERCIAL BUILDING

1426 NORTH THIRD STREET
CITY OF HARRISBURG, DAUPHIN COUNTY
HARRISBURG, PENNSYLVANIA 17102
FOR
MR. ANDREW J. GIORGIONE, ESQ.
SUSQUEHANNA ART MUSEUM BOARD OF TRUSTEES
409 NORTH SECOND STREET, SUITE 500
HARRISBURG, PA 17102

DATE OF REPORT
APRIL 11, 2013
PREPARED BY
RSR APPRAISERS & ANALYSTS
3 LEMOYNE DRIVE, SUITE 100
LEMOYNE, PA 17043
FILE NO: 13-37GW

April 11, 2013

Mr. Andrew J. Giorgione

Buchanan Ingersoll & Rooney, PC
409 North Second Street, Suite 500
Harrisburg, PA 17101
RE:

Mixed-Use Commercial Building

1426 North Third Street
City of Harrisburg
Dauphin County, PA 17102

Dear Mr. Giorgione:

At your request, RSR Appraisers & Analysts has completed a Summary Appraisal Report on
the above referenced property. The effective date of the appraisal is March 26, 2013, the date on
which the property was physically inspected by W. Greg Rothman, MAI, MRICS, CPE, CCIM,
and Andrew Wolfe, licensed appraiser trainee.
The improvements consist of a four-story mixed-use commercial building consisting of 70,000
square feet of space. The improvements are located on a lot containing a total of 0.41 acres or
17,860 square feet.
The report that follows provides a detailed description of the property, and the basis upon which
the estimated value has been developed. This report has been completed in compliance with the
Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board
of the Appraisal Foundation. This appraisal has also been completed according to your
instructions, which are included in the addenda to this report.
The property rights appraised in this report are the leased fee interests. The report that follows
provides a summary description of the property and the basis for the estimated market value.
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

Mr. Giorgione
April 11, 2013
addenda to this report, it is our opinion that the estimated as is market value of the leased fee
interest in the subject property, as of March 26, 2013 is:

* * *NINE MILLION FIVE HUNDRED THOUSAND DOLLARS* * *

($9,500,000)
It should be noted that the market value estimate contained within this report does not include
any business value or FF&E associated with the building.
It is suggested that a Phase I environmental audit be conducted on the subject property if such
materials are suspected on the site. If any existence of hazardous material is found, any discovery
of such materials on the site will require a re-evaluation of the property, and this appraisal will
become null and void.
This letter does not constitute a full appraisal of the subject property. The narrative that follows
contains the data and analyses from which this value conclusion was developed.
This appraisal was prepared by RSR Appraisers & Analysts for the exclusive use of Andrew
Giorgione and the S.A.M. Board of Trustees. The information and opinions contained in this
appraisal set forth the appraisers best judgment in light of the information available at the time
of the preparation of this report. Any use of this appraisal by another person or entity, or any
reliance or decisions based on this appraisal are the sole responsibility and at the sole risk of the
third party. RSR Appraisers & Analysts accepts no responsibility for damages suffered by any
third party as a result of the reliance on or decisions made or actions taken based on this report.
Our compensation is in no way contingent upon the value estimate or conclusions developed
and we will be available to discuss the findings contained within the report with the respective
parties at your request and convenience.
Respectfully submitted,
RSR APPRAISERS & ANALYSTS

W. Greg Rothman, MAI, MRICS, CPE, CCIM

Certified General Appraiser
License #: GA 0001455L
Expiration June 30, 2011

Andrew R. Wolfe
Licensed Appraiser Trainee
License #: LAT000423
Expiration June 30, 2013

TABLE OF CONTENTS

SUMMARY .................................................................................................................... 5
SCOPE OF APPRAISAL... 6
SUBJECT PHOTOGRAPHS .......................................................................................11
REGIONAL ANALYSIS...............................................................................................15
NEIGHBORHOOD ANALYSIS ..................................................................................18
SITE DATA 20
DESCRIPTION OF IMPROVEMENTS .....................................................................23
ZONING .........................................................................................................................25
TAXES & ASSESSMENT ............................................................................................27
HIGHEST AND BEST USE.....28
THE APPROACHES TO VALUE ...............................................................................31
LAND VALUATION .....................................................................................................33
COST APPROACH...42
INCOME APPROACH .................................................................................................48
RECONCILIATION .....................................................................................................55
ASSUMPTIONS AND LIMITING CONDITIONS ...................................................56
CERTIFICATION .........................................................................................................57
ADDENDA
Property Card
Zoning Map
Property Deed
Site Plans
Qualifications of Appraiser
Privacy Notice

REAL ESTATE APPRAISAL REPORT SUMMARY

Property Type:

Mixed-Use Commercial Building

Owners Name:

Campus Square Partners, LP

Location:

1426 North Third Street

City Of Harrisburg, Dauphin County
Harrisburg, Pennsylvania 17036

Tax Map Parcel:

06-015-034

Effective Date of Appraisal:

March 26, 2013

Date of the Report:

April 11, 2013

Property Rights Appraised:

Leased Fee Interest

Site:

The total site area contains 0.41 acres or 17,860

square feet.

Existing Improvements:

A four-story mixed-use commercial building

containing 70,000 SF of space.

Zoning:

Business General (BG)

Utilities:

Public Water and Sewer

Highest and Best Use, As Vacant:

Development with Commercial Use

Highest and Best Use, As Improved:

Continued Commercial Office & Retail Use

AS IS:

Value

Interest

Effective Date

Cost Approach
Sales Comparison Approach:
Income Approach (Direct):

$11,000,000
N/A
$9,500,000

Leased Fee
N/A
Leased Fee

March 26, 2013

N/A
March 26, 2013

Final Market Value Estimate:

$9,500,000

Leased Fee

March 26, 2013

SCOPE OF THE APPRAISAL

According to the Uniform Standards of Professional Appraisal Practice (USPAP) Scope of Work
Rule:
For each appraisal, appraisal review, and appraisal consulting assignment, an appraiser must:

1. identify the problem to be solved;

2. determine and perform the scope of work necessary to develop credible
assignment results; and
3. disclose the scope of the work in the report.

An appraiser must properly identify the problem to be solved in order to determine the
appropriate scope of work. The appraiser must be prepared to demonstrate that the scope of
work is sufficient to produce credible assignment results.1

Problem Identification
To determine the As Is market value (as of the date of our most recent inspection), for the
clients intended internal use.

Description of the Appraisal Process

The appraisal process included an inspection of the subject property by W. Greg Rothman, MAI,
MRICS, CPE, CCIM and Andrew Wolfe, licensed appraiser trainee, on March 26, 2013,
verification of all information with buyers, sellers, brokers, public records, and/or with other
knowledgeable sources; analysis of market conditions, locational factors, physical attributes and
other pertinent factors.

USPAP 2010-2011 Edition, The Appraisal Foundation, page U-13.

6

Scope of Work
The scope of this appraisal encompasses the research and analysis of data required to prepare a
reliable opinion of market value of the subject property. The procedures used in the appraisal
analysis of the subject property are as follows:

Regional and neighborhood data was gathered from various sources, including public data
sources such as the Pennsylvania State Data Center, CCIM Site to Do Business, and the United
States Bureau of the Census. We analyzed specific neighborhood conditions through a
neighborhood inspection.
We have researched site data listed on the subjects tax assessment record, and the most recently
recorded legal description.

A site inspection was conducted on March 26, 2013. Zoning

information was obtained from the City of Harrisburg. Flood Zone information was obtained
from FEMA. Current property assessment and millage information was obtained from the
Dauphin County Tax Assessment Office.

