appraisal of - grasswood auctions · janaokrainetz,b.comm.,aaci,p.ap . suncorp valuations ......

S U N C O R P V A L U A T I O N S

APPRAISAL OF:

320 Park Avenue

Langham, Saskatchewan

FILE NO. 30401

Prepared By:

Suncorp Valuations

Effective Date: January 7, 2011

300 � 261 1st Avenue North Saskatoon, SK S7K 1X2 Ph 306.652.0311 Fx 306.652.8373 Toll Free 800.764.4454

E-mail: [email protected] Website: www.suncorpvaluations.com

E dm o n t o n . S a sk a to o n . T o r on t o . V a n co u ve r . A t l a n t a . M i l w a uk ee . P h i l a d e l p h i a . S e a t t l e


January 19, 2011

Mr. Simarjit Singh

1-119 Hampton Circle

Saskatoon, SK S7R 0C8

Dear Mr. Singh:

RE: Appraisal of 320 Park Avenue, Langham, Saskatchewan

Our File No. 30401

In accordance with your instructions, an inspection, analysis and evaluation of the above property has been

conducted for the purpose of estimating the �market value� of the freehold interest in the above property, as of

January 7, 2011, the property having been inspected on that date. The estimate of market value is of the

going concern business operation, as complete and assuming a stabilized occupancy level.

Attached to this letter is a narrative report of my findings and conclusions, as defined in �The Standards� of

the Appraisal Institute of Canada. In other words, all of the Appraisal Standard Rules have been considered,

observed and applied in the development of this appraisal opinion and the reporting of that opinion.

All comments, opinions, and conclusions are discussed and elaborated upon within the body of this report to

the extent felt necessary to support the estimate of market value as cited herein. Specific factual data, upon

which these values are based, will be retained in the working files of Suncorp Valuations for future reference.

Your attention is also drawn to the Assumptions and Limiting Conditions, which form an integral part of this

report. As my mandate did not include consideration of environmental concerns, no specific investigation of

such factors was undertaken. Please see the section of the report entitled Environmental Concerns for further

particulars.

Based on my inspection and appraisal, it is my opinion that the going concern market value of the property

�As Complete,� located at 320 Park Avenue, Langham, Saskatchewan, as of January 7, 2011, is:

ONE MILLION FOUR HUNDRED FORTY THOUSAND DOLLARS

�As Complete � Assuming Stabilized Occupancy�

$1,440,000

On behalf of,

SUNCORP VALUATIONS

Jana Okrainetz, B.Comm., AACI, P.App


TABLE OF CONTENTS

PART I - INTRODUCTION

Executive Summary ....................................................................................................................1

PART II � BASIS OF APPRAISAL

Identification of the Property........................................................................................................3

Effective Date ............................................................................................................................3

Purpose, Function and Intended Users...........................................................................................3

Property Rights Appraised...........................................................................................................3

Definition of Value .....................................................................................................................3

Definition of Property..................................................................................................................4

Scope of Work..........................................................................................................................5

PART III � FACTUAL DATA

City/Regional ...........................................................................................................................6

The Site ....................................................................................................................................7

Building Description/Existing Use.................................................................................................8

Type and Class of Subject Property ............................................................................................10

Furnishings, Fixtures, and Equipment ..........................................................................................10

Environmental Concerns ...........................................................................................................10

Sales History ...........................................................................................................................10

Assessment and Taxes ..............................................................................................................11

Land Use Controls....................................................................................................................11

PART IV � ANALYSIS AND CONCLUSIONS

Highest and Best Use ...............................................................................................................12

Valuation Methodology ............................................................................................................17

Valuation Procedures ...............................................................................................................18

Valuation of the Property ..........................................................................................................18

The Direct Comparison Approach ..............................................................................................19

The Cost Approach ..................................................................................................................26

Reconciliation and Final Estimate of Value...................................................................................27

Assumptions and Limiting Conditions..........................................................................................28

Certification ............................................................................................................................30

PART V � ADDENDA

Photographs

Provincial Map

Town of Langham Map

Parcel Pictures

Certificate of Title


1

PART I - INTRODUCTION

EXECUTIVE SUMMARY

This executive summary is prepared as a quick reference of the pertinent facts and estimates of value for the

subject property. Readers are advised to refer to the full text of this narrative report for detailed information.

Address: 320 Park Avenue, Langham, Saskatchewan

Legal Description: Parcel J, Plan 101768047

Land Size/Shape: The subject has a frontage of 104 feet along Park Avenue and a

depth of 209 feet for a total site area of 21,736 square feet or 0.50

acres.

Style/Area: The subject property is a two-storey 25 unit motel.

Property Rights: The property rights appraised are those of the fee simple.

Building Area: 7,476 square foot motel and a 784 square foot retail-restaurant

building.

Construction Details: According to the Saskatchewan Assessment and Management

Agency, the existing retail building was constructed in 1988. It is a

wood frame building on a concrete slab foundation with metal

siding and a metal roof cover.

The new motel is a wood frame building on a concrete grade beam

foundation with concrete footings, wood floor structure, hardie

board siding exterior and asphalt roof cover.

Taxes: $1,384.98 (For existing retail building only)

Zoning: C2 - Commercial

Highest and Best Use: Commercial building

Exposure Time: The exposure and marketing time for the subject is estimated at

twelve to twenty four months.

Date of Inspection: January 7, 2011

Effective Date: January 7, 2011

Date of Report: January 19, 2011


2

EXTRAORDINARY ASSUMPTIONS, LIMITING CONDITIONS AND HYPOTHETICAL CONDITIONS:

The subject property is being appraised �As Complete�. Appraising a property �As Complete� requires a

hypothetical condition and both an extraordinary assumption and an extraordinary limiting condition.