Further information gathered was obtained from the Dauphin County Tax Assessment records,
and from in-house appraisal files.

The Highest and Best Use Analysis as though vacant and as improved was determined through
analysis of uses that are legally permitted, physically possible, financially feasible and maximally
productive. The determination of the Highest and Best Use is a compilation of all relevant
market conditions and anticipated yield rates. We have considered and developed a market value
As Is.

In determining the Approaches to Value the appraiser collected data from public records,
interviews with Dauphin County officials, municipal officials, buyers, sellers, residential
builders, real estate brokers/agents, residential property managers, and/or with other
knowledgeable sources.

In addition to the above-mentioned sources, we have used data

contained within our data bank from previous assignments.

7

A final reconciliation of value was determined based on our professional judgment of the
available data. This appraisal is to be used in whole and not in part. No part of this appraisal
shall be used in conjunction with any other appraisal report.

The current (effective date of appraisal) purchasing power of the dollar is the basis for the value
opinion stated within; no extreme fluctuations in economic cycles are anticipated.
The Income Approach was considered and developed for the as is value of the subject
property because the property is an income-producing property.
The Cost Approach was considered and developed for the as is value of the subject property
because the building was constructed in 2009. The Cost Approach is typically used to value new
construction.

The Sales Comparison Approach was considered but not developed for the subject property due
to the lack of comparable sales in the City of Harrisburg.

Ownership: The subject property is owned by Campus Square Partners, LP. The current owner
acquired parcel 06-015-034 from William J. Baker for $425,000 on January 12, 2007 as
referenced in the Dauphin County Recorder of Deeds Office as Document # 2007001884. This
sale was for the land and some improvements on-site.

There have been no other sales in the previous three years.

Intended User
The Intended User of this appraisal report is the client, Andrew Giorgione, Esq. and the S.A.M.
Board of Trustees.

Purpose of the Appraisal

The purpose of this appraisal is to provide the appraiser's best estimate of the market value of the
leased fee interests in the subject property, as of the effective date of this report.
Property Rights Appraised
The property rights under appraisal in this report are the Leased Fee ownership in the subject
property.
Leased Fee the leased fee estate consists of the right to receive the contract rent
provided by the lease, the reversion of the real estate at the end of the lease, plus any
other benefits but minus any penalties according to the provisions of the lease 1

Non Real Property

The Federal Reserve Board requires the appraiser to identify and separately value any personal
property, fixtures, or intangible items that are not real property but are included in the appraisal,
and discuss the impact of their inclusion or exclusion on the estimate of market value. There is
no non-real property included in the estimated market value of the subject.

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:
The most probable price which a property should bring in a competitive and open market under
all conditions requisite to a fair sale, the buyer and seller each acting prudently 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 title from seller
to buyer under conditions whereby:
i)
ii)
iii)

buyer and seller are typically motivated;

both parties are well informed or well advised and acting in what they consider
their best interest;
a reasonable time is allowed for exposure in the open market;

iv)

payment is made in terms of cash in United States dollars or in terms 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
2
with the sale.
Exposure Time
Exposure time is different for various types of real estate and under various market conditions. It
is noted that the overall concept of reasonable exposure encompasses not only adequate,
sufficient and reasonable time but also adequate, sufficient and reasonable effort.

Based on the information presented in the body of the report, which follows, a reasonable
exposure time for the subject property at the indicated market value is nine to twelve months.
[The reader should note that exposure time is different than marketing time in that exposure time
is always presumed to precede the effective date of an appraisal, whereas marketing time is a
time period immediately subsequent to the date of the appraisal.]

Trends and Marketing Time

The economy in general has been strong for most all types of commercial property, as it
proliferates throughout all regions of the country and especially central Pennsylvania. A
reasonable marketing time assumes that the seller is motivated; the property is priced within a
reasonable percentage of an appraised market value and is actively advertised and marketed by a
competent real estate broker or the like. A reasonable marketing time also assumes that the sale
of the property would not require any unusual financing or seller concessions.

Consultations with area real estate professionals for their opinion indicated a range within a
twelve (12) months period of time in the central Pennsylvania area. It is the appraisers opinion;
the subject property would most likely experience a marketing time of twelve (12) months if
placed on the market for sale. The estimate of marketing time assumes that the property is
exposed in the open market at a reasonable asking price and that there are no distressed factors

1Appraisal

Foundation, The Appraisal of Real Estate, 1973 Edition, (Chicago, Ill; 1974) Page 446.
10

affecting its exposure in the market. If the property is listed at a liquidation price, the estimated
marketing period may be less than what the appraisers have forecasted.
SUBJECT PHOTOGRAPHS

Subject Property: Front Elevation

Subject Property: North 3rd Street

Subject Property: Side View

Subject Property: Rear View & Alley

11

Subject Property: Entrance Stairs/Ramp

Subject Property: Garbage Area

Interior View: Office Entrance

Interior View: Corridor & Elevators

Interior View: Typical Office

Interior View: Stairwell

12

Interior View: Kitchenette

Interior View: Typical Conference Room

Interior View: Vacant 3rd Floor

Interior View: Typical Office

Interior View: Classroom

Street View: Intersection of Reily & N. 3rd

13

Street View: North 3rd Street (North facing)

Street View: Susquehanna Street (North)

AERIAL PHOTOGRAPH

TAX MAP

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15

DAUPHIN COUNTY ANALYSIS

Regional Overview
The subject property is located in Derry Township in Dauphin County, Pennsylvania. Dauphin
County is bounded by Northumberland County to the north, Cumberland County across the
Susquehanna River to the west, Lancaster County to the south, and Lebanon County to the east.
Dauphin County, together with Cumberland and Perry Counties form the Harrisburg
Metropolitan Statistical Area (MSA). At the heart of the MSA is the City of Harrisburg, the
Capitol of the Commonwealth of Pennsylvania, which is 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.

Regional Transportation
The major traffic arteries and highway systems that run through the MSA provide important
links to other primary and secondary markets in Pennsylvania and the northeast.
Approximately 25% of the U.S. population lies within a 250-mile radius of the Harrisburg area.

Interstate 76, also known as the Pennsylvania Turnpike, links 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 northern New Jersey.

Interstate 83 runs from Harrisburg to

Baltimore, and Interstate 81 runs north to New York State and Canada, and south to Tennessee.

Other major roads in the area include PA Route 283, which runs from Harrisburg to Lancaster,
U.S. Routes 11 and 15, which run north to New York State and south to Maryland, and PA
Route 581, which runs from Harrisburg westward to the Naval Ships Parts Control Center in
Mechanicsburg.

Both of these roads are four lane limited access highways. A six-mile

extension of Route 581 was completed in 1996, joining the road with Interstate 81.

16

Passenger rail service is provided by Amtrak on ConRail's main line (formerly Penn Central and
Reading Companies). The train/rail terminal is located in downtown Harrisburg at the recently
renovated Harrisburg Transportation Center. Passenger rail service is available to Pittsburgh and
other destinations to the west, and also to Philadelphia along ConRail's northeast corridor.
Freight service throughout the area is provided by ConRail.

Continental Trailways and Greyhound buses run out of a terminal located in the same facility.
Intercity bus service is provided by the Capital Area Transit (CAT); with routes throughout the
East and West Shores of the Harrisburg MSA. The bus system provides important transportation
services for many city residents who work outside of Harrisburg proper.

The area is also served by the Harrisburg International Airport (HIA), which is located 10 miles
south of Harrisburg, along the Susquehanna River.

Major carriers include Air Canada,

American Eagle, Continental Airlines, Delta Airlines, Northwest Airlines, Air Tran, United
Airlines, and US Airways. The Harrisburg area is well served with its own beltway. The
combination of Route 581, I-83 and I-81 form a circle around the immediate East Shore areas,
Harrisburg City, and near West Shore areas. Larger cities such as Pittsburgh and Philadelphia
do not have a full circle route around the core area. This is a large advantage to assist in the
ease of travel around the city.

The Harrisburg MSA employment base is centered on state and federal government and those
government-servicing industries. Located in the center of the Harrisburg MSA is the
Pennsylvania State Capitol and over a dozen state office buildings. Military installations are also
prominent in the area and include: 1) Mechanicsburg Naval Depot, aka Defense Distribution
East; 2) New Cumberland Army Depot; 3) the U.S. Army War College in Carlisle; and, 4) Fort
Indiantown Gap.

The Harrisburg-Carlisle area's unemployment rate fell to 7.5 percent in August 2012, according
to the Pennsylvania Department of Labor & Industry. The area has seen several real estate
construction projects underway in the year 2012.
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MAP OF DAUPHIN COUNTY

18

NEIGHBORHOOD ANALYSIS CITY OF HARRISBURG

The neighborhood analysis provides a bridge between the Area Analysis 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.

AREA MAP

The neighborhood analysis provides a bridge between the Regional Analysis and the study of the
subject property. As in the Regional Analysis, the goal of the Neighborhood Analysis is to
determine how the operation of social, economic, governmental and environmental factors
influences the value of real estate.

Location
The subject property is located on the corner of North Third, James and Calder Streets, in the
Midtown district of Harrisburg. The subjects local market area is the fifth and sixth wards of the
City of Harrisburg, Dauphin County, Pennsylvania. The area is often referred to as the Midtown

19

market of Harrisburg. The State Capitol building and the Central Business District are adjacent,
to the South and East of the neighborhood.

Neighborhood Boundaries
The neighborhood boundaries are North Second Street to the West; Forster Street to the South;
North Sixth Street to the East; and Verbeke Street to the North.

Physical Description & Neighboring Uses

The neighboring uses include retail and commercial office space with a mix of residential
buildings. The Downtown district is adjacent to the subject property. The subject improvements
are considered to be compatible with the overall neighborhood development. The local market
area generally consists of office, apartment, row homes, townhouses, and various commercial
and retail uses. There is a small grocery and convenience store, a pizza shop, a Sprint store, a gas
station, an auto repair shop, an Italian restaurant, and numerous other small retail stores. Many
buildings consist of first floor retail or restaurant use with the upper floor(s) used as offices or
residential apartments.

Overview
The neighborhood is experiencing the urban revitalization that started in the downtown of the
city in 1998. Urban renewal has spread into the mid-town and uptown areas. This is a good sign
for the subject property.

Conclusion
The neighborhood will be a positive factor for the subject property. The subject neighborhood is
a mature, fully developed, area of mixed use known as the Midtown Market District. The Third
Street Corridor is the secondary retail strip often characterized by start-up retail stores. The
Midtown area remains an attractive place for residential living. In conclusion, the neighborhood
and local market area represents a strong location for a school in an area that has experienced
much of the citys revitalization.

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SITE DATA
The following site description is based upon the physical inspection of the site conducted on
March 26, 2013.
Location: The subject property is located at 1426 North Third Street in the City of Harrisburg,
Dauphin County, Pennsylvania. The building is located on a corner lot (North 3rd and Reily
Streets).
Tax Parcel:

The subject property is known as parcel 06-015-034 on the tax maps of Dauphin

County.
Total Area:

The site contains 0.41 acres, or 17,860 square feet.

Shape:

The site is rectangular in shape.

Topography and Drainage: The site is considered to be generally level. Drainage appears to be
adequate.
Landscaping: Landscaping on-site is minimal and is well maintained.
Access and Visibility: The subject property has excellent access and visibility on the corner of
North 3rd and Reily Streets.
Land to Building Ratio: The mixed-use commercial building contains 70,000 square feet of
space and is situated on a 17,860 square-foot plat of land, indicating a land-to-building ratio of
0.25 to 1.
Parking: Some off-street parking is available to tenants. Street parking is available on the roads
surrounding the subject property.
Curbs/Gutters/Sidewalks: Yes.
Zoning: Business General (BG)
Public Utilities: The site is served by public water, sewer, gas, electric and telephone.

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Environmental Impairments: No hazardous waste materials were indicated or observed on the

subject sites. It should be noted that we are not qualified in determining the existence of any
hazardous materials on the site or within the building improvements. Therefore, it is suggested
that a Phase I environmental audit be performed by a qualified professional if the existence of
hazardous waste materials is suspected. For the purpose of this appraisal, it is assumed that there
exists no hazardous material on-site. Any discovery of such materials on the property will
require a re-evaluation of the property, and this appraisal will become null and void.

Easements and Encroachments: No easements or encroachments were indicated or observed.

Flood Zone: The subject property lies outside of the designated flood area according to HUDFIA, Flood Hazard Map, Community No. 42043C0319D, with an effective date of August 2,
2012. Flood insurance would not be required for the property.

Conformity: The subject property conforms well to the immediate neighborhood which is
mostly residential and commercial uses.

22

Favorable Site Attributes: The site has a good location on the corner of North 3rd and Reily
Streets.

Unfavorable Site Attributes: The only unfavorable site attribute noted was the lack of on-site
parking available.

23

DESCRIPTION OF IMPROVEMENTS

The following improvement description is based upon an inspection of the property.

Improvements:

The subject improvements consist of a four-story mixed-use commercial

building built in 2009 which utilizes the latest in modern sustainable technologies. The building
has been registered with the US Green Building Council and has achieved LEED Gold status.
Size: The gross building area is 70,000 square feet.
Construction: The building is constructed of masonry and glass.
Exterior Doors: The exterior doors are glass with aluminum frames.
Interior Doors: Glass.
Sidewalks: A concrete and brick sidewalk surrounds the building. There is metal railing at the
entrance of the building.
Entrances: The main entrance to the building is on North 3rd Street. There are also side and
private entrances.
Lobby: An entrance lobby on North Third Street provides access to the first floor tenants as well
as elevators and stairwells serving the building.
Interior Finish: The floors consist of upgraded carpet and tile. The kitchen contains vinyl
flooring. The walls consist of finished drywall.

The ceilings contain decorative finished

acoustical tiles. There are restrooms on each floor.

Windows: Double-hung and stationary windows.
Lighting: Fluorescent parabolic lighting (censored).
Ceiling: The ceilings are roughly 10 feet throughout.
Roof: White rubber membrane roof which helps to regulate temperature inside the building.
Elevator: Two (2) 2,500 lb. four (4) stop, passenger elevators are located in the lobby.

24

Stairs: There are two internal stairwells that serve the building.
HVAC: Geothermal heating and cooling. There are solar panels on the roof of the building
which provides sufficient power for the common areas.
Sprinkler: The building is served by a wet sprinkler system.
Security System: The building is served by a security system. There is a card access system for
the building.
Americans with Disabilities Act (ADA): Access to the building is adequate to accommodate
the disabled. Door widths are adequate to accommodate the disabled. There is an entrance ramp
at the front entrance of the property.

However, the appraiser is not an expert in ADA

requirements and an audit should be undertaken. Any substantial changes required, may make it
necessary to revise the value conclusion in this report.
Physical Adequacy: The design and layout of the improvements are physically adequate and the
construction quality of the building is very good.