Considering the property as if it is completed is only possible by introducing a hypothetical condition in the

analysis. A hypothetical condition is defined as an assumption that is supposed for purposes of analysis,

where it is known to vary from actual facts. It is assumed that the motel construction is complete and the hotel

is operating with stabilized occupancy as of the effective date of this report. The hypothetical condition

relevant to the �As Complete� portion of the assignment is that the building construction has been completed

as per plans and specifications provided by the client, and the hotel is operating with stabilized occupancy.

The extraordinary assumption that is made is that only good quality materials and labour will be used in the

completion of the subject property, and a condition rating of �good� is assumed upon the completion of the

motel construction. An extraordinary limiting condition is required, in that, any change to the �As Complete�

assumptions made in this report for the subject property may cause the opinion of value stated in this report to

change.

Direct Comparison Approach: $1,400,000

Income Approach: $1,445,000

Final Estimate of Value: $1,440,000 �As Complete � Assuming Stabilized Occupancy�


3

PART II � BASIS OF APPRAISAL

IDENTIFICATION OF THE PROPERTY

The subject property is located at 320 Park Avenue, Langham, Saskatchewan. Legal description of the

property as registered at Saskatchewan Land Titles (ISC) is:

Parcel J, Plan 101768047

EFFECTIVE DATE

The effective date of this report is January 7, 2011. The inspection of the subject property was conducted on

January 7, 2011. The assignment is to provide a current market value opinion of the property, as it was

viewed at the effective date.

PURPOSE, FUNCTION AND INTENDED USERS

The purpose of this report is to provide an unbiased and impartial estimate of the current market value of the

fee simple interest in the subject property, as at the effective date. The function or intended use of the report is

to provide an external review of the value of this property, to assist in securing first mortgage financing for the

subject property. Accordingly, the client and their first mortgage lender are considered the only intended

users of this document. Liability to unintended users is denied (see Assumptions and Limiting Conditions for

further particulars).

PROPERTY RIGHTS APPRAISED

The property rights considered in this appraisal are those of the fee simple owner. This proprietary interest is

defined as:

�The greatest interest that can be held in real property. It consists of the entire bundle of rights

associated with ownership of property subject to the powers of government, police, taxation,

expropriation and escheat.�

DEFINITION OF VALUE

The Appraisal Institute of Canada recognizes the following definition of market value, at section 12.16.1 of the

2007 edition of the Canadian Uniform Standards of Professional Appraisal Practice:

"The most probable price which a property should bring in a competitive and open market as of the

specified date 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."


4

This definition is expanded at 12.16.2.i as follows:

"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:

buyer and seller are typically motivated;

both parties are well informed or well advised, and acting in what they consider their best

interests;

a reasonable time is allowed for exposure in the open market;

payment is made in terms of cash in Canadian dollars or in terms of financial arrangements

comparable thereto; and

the price represents the normal consideration for the property sold unaffected by special or

creative financing or sales concessions granted by anyone associated with the sale."

In addition, for hotel properties, a Going Concern Value is present and defined as the value existing in a

proven property operation. A going concern operation is usually comprised of four components (occasionally

more or less than four) which can be identified. These are:

Land

Building

Furnishings, Fixtures, & Equipment

Goodwill

Furnishings, Fixtures, & Equipment are an integral part of an ongoing operation and are assumed to be part

of the package that would be offered for sale if the property were placed on the market. Without these items,

the market value estimated herein would be substantially less.

Goodwill is an intangible and can most often be described as an asset. Goodwill generally comprises the

advantages or disadvantages that the business has developed. It is also true, however, that the going concern

value could be lower than the market value, or a liability. Such is often the case in failing business operations

when the sum of the tangible assets is greater than the ongoing business operation. Goodwill assets are

created from effective management.

The value of a hotel incorporates productivity, management experience, and sufficiency of capital, as well as

the value of the real estate itself. It is often difficult to distinguish where the fixed asset values stop and the

goodwill values begin. It should be noted that if, for whatever reason, the business volume drops or is

discontinued, one could not expect to realize the values calculated in this report.

DEFINITION OF PROPERTY

The term property as it is referred to throughout this report, includes the physical land and buildings

affixed thereto, all furniture, fixtures, and equipment located on the site, and any value generated from

business conducted on the premises.


5

SCOPE OF WORK

INSPECTION

An external inspection of the subject property was completed on January 7, 2011, in order to view the

physical and functional state of the property. At this time the foundation was poured and the framing had

begun. Information regarding future use, building management, and building history was obtained through a

discussion with the client, unless otherwise stated.

TYPE OF ANALYSIS

The current appraisal complies with the Standards of the Appraisal Institute of Canada.

DATA RESEARCH

Information pertaining to the building assessment, the applicable land use controls, and the community in

general was provided by the local municipality and through discussion with various local residents.

Comparable sales and lease information were obtained from a variety of sources; some of which included

meetings/discussions with landlords, property managers, purchasers and vendors active in the market, local

real estate agents, Multiple Listing Services where available, land titles offices, our own files, and other

appraisers.

Other investigations included research and analysis of the local real estate market and trends. This included a

review of sales of similar properties, analysis of factors influencing current market rental values, projected

rental income and the accountability for revenues and expenses, research of prevailing capitalization rates,

plus other data that influence the estimation of market value in general.

AUDITS AND TECHNICAL INVESTIGATIONS

Unless otherwise specifically stated, technical investigations were not completed as part of this assignment,

nor were results of such studies provided, including:

detailed inspections or engineering reviews of the structure, roof or mechanical systems;

environmental reviews or studies;

a site or building survey;

a building abstract or occupancy permit;

investigation of bearing capacity of the soil;

audits of financial or legal arrangements concerning the leases;

legal advice on title related issues.

VERIFICATION OF THIRD PARTY INFORMATION

The analysis set out in this report relied upon written and verbal information obtained from a variety of

sources that are considered reliable. The information provided by these sources is assumed correct;

independent verification was conducted only where deemed appropriate and as noted in this report.


6

PART III � FACTUAL DATA

CITY/REGIONAL

SASKATCHEWAN

The Saskatchewan economy, once highly dependent on agriculture, is now enjoying buoyant times through its

new diversity. In their December 2010 monthly summary, the Economic Analysis Branch of Saskatchewan

Economic and Co-operative Development reported the following:

Employment: Saskatchewan�s unemployment rate (seasonally unadjusted) was 4.9% in

December 2010, which was up from 4.5% in November 2009. The national

unemployment rate was 7.2%, down from 8.0% in November 2009.

New Capital Investment: Capital investment in 2009 decreased by 2.8% to $14.3 billion compared with

2008. For 2010, capital investment in Saskatchewan is expected to increase

by 5.5% to a record level of $15.0 billion. This would be the third consecutive

year in which capital spending exceeded $14 billion.

International Exports: In October 2010 total international exports increased by 12.5% to $2.14

billion, up from $1.91 billion in October 2009. Saskatchewan ranked fourth in

terms of percentage change among the provinces for this period.

Manufacturing: October 2010 saw the value of manufacturing exports from Saskatchewan

increase by 5.4% to $909 million compared to $862 million in October 2009.

Mineral Production: In August 2010 potash production increased by 103.7% to 0.5 million tonnes

K20 compared to August 2009. In the first eight months of 2010, potash

production was up 129.2% and sales were up 230.2% compared to the first

eight months of 2009. Natural gas production declined by 11.9% to $576.5

million cubic metres in August 2010 compared to the same month in 2009. Oil

production decreased in the first eight months by 1.0% to 16.2 million cubic

meters.

Farm Cash Receipts: In the third quarter of 2010, total farm cash receipts in Saskatchewan increased

by 19.4% to $2.2 billion compared to the same period the previous year. In the

first nine months f 2010, farm cash receipts in Saskatchewan increased by

30.1% to $9.1 billion, compared to the same period in 2009. This percentage

increase ranked seventh among the provinces.

Retail Sales: In September 2010 retail sales in Saskatchewan increased by 2.8% to $1.27

billion compared to September 2009. Among retail outlets, motor vehicle and

parts dealers had the largest increase in retail sales in September 2010 at

$12.1 million, followed by gasoline stations at $12.0 million, grocery (except

convenience) stores at $8.5 million and new car dealers at $6.7 million,

compared to September 2009.

Building Permits: The value of building permits decreased by 17.1% to $232.6 million in

October 2010 compared to the same period in 2009, but was up by 5.1% in

the first ten months of 2010 compared to the first ten months of 2009.

Housing Starts: Urban housing starts in Saskatchewan decreased by 11% in November 2010

compared to November 2009.

The Saskatchewan Annual Population Report produced by Statistics Canada indicated a population increase

of 16,498 persons to 1,045,622 as of July 1, 2010, as compared to July 1, 2009. International migrants

made up 50% of new residents, outweighing interprovincial migrants at 21%. The provincial population now

stands at an all-time high and is experiencing one of the highest levels of growth in Canada.


7

LANGHAM

Langham is located approximately 30 kilometres north of Saskatoon on Highway 16. Due to its close

proximity to the City of Saskatoon, many of it residents commute to and from their daily workplace in the city.

Langham offers a variety of amenities to its approximately 1,200 residents, including both elementary and

high schools, a first response group, restaurants, post office and a Credit Union.

Some new residential home development has occurred within the town over the past couple of years. This

development is directly related to the boom in the Saskatoon residential market. More recently, however, the

residential market has stabilized over the past year, a trend that is expected to continue. Given its proximity to

Saskatoon, Langham residents do the bulk of their purchasing in Saskatoon. As such, the demand for

developable commercial/multi-family land in Langham is somewhat limited.

THE SITE

Location: The subject is located on the west side of Park Avenue south of Third Street

West.

Visibility of Property: Visibility is good. Exposure from Highway 16.

Dimensions: The subject has a frontage of 104 feet along Park Avenue and a depth of

209 feet for a total site area of 21,736 square feet or 0.50 acres.

Topography: Considered level with adequate drainage.

Utilities: Services to the subject include electricity, natural gas, and municipal water

and sewer.

Roadway: Paved bi-directional roadway along the front which allows on street parking.

Site Improvements: There is paved parking available in front of the hotel and retail building.

Neighbouring Uses: The subject is surrounded by residential development to the north, a park to

the east, a gas station/truck stop to the south and an RV park to the west.


8

BUILDING DESCRIPTION/EXISTING USE

This building description is compiled from a visit to the site on January 7, 2011 and a review of the building

plans on January 7, 2011:

Year Constructed: The existing retail building was constructed in 1988 according to the

Saskatchewan Assessment and Management Agency. The hotel is under

construction and will be completed early to mid 2011

Building Design: Two-storey 25-unit motel and an older one-storey take-out retail/restaurant

building on site.

Building Area: The existing retail building is 784 square feet. The motel is 3,732 square

feet on each level with a gross area of 7,464 square feet.

The combined gross building area is 8,248 square feet and the combined

total footprint is 4,516 square feet. Therefore, the site coverage ratio is

0.21.

Design Details: The subject is a limited service motel, which includes 25 guest rooms and a

small take-out restaurant. There is a small office and laundry room on the

main level.

Construction Details: The existing retail restaurant is a wood frame building on a concrete slab

foundation with metal siding and a metal roof cover.

The motel is a wood frame building on a concrete grade beam foundation

with wood floor structure over a four foot insulated crawl space. There will

be one and a half hour fire rated walls between the units. There will be

hardie board siding and an asphalt shingle roof cover.