25

ZONING

The subject property is zoned Business General (BG), according to the zoning officer of the
City of Harrisburg. The subject property is a permitted use in this zone. The zoning ordinance
and dimensional requirements can be seen below:

Principal Uses: In a BG Zone, only the following buildings, structures and uses shall be
permitted:
(1) all buildings, structures and uses permitted in any Residence Zone;
(2) all buildings, structures and uses permitted in a BL Zone, without any restriction as to the
number of persons employed;
(3) sales shops, stores and markets, both wholesale and retail;
(4) cigar making shops;
(5) fur and fabric storage buildings;
(6) lithography, book binding and printing plants;
(7) radio broadcasting stations and studios;
26

(8) storage or parking garages;

(9) express freight offices;
(10) recreation halls, poolrooms, billiard rooms, etc.;
(11) filling stations; 7-94
(12) bar rooms, taverns or restaurants;
(13) curtain, upholstery, rug cleaning or garment cleaning, when adequately housed to prevent
nuisance;
(14) clubs or fraternal homes;
(15) home beverage and beer distributors;
(16) laundromats or dry cleaning pick-up and delivery;
(17) office buildings.
(Ord. 29-1974.)

Dimensional Requirements:
(1) In the BG Zone, this chapter prescribes no height limitations.
(2) In a BG Zone, each lot shall have front, side, and rear yard of not less than the depth or width
indicated below:
(A) front yard: depth, five (5) feet or conform to existing setbacks, within the block;
(B) side yards:
(i) width, ten (10) feet each side of a principal building, provided that when a written agreement
is reached by adjoining property owners, no side yard shall be required where commercial uses
abut side to side; provided, however, in no case shall party walls be permitted between properties
of separate ownership;
(ii) the width of a side yard abutting a major street shall equal the required depth of the front
yard;
(C) rear yard: depth, five (5) feet.

27

TAXES AND ASSESSMENT

The Dauphin County Real Estate Tax Assessment Office identifies the property as tax parcel 06015-034. This parcel has a current total assessed value of $4,520,800 ($115,700 for land and
$4,405,100 for improvements).

The City of Harrisburg and Dauphin County millage rates may be broken down as follows:.
Land:
County Library
6.876
0.35

Municipal
30.97

School
26.965

Total
65.161

Municipal
5.16

School
26.965

Total
39.351

Improvements:
County Library
6.876
0.35

Based upon the current assessment of parcel 06-015-034 and the Dauphin County millage rates,
the total annual tax liability is estimated at $180,884. The Common Level Ratio (CLR) factor in
Dauphin County, effective July 1, 2012, is 1.38, translating into an implied market value of
$6,238,704 or $88.48 per square foot of gross building area.

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HIGHEST AND BEST USE

Highest and best use is defined as "The reasonably probable and legal use of vacant land or an
improved property, which is physically possible, appropriately supported, financially feasible,
and that results in the highest value."3

Implied in this definition is that the determination of highest and best use takes into account the
contribution of a specific use to the community and community development goals, as well as the
benefits of that use to individual property owners.

In appraisal practice, the concept of highest and best use is the basis upon which the value
estimate is based. The market values of land or of an improved property are both estimated
under the assumption that potential purchasers will pay a price that reflects their analyses of the
most profitable use of the land or property as improved. Therefore, the most profitable use
assumption tends to produce the highest offering prices.

The highest and best use analysis requires the application of various categories of use oriented
decisions. To conclude that a given use is the highest and best use of the land as vacant must
meet the following four criteria: 1) legally permissible, 2) physically possible, 3) financially
feasible and 4) most profitable.

Highest and Best Use as Vacant:

An analysis of highest and best use as if vacant is necessary to identify comparable land sales that
profile this use. The four tests are as follows:

Legally Permissible
Uses that are legally permitted at the subject property are largely controlled by the zoning district
in which the property is located. Other factors that may affect the categories of permitted uses
include deed restrictions, easements and encroachments, covenants, etc. As mentioned in the

The Dictionary of Real Estate Appraisal, 2nd Edition; American Institute of Real Estate Appraisers, 1989.
29

Zoning section of this report, the subject property is located within the Business General (BG)
zoning district, according to the zoning officer of the City of Harrisburg. Permitted uses within
this zoning district include the following: all uses permitted in any Residence Zone; all uses
permitted in a BL zone; sales shops, stores and markets, both wholesale and retail; cigar making
shops; fur and fabric storage buildings; lithography, book binding and printing plants; radio
broadcasting stations and studios; storage or parking garages; express freight offices; recreation
halls, poolrooms, billiard rooms, etc.; filling stations; bar rooms, taverns or restaurants; curtain,
upholstery, rug cleaning or garment cleaning, when adequately housed to prevent nuisance; clubs
or fraternal homes; home beverage and beer distributors; laundromats or dry cleaning pick-up
and delivery; and office buildings. The subject property is a permitted use in this zoning district.

Physically Possible
The subject site consists of 0.41 acres of land on the corner of North Third and Reily Streets in
the City of Harrisburg, Dauphin County. Access and visibility of this site is considered excellent.
Public utilities are available to the site and the topography is level at street grade. The size of the
subject site limits some uses but most commercial uses in the Business General Zone are
physically possible. The subject site is well-suited for commercial retail use due to the fact that it
is situated on a corner lot. Commercial uses are physically possible at the site.

Financially Feasible
The uses that are both legally permissible and physically possible are the focus of this section of
the analysis. This section eliminates uses that are incapable of supporting development costs
through potential income streams. This analysis is conducted through a study of potential rents
of various property types at the subject site. In general, any of the physically possible and legally
permitted uses which are capable of generating enough income to satisfy operating expenses,
financial obligations and capital amortization are considered financially feasible. Commercial
development with retail/office use is deemed feasible for the property.

30

Maximally Productive
Of the uses that are considered financially feasible at the subject property, the use that generates
the highest rate of return over the longest period of time is considered to be the highest and best
use of the property. Commercial development with retail/office use is viewed as financially
feasible for the subject property. This use would conform well to the neighborhood. As such,
this is the highest and best use of the subject property.

Highest and Best Use as Improved:

The appraiser tries to identify the highest and best use of the property as improved so that he can
understand those uses that create the highest present value in relation to the capital investment
required. It also helps the appraiser to identify comparable properties for the Sales Comparison
and Income Approaches. In addition to analyzing the property relative to the four criteria
required for highest and best use, the appraiser must consider whether the need for renovation,
expansion, demolition or any combination of these actions will increase the return on invested
capital. The subject site is currently improved with a four-story mixed-use building containing
73,400 square feet of space on 0.41 acres. The highest and best use as improved of the property
is its current use as a mixed-use commercial building.

31

THE APPROACHES TO VALUE

Typically, after analyzing the physical characteristics of the subject and current conditions within
the real estate markets, three approaches to value are developed to arrive at three separate
indications of the subject's value. These three approaches, the Sales Comparison Approach,
Income Capitalization Approach, and Cost Approach arrive at a value indication through
dissimilar methods and the use of different types of data. However, these three approaches are
not always unrelated, and some aspects of each approach may be applicable to the others.

In applying the Cost Approach to value, the appraiser attempts to estimate the difference in worth
to a buyer between the property being appraised and a newly constructed building with optimal
utility. The depreciated replacement cost of the improvements is estimated by analyzing three
forms of depreciation; physical deterioration, functional obsolescence and external or economic
obsolescence. This depreciated replacement cost is then added to the market value of the
underlying site, to arrive at a value indication for the subject.