Electrical: 100 Amp service to the retail building. The hotel is assumed to have

adequate electrical capacity.

Plumbing: There are 2 two-piece washrooms in the retail building.

Each of the hotel rooms will have a four-piece bathroom and kitchen sink.

Heating/Cooling: The existing retail building is heated via one forced air furnace with air

conditioning.

Each of the motel rooms will have individual heat pump units with air

conditioning. There will be a forced air furnace for the larger one bedroom

suite.

Floors: The existing retail building has dated vinyl tile flooring in average condition

throughout.

According to the owner, there will be engineered hardwood flooring

throughout the main level and carpet on the second level of the motel with

some type of water resilient flooring in the bathrooms.


9

Interior Walls: The existing retail building has mainly painted gyproc walls with some

wallpaper.

The motel will have painted gyproc walls throughout.

Ceilings: There is a suspended ceiling in the retail restaurant building.

It is assumed that the motel ceilings will be either textured gyproc or painted

gyproc.

Additional Comments

As of the effective date, the existing building was not operating as a restaurant and the hotel was in the

framing stage.

Guest Rooms

The subject contains 25 guest rooms. There are 12 suites on the main floor and 13 suites on the upper level.

One of the suites on the main floor is a large one-bedroom suite. There is also an office and laundry facilities

located on the main floor. Each of the suites will have either one or two double beds, a desk, flat-screen TV,

dresser, night stands, and a table. There will be a small kitchenette in 23 of the suites with a microwave and mini-

refrigerator.

According to the owner, rack guest room rates will be set at $100 per night for all suites. Some discounts

may be applied to various patrons at a rate of $89 per night.

Restaurant

As of the effective date, the take-out restaurant in the retail building was not in operation. The finishes are

dated, but in average condition. The kitchen is equipped to accommodate the take-out restaurant with all

standard kitchen equipment and fixtures in place. It is assumed all equipment is functioning adequately. Also

included is a walk-in cooler. The walk-in cooler is also assumed to be in working condition.

EXTRAORDINARY ASSUMPTIONS, LIMITING CONDITIONS AND HYPOTHETICAL CONDITIONS:

The subject property is being appraised �As Complete�. Appraising a property �As Complete� requires a

hypothetical condition and both an extraordinary assumption and an extraordinary limiting condition.

Considering the property as if it is completed is only possible by introducing a hypothetical condition in the

analysis. A hypothetical condition is defined as an assumption that is supposed for purposes of analysis,

where it is known to vary from actual facts. It is assumed that the motel construction is complete and the hotel

is operating with stabilized occupancy as of the effective date of this report. The hypothetical condition

relevant to the �As Complete� portion of the assignment is that the building construction has been completed

as per plans and specifications provided by the client, and the hotel is operating with stabilized occupancy.

The extraordinary assumption that is made is that only good quality materials and labour will be used in the

completion of the subject property, and a condition rating of �good� is assumed upon the completion of the

motel construction. An extraordinary limiting condition is required, in that, any change to the �As Complete�

assumptions made in this report for the subject property may cause the opinion of value stated in this report to

change.


10

TYPE AND CLASS OF SUBJECT PROPERTY

If the distinction of accommodation class can be defined as luxury, basic, economy upper or economy

moderate, the subject fits into the economy moderate class given its location and amenities. This is typical for

small town settings. Competition for the motel is non-existent within the town of Langham; however,

Saskatoon is only 27 kilometres away and offers numerous lodging accommodations ranging from luxury

hotels to limited service economy motels.

The subject is a limited service type motel which will cater mainly towards the local mining industry workers

from the proposed metals processing plant, truckers, and visitors to the town.

FURNISHINGS, FIXTURES, AND EQUIPMENT

For purposes of this report, it has been assumed that all furnishings, fixtures, and equipment necessary to run

the operation at a stabilized occupancy are in place and would transfer with ownership of the operation.

Confirmation that all of these items are in place is normally part of the due diligence process that would

precede purchase of the property.

Commentary throughout the description of the buildings contains some insight into the furnishings, fixtures,

and equipment that is present and the nature and quality of these items. It is assumed that all furnishings

necessary for the operation are in place. All rooms in the building are assumed to be operational, with all

fixed equipment present. The existing kitchen equipment is assumed to be functional.

A physical count of furnishings, fixtures, and equipment was not undertaken given that the building was not

fully constructed as of the effective date. This exercise is also beyond our mandate.

ENVIRONMENTAL CONCERNS

The subject property was inspected on a cursory basis on January 7, 2011, to view the physical condition of

the structure and its functional capacity. The inspection of the property did not reveal any obvious signs of

environmental problems; however, it should be acknowledged that our mandate does not specifically include

consideration of environmental concerns. Additional investigations would therefore be required to confirm

our cursory observations.

It should also be noted that the adjacent parcel to the southwest has an operating gas station and service

station on site. This building is located a reasonable distance from the subject site; however, it is assumed

that the subject property has no environmental contamination from the adjacent site associated with

underground fuel tanks.

SALES HISTORY

Generally accepted appraisal-reporting standards require the disclosure and analysis of any recent market

activity involving the subject property that is available to the appraiser in the normal course of business. This

includes any listings for sale, offers to purchase, or transfers over a minimum of the immediately preceding

three year period.


11

According to the owner, the subject property (land and existing 784 square foot retail building) transferred in

October 2010 for $120,000; however, the agreement was made back in the summer of 2008. According to

the owner, the cost to construct the motel is estimated at $1,200,000. Title to the property is currently held in

the name of Simarjit Singh under title number 139873135. A copy of the Certificate of Title is included in the

Addenda of this report for reference. There is one easement registered on tile; the holder is listed as

conversion unknown. The encumbrance registered on the title is deemed not to influence the market value of

the property. Legal consideration should be sought before dealing with title issues.