In the Sales Comparison Approach, market value is estimated by comparing the subject to similar
properties which have been sold recently, or to properties which are currently offered for sale.
The analysis of the sales relative to the subject focuses upon differences in legal, locational,
physical and economic characteristics. This approach is applicable to all types of real property
when there is sufficient data in the market.

Real estate which is capable of producing income through rents and leasing is often purchased as
an investment. From the buyer's point of view, the earning power of a property is the most
significant determinant of property value. The buyer is essentially trading present dollars for the
right to receive future income. Development of the Income Capitalization Approach involves
estimating net operating income by analyzing encumbering leases, market rents, market
occupancy levels and absorption rates, and expenses.

This net operating income is then

capitalized at an appropriate rate, which is also determined by the market, to arrive at a single
value estimate.

32

After developing each of the approaches to value, the three value estimates are normally
reconciled into a single estimate of value for the subject property. Since the approaches involve
different techniques, and the reliability of data involved in each technique may vary, the market
value is usually based upon the approach which utilized the strongest market evidence.

33

LAND VALUATION
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

Ground Rent Capitalization

Allocation

Land Residual

Extraction

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 reflect market reaction. In the valuation of the subject
property, the Sales Comparison Approach was used for land valuation.
Units of Comparison
Vacant commercial land is typically valued on a price per acre or price per square foot basis,
depending on the size of the property while residential land is typically valued on a price per acre
or price per lot or dwelling unit basis. In the analysis of the subject site, the price per square
foot of land was chosen as the appropriate unit of comparison because it indicated a tighter range
than the price per acre.
COMPARABLE LAND SALES
Comparable

Price per Acre

Price per SF of Land

1
2
3
4

$401,351
$248,447
$612,245
$547,617

$9.21
$5.70
$14.06
$12.57

Comparable Land Sales

Comparable commercial retail land sales were identified in the Cumberland County and Dauphin
County markets. The sales shown on the following pages are considered to be most comparable
to the subject property and reflect a similar highest and best use as the subject, as if vacant.

34

COMPARABLE LAND SALE ONE

Location:

2521 North Front Street, City of Harrisburg

Dauphin County, Pennsylvania

Transaction Data:
Consideration:
Date of Sale:
Grantor:
Grantee:
Tax Parcel:
Conditions of Sale:
Property Rights Conveyed:
Financing:
Verification:

$297,000
May 2012
Radnor Realty
Harrisburg Buildings & Grounds Co.
10-066-037
Arms Length
Fee Simple
Cash to Seller
Jamie Pascotti (Listing Agent, RMA) 717-790-0111

Site Data:
Lot Size:
Shape/Topography:
Access/Visibility:
Public Utilities:

0.74 acres or 32,234 square feet

Irregular/Level
Good/Excellent
All public available

Appraisal Measures:
Sale Price per Acre:
Sale Price per Sq Ft of Land:

$401,351
$9.21

Comments: This is the sale of a Class B office building located at the corner of North Front and Radnor
Streets in the City of Harrisburg. The building was vacant at the time of sale. Parking on-site includes
32 spaces. The property is zoned Special Planned Development (SPD), which permits offices, labs,
studios, etc. The sale was for land only. The building will be demolished in the near future.
35

COMPARABLE LAND SALE TWO

Location:

1801 Derry Street, City of Harrisburg

Dauphin County, Pennsylvania 17104

Transaction Data
Consideration:
Sale Date:
Grantor:
Grantee:
Parcel ID:
Deed Reference:
Property Rights:
Conditions of Sale:
Financing:
Verification:

$400,000
July 2012
State N Dairy Inc.
LandVEST Harrisburg LLC
02-035-005
20120020499
Fee Simple
Arms Length
Cash to Seller
Senada Mavric (Listing Broker, RE/MAX 1st Advantage) 717-805-6557

Site Data
Site Size:
Shape/Topography:
Access/Visibility:
Zoning:
Public Utilities:
Proposed Use:

1.61 acres or 70,132 square feet

Irregular/Generally Level
Good/Very Good
Business General, BG
All public available to site
Family Dollar Discount Store (Retail)

Appraisal Measure
Sale Price per Acre:
Sale Price per SF of Land:

$248,447
$5.70

Comments: This is the sale of a vacant commercial lot located along Derry Street in the city of
Harrisburg. The site will be improved with a 9,180-square-foot discount store in the near future. The
property was on the market for more than two years. The site has frontage on Derry Street, South 18th
Street and Berry Hill Street.

36

COMPARABLE LAND SALE THREE

Location:

4415-4423 North Front Street, Susquehanna Township

Dauphin County, Pennsylvania

Transaction Data
Sale Date:
Consideration:
Grantor:
Grantee:
Parcel ID:
Deed Reference:
Conditions of Sale:
Property Rights:
Financing:
Verification:

November 2011
$1,500,000 ($830,000 & $670,000)
Thomas Carlock & 4415 North Front Street Associates
Riverwatch Properties LLC
62-006-054 & 055
20110031202 & 20110031203
Arms Length
Fee Simple
Cash to Sellers
Public Records

Site Data
Site Size:
Shape/Topography:
Access/Visibility:
Public Utilities:
Zoning:

2.45 acres or 106,722 square feet on two adjacent parcels

Rectangular/Generally Level
Good/Good
All public available
Commercial Office Limited, COL

Appraisal Measures
Price per Acre:
Price per SF of Land:

$612,245
$14.06

Comments: This is the sale of two (2) adjacent tracts of land that were once improved with
older style office buildings that were demolished immediately after purchase. The sale was for
land only. The site is currently being improved with a 3-story, 47,100 square foot Class A office
building.
37

COMPARABLE LAND SALE FOUR

COMPARABLE

Location:

4680 East Trindle Road, Hampden Township

Cumberland County, Pennsylvania 17055

Transaction Data
Consideration:
Sale Date:
Grantor:
Grantee:
Parcel ID:
Deed Reference:
Conditions of Sale:
Property Rights:
Financing:
Verification:

$460,000
February 7, 2013
4660 Associates (Norm Hoffer)
BAM Trindle Road LLC
10-22-0529-003-U2
201304358
Arms Length
Fee Simple
Cash
Tom Posavec (Landmark Commercial Realty) 717-731-1990

Site Data
Site Size:
Shape/Topography:
Access/Visibility:
Public Utilities:
Zoning:
Proposed Use:

0.84 acres or 36,590 square feet

Rectangular/Level
Good/Excellent
All public available
Commercial General, C-G
Office Condominium

Appraisal Measures
Sale Price per Acre:
$547,619
Sale Price per SF of Land: $12.57
Comments: This is the sale of a vacant commercial lot located at the signalized intersection of
Trindle Road and Railroad Avenue in Mechanicsburg. The site will be improved with a 10,000square-foot office building, which will be leased by AAA Central Penn. The property was
previously on the market for $550,000.
38

COMPARABLE LAND SALES GRID

LAND SALES

SUBJECT PROPERTY

LOCATION
TOWNSHIP
COUNTY

1426 North 3rd Street

City of Harrisburg
Dauphin

DATE OF SALE
CONSIDERATION
SQUARE FEET OF LAND

SALE 1

SALE 2

2521 N. Front St. 1801 Derry Street

City of Harrisburg City of Harrisburg
Dauphin
Dauphin

N/A
N/A
17,860

May-12
$297,000
32,234

4415-4423 N. Front St. 4680 E. Trindle Rd.