ASSESSMENT AND TAXES

Assessment for property tax purposes is mandated via an Act of the Saskatchewan Provincial Legislature

where assessments are carried out under a Manual prepared by the Saskatchewan Assessment Management

Agency. The Provincial Agency carries out the assessments in all urban and rural areas, except for the largest

cities where local assessors complete the valuations � they must, however, still follow the Manual. In 2009, a

revaluation was undertaken, updating values from the old base year (2002) to 2006. It is legislated that such

revaluations be done every four years.

The 2009 revaluation for Saskatchewan introduced a market value standard for assessments. The principles

under this system still emphasize equity among properties but permit the use of the cost, sales comparison and

income approaches where appropriate. The implementation of this new process embraces valuation

methodologies that accurately measure the economic realities of the real estate market and brings

Saskatchewan�s assessment system closer in line with the rest of the provinces.

The subject�s 2010 taxable assessment and tax levy are summarized as follows:

Total Assessment $50,200 (land and existing retail building only)

Taxes $1,384.98 (land and existing retail building only)

*Note: For taxation purposes commercial property is assessed at 100% of fair value and residential is

assessed at 70% of fair value. The new motel has not yet been assessed.

LAND USE CONTROLS

The subject property is zoned C2, Commercial, under the Zoning Bylaws of Langham. The Bylaw, which is

reasonably well-enforced, permits a range of land uses, and provides provisions for setbacks, minimum lot

frontages, and side yards. Although it was not independently verified, the subject appears to be in

conformance with the Bylaw from a land use perspective. It has been assumed that the subject is also in

conformance with any other jurisdictional requirements including Fire Code, Building Code, Health

Department Regulations and similar bodies that each influence land and/or building use.

The write up for the Zoning Bylaw was not at available at the time of this report. For full particulars, the

Zoning Bylaw itself should be consulted.


12

PART IV � ANALYSIS AND CONCLUSIONS

HIGHEST AND BEST USE

The concept of Highest and Best Use underlies the entire valuation process. It is based on the concept that a

finite supply of product demands that land uses be optimised, whenever demand conditions warrant. Highest

and Best Use is defined in Basics of Real Estate Appraising, 4th Edition, Copyright Appraisal Institute of

Canada (1995), on p. 95 as:

�That use which is likely to produce the greatest net return over a period of time. Net return may be

monetary as with income-producing property or may, in the case of a single family dwelling, take the

form of amenities such as pride of ownership, comfort or convenience.�

Highest and Best Use of a site at any given time evokes several principles of valuation, including the Principle

of Consistent Use, Contribution, Change, Balance, and Conformity. Considerations in estimating Highest and

Best Use include that:

the use must be legal;

the use must be within the realm of probability, that is, it must be likely, not speculative or

conjectural;

there must be demand for such use;

the use must be profitable;

the use must be such as to provide to the land the highest net return;

the use must be such as to deliver the return for the longest time.

Generally accepted appraisal reporting standards also require consideration of the Highest and Best Use on

an �as-if-vacant basis.� If the subject site is free of structural improvement, surrounding development suggests

that some form of commercial development would be its most probable use. The subject fits these criteria,

although it must be recognized that a wide range of other possible uses would also be considered

appropriate for this location.

The test of whether a site is improved to its �Highest and Best Use� is often limited to whether the building

contributes to the overall property value. If land value for redevelopment purposes exceeds the value of the

improved property, then there is economic justification for demolishing the structure to permit redevelopment

of the site.

As concluded in the valuation section of this report, and through a cursory review of land values in this area,

this is clearly not the case with the subject, as the building �As Complete� contributes significantly to the

overall property value. The building has a substantial remaining economic life given that it is new and

provides amenities that are in demand, and is complimentary to surrounding development. It is, therefore,

concluded that the Highest and Best Use of the subject site, as at the date of appraisal, is for a continuation of

its existing use as a motel operation.


13

COMPETITIVE ANALYSIS

The subject property has been described as a low end economy motel, with its source of income primarily to

be generated from the rooms. However, additional revenue is generated from the take-out restaurant. The

charts below give a summary of other comparable rental options for retail/restaurant space, and then for

hotel/motel suites. Given the limited information available, information from other small town centers was

researched and included below.

RESTAURANT SPACE

The current owner of the subject property is planning to run the take-out restaurant as part of the motel operation.

He notes that an offer was made to lease this space separately from a private individual at $1,800 per month.

This offer was turned down as the owner intends to occupy this space.

In order to determine a market lease rate for the subject, a review of other current lease rates for restaurant space

were reviewed. Below is a summary of leased restaurant space throughout Saskatchewan.

Indicator Rental Rate

Area

(sq. ft.)

Occupancy

Costs

Comparability

1 $1,600 per month or

$6.86 psf net 2,800 SF Paid by Tenant

Moderately superior location. Thriving

community. Newer building. Signed in 2008.


$6.17 psf net 4,500 SF +/- Paid by Tenant

Comparable location.

Restaurant space in a hotel.



Superior location in Warman. Small space.

Restaurant tenant in strip mall. Recent lease.



Superior location in Kindersley. Single-storey

building. Constructed in 1958/1964. Lease

negotiated in 2006.

5

$1,500 per month or

$6.57 psf

(semi-gross)

2,738 SF +/- Shared

Located in inferior location. New one year lease

signed in June 2010. Estimated net effective

rate is $4.82 psf or $1,100 per month.