Susquehanna
Hampden
Dauphin
Cumberland
November-11
$1,500,000
106,722

PROPERTY RIGHTS CONVEYED

N/A

Fee Simple

Fee Simple

Fee Simple

Fee Simple

FINANCING

N/A

Cash to Seller

Cash to Seller

Cash to Seller

Cash to Seller

CONDITIONS OF SALE

N/A

Arm's Length

Arm's Length

Arm's Length

Arm's Length

TIME

N/A

0%

0%

0%

0%

-10%
10%
10%
0%
0%
10%
5%

0%
0%
0%
0%
0%
0%
20%

-20%
10%
0%
0%
0%
0%
25%

-10%
0%
0%
0%
0%
0%
10%

25%
$11.52

20%
$6.84

15%
$16.16

0%
$12.57

NET ADJUSTMENT
ADJUSTED PRICE PER SF

Comparable Sales
Comparable Sale Two
Comparable Sale One
SUBJECT PROPERTY
Comparable Sale Four
Comparable Sale Three

Adjusted $/SF of Land

$6.84
$11.52
$12.57
$16.16

39

$14.06

February-13
$460,000
36,590

N/A

Urban
Good/Very Good
Generally Level/Rectangular
All public to site
Curbing/Gutters/Paving
Business General (BG)
0.41 acres

$5.70

SALE 4

PRICE PER SQUARE FOOT

LOCATION
ACCESS & VISIBILITY
SITE CHARACTERISTICS
UTILITIES
OFF-SITE IMPROVEMENTS
ZONING
SIZE

$9.21

July-12
$400,000
70,132

SALE 3

$12.57

Discussion of the Comparable Building 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 subject for a
given element of comparison.

Elements of Comparison
Key value elements under scrutiny that may require adjustments are: property rights conveyed,
financing terms, conditions of sale, market conditions, and physical characteristics including
location, condition, and size. These factors are the primary influences on site prices and tend to
affect the differences in price levels.

Property Rights Conveyed

A transaction price is always predicated on the real property interest conveyed. Many types of
real estate, particularly income-producing property, are sold subject to existing leases. The
income potential of a property is often limited by the terms of existing leases. In these situations
the real property that is sold is the Leased Fee Estate.

The comparable sales included fee simple property rights. No adjustment is warranted for
property rights conveyed.

Financing Adjustments
This adjustment renders the sale 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. The present value of this difference represents an
advantage to the comparable sale and warrants a negative adjustment. While this calculated
amount is not always the market's reaction to favorable financing, it serves the appraiser well as a
guide in the absence of market data. All transfers were reported to be cash sales and no
adjustments are required for financing.

40

Conditions of Sale
This adjustment is applied if there are any unusual circumstances surrounding the transaction,
such as foreclosures, bulk sales, related parties, and assemblages. No adjustments were warranted
for conditions of sale. All the properties were listed for sale and exposed to the real estate
market for a reasonable amount of time. All sales are considered arms length transactions.

Market Conditions (Time)

After adjusting the comparable sales to a cash equivalent price and for conditions of sale, the
sales must be brought current by means of a time adjustment if warranted. In all likelihood,
prices are predicated on physical factors. All comparable sales sold between 2011 and 2013; no
adjustments were warranted.

Location Adjustments
Adjustments are necessary for location when a property is in a location that is more or less
favorable than the subject.

Comparable sale one was adjusted downwards for superior location on North Front Street. It
was adjusted upwards for its inferior access and visibility (North Front Street is a one-way
street). It was also adjusted upwards for site characteristics (L shaped). Finally, this sale was
adjusted for its inferior zoning and size.

Comparable sale two was only adjusted upwards for inferior economies of scale. Bigger tracts
of land tend to sell for a lower price per unit.

Comparable sale three was adjusted downwards for its superior location on North Front Street
in Susquehanna Township. It was adjusted upwards for its inferior access and visibility (North
Front Street is a one-way street). This sale was also adjusted upwards for inferior economies of
scale. Bigger tracts of land tend to sell for a lower price per unit.

41

Comparable sale four was adjusted downwards for its superior location in Hampden Township.
This sale was adjusted upwards for inferior economies of scale. Bigger tracts of land tend to sell
for a lower price per unit. This sale was considered similar to the subject property.

Conclusion Sales Comparison Approach As Is

The adjusted price per square foot of land ranged from $6.84 to $16.16 with a mean of $11.77
per square foot of land. Comparable Sale Four ($12.57) was considered most similar to the
subject property but all sales were taken into account. Based on the foregoing analysis, a price
per square foot of $11.77 was chosen, yielding a total value of $210,287 ($11.77 x 17,860 SF),
rounded to $210,000. Therefore, the Fee Simple value of the subject site as is is:

* * *TWO HUNDRED TEN THOUSAND DOLLARS***

($210,000)

42

COST APPROACH

Estimate of Replacement Cost

Replacement costs consist of two components; direct construction costs and indirect construction
costs. Direct construction costs include the cost of labor and materials necessary to construct the
improvements new, as of the effective date of the appraisal. Indirect, or soft, costs include costs
for legal and accounting fees, taxes and insurance, loan fees, permits, closing costs,
contingencies, and miscellaneous fees.

To estimate the replacement cost new of the existing improvements, the Marshall Valuation
Service, a national cost estimating service was consulted, and was correlated with information
concerning other similar properties within the subjects market area. These estimates are based
upon the description of the property contained within this report, which can best be described as
Average Class A Offices (344). The cost data utilized in this evaluation was obtained from the
Marshall Valuation Service and is outlined on the following pages. The base costs contained in
the Marshall Valuation Service include in addition to labor and materials, architectural and
engineering fees, interest and bank charges on building funds during construction, and site
preparation.

43

Construction Cost Comparable

Location:
Property Type:
Site Size:
Improvements:
Age:
Hard Costs:
Soft Costs:
Total Development:
Overall Cost per SF:
Information Source:
Comments:

409 North Second Street, Harrisburg, PA 17101

Class A Office Building (5-story)
0.31 acres
56,000 SF; steel frame on concrete slab with masonry exterior
2012
$11,200,000 (core, shell, & tenant fit out)
$672,000
$11,872,000
$212.00
Dave Butcher (Developer, WCI Partners)
The developer indicated that the land acquisition was $1,587,234,
entrepreneurial profit was $415,000 and the interest was
approximately $500,000 to $600,000. Including land, interest and
profit, the overall cost per SF was $250.00.

44

Construction Cost Comparable

Location:
Property Type:
Site Size:
Improvements:
Age:
Construction Cost:
Cost per SF:
Land Acquisition:
Total Development:
Overall Cost per SF:
Information Source:

4415-4423 North Front Street, Harrisburg, PA 17110 (Susquehanna Twp.)

Class A Office Building (3-story)
2.45 acres
47,100 SF; steel frame on concrete slab with masonry exterior
Under construction - Fall 2012
$4,976,073
$105.65
$1,500,000 in November of 2011
$6,476,073 (Land & Building)
$137.50 (Land included)
Public Records

45

These properties reflect a total construction cost of between $137.50 per square foot to $212.00
per square foot. Both of the comparables are new construction. The appraiser expects the
construction cost per square foot to fall within this range.

Comparable 1 is considered superior in regards economies of scale (size). Economies of scale

dictates that construction costs will be more per square foot for a smaller building.

Comparable 2 is considered superior in regards to economies of scale. This comparable is

inferior in regards to quality of construction.

Conclusion:
The first comparable construction cost was considered most similar to the subject due to its
location, size and quality of construction.

Therefore, we have estimated a market derived

construction cost for the subject at the high end of the range at $175.00. Utilizing a market
derived cost estimate would produce a total construction amount of $12,250,000 ($175.00 x
70,000 SF) for the subject; however, in our analysis, Marshall & Swift Valuation Service was
considered most appropriate.