Considering most restaurant spaces in smaller communities are owner-occupied, there are few leases available

for comparative purposes. However, the above leases are all restaurant spaces (with the exception of Indicator

4) in smaller communities and bracket the size of the subject�s restaurant space. Indicator 1 is located in a

thriving community near a lake resort. Indicator 2 is located in a comparable location and is similar to the

subject given that it is a restaurant within a hotel. Indicator 3 is located in a larger community with more

commercial demand. It is located in a strip mall building. Indicator 4 is located in a larger center with a

stronger economy and is a regular retail building; however, it is a dated lease. Indicator 5 has an inferior

location; however, it is also a restaurant located within a small town hotel and is a new lease.


14

Overall, Indicator 1 is considered to be the most comparable to the subject. Indicator 5 is also considered a

good comparable as it is new and located within a hotel. As such, the concluded market lease rate for the

subject space is roughly $1,500 per month on a net basis. This is slightly lower than the offer of $1,800 per

month; however, details of this verbal offer are unknown including whether it was a net, semi-gross or gross rate.

A rate of $1,500 per month appears to fall in line with market and is concluded as reasonable for the subject

space.

Given that the restaurant is not yet in operation and the net income from the business is difficult to estimate, the

value of this building, under the income approach section, is included as land and building value only, not

business income.

ROOM RATES

Typically, directly competitive facilities must be judged considering three basic factors: location; style and

quality; and services offered. The competitive market in Langham is limited given that there is only one bed

and breakfast facility located in the town which is not considered comparable to the subject.

The motel operating is new and therefore, there is no financial information available to determine an

appropriate average daily rental rate for the subject. The rack rates as indicated by the client will be $100

per month with some discounts being offered at $89 per night.

HOTEL GUEST SUITES

Hotel/Motel Rate Comments

Adobe Inn, Martensville $86.90 + tax (Single Room)

$97.90 + tax (Double Room)

Hotel, restaurant/lounge, meeting and

convention space, complimentary

breakfast available. Nice modern rooms.

Warman Hotel, Warman

$75 + tax (Standard)

$95 + tax (Jacuzzi Suite)

$60 + tax (Nightly rate/week)

$45 + tax (Nightly rate/month)

Older hotel with beverage room.

Clavet Motor Inn, Clavet

$55 + tax (Single Room)

$60-$80 + tax (Double Room)

$350 + tax (Single Room/week)

$450 + tax (Double Room/week)

Small motel in similar location.

Saskatoon Thrift Lodge,

Saskatoon

$109.95 + tax (Standard)

$109.95 + tax

(Two Room Junior Suite)

$139.95 + tax

(Two Room Family Suite)

Motel style, renovated rooms, superior

location.

Confederation Inn, Saskatoon $85 + tax (Single Room)

$90 + tax (Double Room)

Older hotel, restaurant, pool, meeting

rooms, superior location in Saskatoon.

Heritage Inn, Saskatoon

$115-$155 + tax (Single Room)

$145-$260 + tax

(Double Room)

Large hotel, restaurant, pool,

meeting/banquet rooms, superior location

in Saskatoon.

Comfort Inn, Saskatoon $128-$163 + tax (Single Room) Larger hotel, continental breakfast,

superior location in Saskatoon.


15

Considering the alternative accommodations in similar communities and some within the City of Saskatoon,

the subject�s projected rack rate appears to be reasonable. Given the new condition of the motel with small

kitchenettes and the take-out restaurant on site, it is reasonable that the subject would have rack rates at or

slightly below the first indicator and that the comparables located within Saskatoon would have higher rates.

Overall, as noted above, the subject�s guest room rental rates appear to be in line with market rates.

However, the average daily rate needs to be estimated as this is the true rate that is reflective of the average

room revenue per occupied room at any given time. Given that there is no historical data available to

determine the ADR, it must be estimated. The owner notes that there will likely be some discounts applied to

certain groups and also a weekly or monthly rate may be offered. These things will result in a difference

between the average daily room rate and the rack rate. Overall, considering the subject rooms including the

larger one bedroom suite, an average daily room rate of $75 per night is concluded for the subject property.

OCCUPANCY RATES

As the subject operation is new, there are no historical occupancy rates to report. The Saskatchewan Hotel

and Hospitality Association indicates that average occupancy for Saskatoon in 2009 was 75.4% up slightly

from 2008 at 72.6%. A review of hotels which participate in a Saskatoon hotel survey show that average

occupancy rates in Saskatoon range from a low of 40% to a high of 92%. Older hotel operations in small

towns typically have lower occupancy rates closer to 35%. The hotels in the subject�s immediate area trend

towards the middle of the range. Considering that the subject property will offer a newly constructed hotel in

a smaller community, and the proposed metal processing plan which is anticipated bring business to the

subject motel operation, an overall occupancy rate slightly below the 2009 average is concluded at 68%.

INCOME AND EXPENSE ANALYSIS

Estimates of Income and Expenses are fundamental to the valuation process, since income production has

been referred to as the primary motivation for purchase and ownership of this type of asset. It forms an

important component of the market value estimates developed herein.

In order to formulate a stabilized operating statement for the subject motel, a detailed discussion with the

developer was held along with research into comparable hotel operations. The performance of other similar

local hotel/motel operations was utilized as the main basis for the subject�s stabilized operating statement as

the subject is of new construction and the developer has no forecasted operating statements.

On the following page, the stabilized operating statement is presented. Commentary on the following pages

describes the items and calculations in the statement.

These figures were compiled on the basis of the overall operation. It should be noted that these statements do

not include amortization, income taxes or interest on long term debt; these expenses are not considered

relevant to the valuation of the property as they are dependant on ownership and financing arrangements

rather than the actual operations of the business. A summary of these results is presented within the following

pages.