A separate estimate is required for site improvements. These costs have also been derived from
the Marshall Valuation Service. Site work/improvements at the subject property include asphalt
paving, concrete curbing and sidewalks, landscaping and signage.

The appraiser was provided the actual construction cost of the building by Matt Tunnell, of
GreenWorks Development. The breakdown can be seen below:

Land:

$850,174

Land Improvements:

$173,292

Building:

$12,171,224

Total:

$13,194,690

46

Entrepreneurial Incentive
Entrepreneurial incentive is the profit a developer earns through the completion of the
development. The true measure of entrepreneurial incentive is determined by surveying profit
expectations of local market participants. (Note: the site value is excluded from the estimate of
entrepreneurial incentive because it is assumed that the sales prices of the comparable parcels
include an entrepreneurial incentive adjustment to the developer). Entrepreneurial incentive is a
percentage of direct and indirect costs, and ranges from 5% to 25% in the local market. It varies
depending on the location, size, type, complexity of the project, and market forces. For the
subject property, entrepreneurial incentive was estimated at 10%.

Depreciation
From the total replacement cost of the subject improvements, an amount attributed to accrued
depreciation must be subtracted.

Accrued depreciation is the loss in value resulting from

physical wear and tear, functional obsolescence, or economic obsolescence. An estimate of 7.3%
depreciation was taken into account due to physical wear and tear. This is based off of a 55-year
life expectancy for an Average Class A Office Buildings according to Marshall & Swift
Valuation Service. Depreciation is calculated by taking the estimated effective age (4 years) and
dividing by the life expectancy (55 years) of the building 7.3% (4 / 55). No depreciation was
taken into account for functional obsolescence. There is limited private parking on-site. Also,
the City of Harrisburg has been going through significant financial woes, and taxes will be
increasing in the near future; therefore, 15% was chosen for external obsolescence. Therefore,
the improvements have an estimated depreciation amount of 22.3% overall.

47

Replacement Cost New (RCN), Average Class A Office Buildings (344)

Direct Hard Cost
Basic Square Foot
Current Cost Multiplier
Local Multiplier for Harrisburg, PA
Final Square Foot Cost
Total Direct Hard Cost ($166.02 x 70,000 SF)

$145.12
x 1.04
x 1.10
$166.02
$11,621,400

Basement Area
($55.13 x 2,940 SF)

$162,082

Wet Sprinkler System

($2.81 x 70,000 SF)

$196,700

Total Building Replacement Cost

$11,980,182

Indirect Cost
Soft Cost @ 5% of Direct Cost
Entrepreneurial profit @ 10% of Direct and Soft Cost
Total Indirect Cost

$599,009
$1,257,919
$1,856,928

Replacement Cost New

$13,837,110

Accrued Depreciation
Physical Deterioration @ 7.3% (Wear & Tear)
Functional Obsolescence @ 0%
External Obsolescence @ 15%
Total Depreciation (17.3%)

($1,010,109)
$0.00
($2,075,567)
($3,085,676)

Total Depreciated Replacement Cost

$10,751,434

Site Value
Land Value
Site Improvements @ 1.5% DRC
Total Site Value

$210,000
$161,271
$371,272

As Is Value Indication from Cost Approach

$11,122,706

Rounded to

$11,000,000

48

INCOME APPROACH
As Is
The Income Capitalization Approach is based upon the premise that an investor who purchases
income producing real estate is essentially trading present dollars for the right to receive future
income. This is the Principle of Anticipation. The Principle of Supply and Demand is also
fundamental to this approach in that changes in supply and demand will have an effect on market
rents. The Principle of Substitution holds that market rents and capitalization rates tend to be set
by prevailing rates and rents at equally desirable substitute properties.

Forces outside of the property will also have an effect upon the income attainable at the property.
The state of the economy, political environment, crime rates, and new development are just a few
of the outside factors, which may influence rents and rates. This is the Principle of Externalities.

In general, the Income Capitalization Approach involves the estimation of net operating income.
This net operating income is then capitalized at an appropriate rate based upon that particular
property's risk and return profile.

Estimating the net operating income involves the analysis of market rents as well as contract
rents. This involves analyzing leases and rents at similar competing properties as well as the
encumbering leases at the subject property if applicable. From this analysis, a potential gross
income is derived, that is, income prior to vacancy and collection losses. Once a proper vacancy
rate is derived from the market, the effective gross income of the property may be derived by
subtracting this vacancy from the potential gross income. Expenses involved in the operation of
the property are analyzed and subtracted from the effective gross income to arrive at the net
operating income.

The next step involves the derivation of an appropriate capitalization rate. There are many
methods for developing capitalization rates.
capitalization

and

yield

capitalization.

Two of the most common include direct

Direct

capitalization

requires

market-derived

capitalization rates from similar properties and transactions and then applies them to the subject
49

property without explicit attention to return on and return of capital. Only the first years Net
Operating Income (NOI) or the first stabilized years NOI is capitalized.

Yield capitalization is more complex and requires interpreting expectations and attitudes into
formulas designed to convert various income streams into present value. It is typically used
when the income stream is derived from terms of a lease or leases.

Yield capitalization will be the only method utilized as the entire finished portion of the subject
property is encumbered by a long term lease.

Existing Lease:
The subject property is a two-story professional office building containing 70,000 square feet of
space on 0.41 acres. The property has multiple tenants; there is also space available to lease.
Copies of each individual lease were requested but not provided to the appraisers. A breakdown of
tenant occupancy can be see below.
First Floor
Suite 100
Suite 120
Suite 125
Suite 130
Suite 140
Suite 150

Commonwealth Connection Academy

Wohlsen Construction Company
GreenWorks Development Management Office
Vacant
Brother's Pizzeria and Caf
Commonwealth Connection Academy

Second Floor
Suite 200
Suite 225
Suite 250

Schutjer Bogar, LLC

Vacant
TBD

Third Floor
Vacant
Fourth Floor
HACC--Central Pennsylvani'a Community College
*Each floor contains approximately 17,500 square feet

50

The Direct Capitalization method requires capitalizing a single years net operating income into
a value estimate. This net operating income reflects the estimated income on a stabilized basis.
The overall capitalization rate applied to the net operating income estimate contains provisions
for return on and of capital. This capitalization rate also accounts for any estimated future
fluctuation in income as well as future risk. In the valuation of the subject property by the Income
Approach, the leased fee value was estimated through direct capitalization. The developer of the
property did not provide the appraisers with leases.

Gross Income
Potential Gross Income reflects the maximum amount of income that a property is capable of
producing at full occupancy. The information provided to the appraisers indicates a stabilized gross
income of $1,328,871 for the subject property.

Vacancy and Credit Loss

According to the Landmark Office Study, Class A office space in the City of Harrisburg is
operating at 93% occupancy for the 4th Quarter of 2012. Conversations with Bobbie Van
Buskirk of GreenWorks Development indicated that the building is currently 70% leased. We
estimate a stabilized occupancy rate of around 85% for the building. A vacancy and credit loss
of 15% is considered appropriate.

Expenses:
The expense projections are based on our knowledge of the Harrisburg Real Estate market to
determine the reasonableness of the expense estimates. As the rent estimated for the subject
involves a NNN lease scenario, the tenant would be responsible for all operating expenses.

51

Reserves for Replacements

The majority of the items needed to be covered under reserves for replacements are contained in
the Sinking Fund for HVAC. However, items such as the roof, parking lot, walls, floors and
windows need to be accounted for in Reserves for Replacement. The Korpacz Real Estate
Investor Survey notes the range for National CBD Office Market 4th Quarter 2012 between $0.15
and $0.50. The property is in good condition and was constructed in 2009. Therefore, the
Reserves for Replacement expense is estimated to be at the low range.