16

320 Park Avenue, Langham

Motel Projected Statement of Operations

Stabilized

Revenue

Room Rentals $465,375

Restaurant Lease $21,920

Total Revenue $487,295

Expenses

Payroll Expenses

Wages - Front Desk $48,730

Wages - Housekeeping $38,984

Wages - Maintenance $12,182

Wages - Management $48,730

Total Payroll $148,626

Operating Expenses

Cleaning and Laundry $12,182

Office Supplies $4,873

Cable/Phone/Internet $21,928

Professional Fees $3,655

Bank Fees $3,655

Advertising and Promotion $12,182

Misc. Operating Expenses $7,309

Utilities $24,365

Repairs & Maintenance $7,309

Insurance $6,091

Taxes $19,492

Total Operating Expenses $123,041

Reserve Allowance $24,000

Total Operating Expenses $295,667

Net Income $191,628

REVENUE

The revenue for the operation is expected to be generated from two sources: room rentals and the rental

income generated from the retail restaurant building.

As concluded previously, room revenues are based on an average room rate of $75 per night and an

average occupancy rate of 68%. The restaurant lease is �grossed-up� to include the occupancy costs given

that the full expenses are deducted from the total revenue. The occupancy costs are estimated at $5.00 per

square foot for the restaurant space.


17

OPERATING EXPENSES

The estimated expenses of the operation are based on historic levels of various limited service hotels and

motels, the client�s business plan, and conversations with local residents. The expenses of note are explained

below.

Depreciation, interest on income tax, and interest on loans are not operational expenses and have not

been included in the stabilized estimate of net income.

The payroll expense covers the salaries of the front desk employees, housekeepers, part-time

maintenance staff, and management. Wages have been stabilized based upon similar type operations

in Saskatoon and throughout the province.

An expense item for cleaning and laundry supplies was added and projected at 2.50% of revenues.

Professional fees are mainly accountant and legal fees.

Other occupancy expense relate to utilities for the building, maintenance, insurance and advertising,

which have all been stabilized examining normal expense ratios for similar operations.

The operating bank charges are expenses directly associated with the operation, not financing.

Property taxes are estimated based upon other comparable properties and our own local assessment

knowledge. The estimate used could be higher or lower depending on SAMA�s (Saskatchewan

Assessment and Management Agency) treatment of new hotel operations. The client is unaware as to if

they will be seeking a tax abatement.

Repair and maintenance is based on approximately 1.50% of revenue.

A reserve allowance is included in the stabilized operating statement. The expense will not be incurred

on a yearly basis, but the fund will allow for larger expenses when necessary, such as the replacement

of furniture, fixtures, and equipment. This has been stabilized at $1,000 per room per annum.

Overall, the expenses are stabilized at 60.67% of the gross revenue. This ratio is consistent with the sales

comparables presented in this report, as well as the financials of a variety of limited service hotel operations.

NET INCOME

Net Income is the difference between the revenues and operating expenses. In other small town hotel

operations, the net income typically represents 5% to 50% of the revenue. In this operation, the net income is

stabilized around 39.33% of the gross revenue which falls in line with the noted range.

VALUATION METHODOLOGY

The following commentary outlines the general procedures employed in the valuation of the subject property,

in view of the purpose and function of this study. It is meant to serve as an overview of the appraisal

methodology.


18

VALUATION PROCEDURES

The property valued herein is to be an operating commercial hotel. The hotel market comprises of two distinct

types of ownership; as an owner-operator or as an investor. The owner-operator segment of the market often

involves smaller properties and mid-sized hotel operations in smaller communities. Larger properties owned

by investors often have day-to-day operations handled by a professional general manager or through a

management contract with a hotel chain. In either case, this type of asset is owned solely for its revenue

producing capacity. Therefore, the market value of this type of asset is most often determined as a function of

the net earnings, which it is capable of producing. This is referred to as the Income Approach to valuation,

which will be the focus in this analysis.

While the study will focus on the income features of the property, it is also possible to evaluate the property

with other methodologies. In hotel valuation, it is common to develop estimates of value based on an analysis

of the total sales of the subject property, compared to total sales of other hotels with similar characteristics that

have transacted in the market. This analysis is known as the gross revenue multiplier. It is also possible to

compare the subject operation to hotel sales transactions based on a selling price per suite. These types of

methodologies are conducted in what is referred to as the Direct Comparison Approach to valuation. This

approach will also be used in the evaluation of the subject property; however, it will serve mainly as a cross-

check to the value estimated in the income approach.

Following the application of these valuation methods, a correlation is made of all factors and circumstances

that come to bear on the market value of the property.

VALUATION OF THE PROPERTY

This section of the report presents the valuation procedures used in arriving at the estimated market value of

the subject property. The analytical process leading up to this point has entailed primarily an internal

diagnosis of the subject property. The study undertaken for purposes of this report includes an investigation

external in character, an analysis of the market itself. This involves consideration of rates of return, that apply

to similar investments, through the analysis of sales data related to other similar properties, all of which occur

within the framework of the current market.


19

THE DIRECT COMPARISON APPROACH

In this approach, an analysis of sales of other hotel operations located in remote communities is undertaken

based on a common unit of comparison. Market transactions are compared to the subject, adjusted for

differences, and rationalized into an estimate of value. The analysis, most importantly, calls for comparison

of like-to-like, and can be reliable as a test of value if enough sales of similar properties can be found for

comparative purposes.

Application of this approach to valuation is founded upon the Principle of Substitution:

One will not pay more for a given property than the cost of acquiring an equally acceptable

substitute property, provided that the substitution can be made without undue delay.

Considering the hotel as a complete integrated entity, this method does not separate the value of the fixed

assets of real estate (including site improvements) from furniture, fixtures and equipment and/or management.

The underlying theory is that a hotel, like any other commercial property, was designed to produce income.

In order for it to do so it requires a certain amount of managerial talent. Although the replacement value of

land, improvements, furniture, fixtures, and equipment is an important component in the investment decision, it

is not the prime criteria. Hotels are always bought and sold on a �going concern basis.� To this end, the

better the management of a particular hotel property the greater is its market value.