Management Fees
Commercial real estate of the subject type needs to be professionally managed. Historically, the
management was done between an on-site manager (for maintenance) and the property owner.
Based on discussions with local real estate professionals, management fees typically range from
4% to 6%.

Leasing Fees and Commissions

Based on numbers from market data for similar buildings we estimate the leasing fees and
commissions to equal a blended rate of five (5%) percent annually.

Expense Summary:
A total income and expense figure was provided to the appraisers by Matt Tunnell, of
GreenWorks Development, and was used in the stabilized statement. Broken down income and
expense information was not provided to the appraisers.

STABILIZED OPERATING STATEMENT

Potential Gross Income

$1,328,871

Less Expenses

$440,000

Net Operating Income

$888,871

52

Discount Rate Analysis:

The analysis discounts the cash flows to an estimate of the present value, based on annual
discounting periods. After deriving the estimated cash flows, the next step in the process
involves the selection of a discount rate. A discount rate is defined as a rate of return
commensurate with perceived risk used to convert future payments or receipts to present value.
The discount rate accounts for the time value of money within a cash flow analysis, and also
accounts for the perceived risk and profit within an investment. Discount rates are virtually
impossible to extract directly from sales because actual yields are historical facts and are not
relevant to reflect future expectations. The measurement of an appropriate discount rate for a
property is not a reflection of past performance but involves measuring expected yield
requirements as of the date of the appraisal. The appropriate discount rate is the reasonable rate
that will attract capital to the investment. Because real estate is unique and each property has
specific risk characteristics, as well as management and liquidity considerations, the ultimate
selection of a discount rate is subjective and consequently there is no correct rate. However, there
is an appropriate range of rates that are reasonable to apply to a property.

For the purpose of selecting a discount rate for the subject property, a discount rate from
national-based real estate surveys was analyzed.

National Based Real Estate Surveys:

The Korpacz Real Estate Investor Survey published by PricewaterhouseCoopers LLP (PWC)
tracks the National CBD Office Market for the 4th Qtr. 2012, investment criteria are as follows:
National CBD Office Market (4th QTR. 2012)
CURRENT
LAST QUARTER
DISCOUNT RATE
RANGE
AVERAGE
OVERALL CAP RATE
RANGE
AVERAGE
RESIDUAL CAP RATE
RANGE
AVERAGE

1 YEAR AGO

5.25% - 12.00%
8.41%

5.25% - 12.00%
8.50%

5.00% - 11.00%
8.38%

4.25% - 10.00%
6.70%

4.25% - 10.00%
6.85%

4.50% - 10.00%
7.53%

5.25% - 11.00%
7.48%

5.25% - 11.00%
7.48%

5.00% - 10.25%
7.21%

53

Having concluded that direct capitalization is the most suitable technique, an overall
capitalization rate (Ro) must be estimated. Three of the more common techniques for rate
derivation are briefly described as follows:

R can be developed through a Mortgage/Equity technique, which compares the

proportionate return requirements of both the equity and debt positions.

R can be derived from Debt Coverage (DCR) and Loan to Value (LTV) ratios.

R can be extracted directly from the market based on the sale price and anticipated income
generation of comparable properties, or based on interviews with market participants.

Assumptions
CAPITALIZATION
Loan-To-Value Ratio
Interest Rate
Term (Years)
Equity-To-Value Ratio
Equity Dividend Rate
Mortgage Constant

70.0%
5.00%
25
30.0%
15.00%
0.0702

BAND OF INVESTMENT
Loan Ratio x Mortgage Constant
Equity Ratio x Equity Dividend
Rate
Capitalization Rate

0.0491
0.0450
0.0941

The Mortgage/Equity Technique suggests a rate of 9.41%.

Discount Rate Selection

The indicated range of discount rates indicated by the above surveys conducted by
PricewaterhouseCoopers LLP (PWC) averaged 8.41% with a range of 5.25% to 12% for the
National CBD Office Market. The mortgage/equity technique yielded a discount rate of 9.41%.
The investor survey is property specific and was solely relied upon. The subject building was
constructed in 2009 and is in good condition. Therefore, for this analysis, a discount rate of 9.5%

54

was chosen which reflects some of the risk that would be involved in purchasing a property of
this type that is not fully stabilized.
Value Conclusion Direct Capitalization:
The direct capitalization analysis can be found above. Applying the discount rate of 9.5% to the
stabilized net operating income provided to the appraisers yields a market value of $9,356,537
($888,871 / 0.095). Therefore, the market value of the Leased Fee interest in the subject
property, by means of the Income Capitalization Approach, based on the direct capitalization
analysis, as is, the date of our most recent inspection of the subject property, is estimated to
be $9,356,537, rounded to:

* * *NINE MILLION FIVE HUNDRED THOUSAND DOLALRS* * *

($9,500,000)

55

RECONCILATION AND CORRELATION

The Cost Approach was developed for the as is value of the subject property yielding a value of
$11,000,000 for the improvements.

The Income Approach was developed because the subject property is encumbered with long-term
leases. A direct capitalization analysis was utilized to yield a as is value of the subject property
of $9,500,000.

The Sales Comparison Approach was considered, but not developed due to the lack of comparable
building sales in and around the City of Harrisburg.

In this analysis of the subject property, the Income Approach is given more weight toward the final
estimate of market value due to the fact that the property is encumbered by long term leases and a
potential investor would most likely purchase the property based on its income producing potential.
Therefore, it is our opinion that the estimated as is market value of the leased fee interest in the
subject property, as of March 26, 2013 is:

* * *NINE MILLION FIVE HUNDRED THOUSAND DOLLARS* * *

($9,500,000)

56

ASSUMPTIONS AND LIMITING 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 Limiting 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.

57

CERTIFICATION
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 is our personal, impartial, 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 we have no personal interest or bias with respect to the parties or properties involved
with this assignment.

4.

My engagement and compensation is not contingent upon the reporting of a predetermined

value, or 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
directly related to the interested use of this appraisal.

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 real property appraisal assistance to the person signing this
certification.

8.

I am certified by the Commonwealth of Pennsylvania Department of State Bureau of

Professional and Occupational Affairs as a General Certified Real Estate Appraiser until
June 30, 2011.

9.

As of the date of this report, I have completed the requirements of the continuing education
program.

W. Greg Rothman, MAI, MRICS, CPE, CCIM

Pennsylvania Certified General Real Estate Appraiser

58

November 1, 2012
Date

CERTIFICATION
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, impartial, and unbiased
professional analyses, opinions, and conclusions.

3.

I have no (or the specified) present or prospective interest in the property that is the
subject of this report and no (or the specified) personal interest with respect to the parties
involved.

4.

I have no bias with respect to the property that is the subject of this report or to the
parties involved with this assignment. RSR Appraisers and Analysts have not appraised
this property before.

5.

My engagement in this assignment was not contingent upon developing or reporting

predetermined results.

6.

My compensation for completing this assignment is not contingent upon the development
or reporting of a predetermined value or direction in value that favors the cause of the
client, the amount of the value opinion, the attainment of a stipulated result, or the
occurrence of a subsequent event directly related to the intended use of this appraisal.

7.

My analyses, opinions, and conclusions were developed, and this report has been
prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.

8.

I have made a personal inspection of the property that is the subject of this report.

9.

No one provided significant real property appraisal assistance to the person signing this
certification.

Signature:
Andrew R. Wolfe
Licensed Appraiser Trainee
No: LAT000423
Expires: June 30, 2013
59

ADDENDUM

60