This method provides an estimate of the value of the hotel by comparing it as a whole single operating entity

with similar hotels that have recently been sold or are currently offered for sale. Comparison is normally

made on the basis of the number of rooms, amenities, distribution of income between rooms, beverages and

food, the age and condition of the building, the type and potential of the community, and the competitive

factors either present or foreseeable in the future. Principally this method uses a gross revenue multiplier or

selling price per rental room comparison. This is to say that the prime criteria for the value of the hotel is

what it has sold for in the past, present volumes, what it can sell in the future and its overall profitability.

The gross revenue multiplier is considered an appropriate unit of comparison to be used in valuing this type of

property. Hotels are often bought and sold primarily for their ability to generate a profit from the sale of

rooms and other enterprises within the operation (leased areas, confectionery and telephone sales, etc.);

accordingly, a lower priority is given to true real estate value. This method of comparison is preferred over

other approaches, as there is no need to adjust for differences in such items as building types, age, size, or

amenities. All of these differences are reflected in the income the property generates.

The difficulty with using only total sales indicators for an indication of value (although this is the generally

accepted benchmark as earlier detailed) is that source of income and expenses vary from one hotel or motel

to another. This results in a wide discrepancy in profitability. Further to this, a total sales indicator does not

take into consideration the age and condition of the building, obsolescence thereof, and whether or not it is

necessary to employ the use of inducements to attract business. It does not take into consideration the type

and size of the community, economic support or competitive factors.

The selling price per unit is another unit of comparison often used in valuing this type of property. Generally,

when comparing commercial properties, differences in value can be based on location, age/condition,

building design, and site coverage. All of these differences are reflected in the income the property

generates.


20

The weaknesses of this approach are that this unit of comparison does not recognize differences in operating

expenses or differences in interest rates or terms of sale. Operating expenses can be significantly different

depending on the nature of the comparables; interest rates or terms of sale can also vary significantly. For the

purpose of comparison it is assumed that a prudent buyer would factor these considerations into the resultant

value. Other factors that attribute value, but do not affect clientele patronage, need to be reviewed when

striking a price per unit figure. For the purpose of comparison it is assumed that a prudent buyer would factor

these considerations into the resultant multiplier.

The sales presented in the following grid represent a variety of hotel sales throughout Saskatchewan and

Alberta that are known of, or for which information was available.


21

INDICATORS OF VALUE

# Indicator Units Built

Sale

Date

Sale

Price

Price per

Unit

GRM

Overall Cap.

Rate

1

Full Service

Hotel,

Best Western

Inn

Saskatoon, SK

91 1976 02/08 $15,000,000 $164,835 N/A 10.50%

2

Full Service

Hotel,

Best Western

Marquis Inn,

Prince Albert,

SK

77 N/A 03/08 $6,650,000 $86,364 N/A 11.00%

3

Full Service

Hotel,

Prince Albert

Inn,

Prince Albert,

SK

109 N/A 03/08 $5,250,000 $48,165 N/A 11.00%

4

Limited Service

Motel, Last

Mountain Inn,

Watrous, SK

18

1978

/

1997

12/09 $650,000 $36,111 2.61 16.77%

5

Limited Service

Motel,

Travelodge,

Moose Jaw,

SK

28 1963 09/10 $1,460,000 $52,143 3.04 13.25%

6

Limited Service

Motel

Super 8,

Swift Current,

SK

63 1998 01/10 $6,500,000 $103,175 3.56 13.21%

7

Limited Service

Hotel,

Days Inn,

Lethbridge, AB

87 1990 04/09 $5,300,000 $60,920 2.98 13.51%

8

Limited Service

Hotel,

Foam Lake, SK

N/A 18 N/A 06/10 $710,000 $39,444 2.45 13.98%

9

Limited Service

Hotel,

Perfect Inns &

Suites Hotel,

Estevan, SK

70 2001 05/09 $7,400,000 $105,714 3.99 12.19%

10

Limited Service

Motel,

Westgate Inn,

Saskatoon, SK

42 1965 09/08 $2,550,000 $60,714 3.41 11.66%


22

The above grid illustrates sales/listings of ten hotel/lodging properties that have occurred in various

communities throughout Saskatchewan and Alberta over the past couple years. Given the lack of sales data,

as well as, the motel style of the subject, some sales from larger centers are also analyzed. As is readily

apparent, there is a wide range in values of the units of comparison. The selling price per rental unit varies

from $39,444 to $164,835.

Indicators 1 through 3 are sales of full service hotel operations, while Indicators 4 though 10 are sales of limited

service hotel/motel operations. The sale at the upper end of the range (Indicator 1) is set by the sale of the Best

Western Inn in Saskatoon. This property is considered to be superior to the subject as it is located in a larger

center and offers full services including a restaurant, lounge and pool.

Indicators 2 and 3 are both located in Prince Albert, which is also considered to be a superior market compared

to Langham. Indicator 2 is a branded hotel which offers complimentary breakfast, a fitness center, on-site

restaurant, room service and high speed internet. This hotel is considered superior to the subject. Indicator 3

has a superior location, also in Prince Albert. It has a skywalk to the Northern Lights casino, fitness center,

restaurant/lounge, pool and hot tub, and meeting space. Overall, it is considered superior to the subject;

however, its sale price per room appears low and it is an outlier compared to other mid-size city sales given its

quality and amenities.

Indicator 4 has a moderately comparable location within the town of Watrous. This property is an 18 room

motel and is located along Highway 2. It is an older building; however, the rooms have been well maintained.

This motel caters mainly to work crews and business travelers. There is no restaurant on site. Overall, this

indicator is considered inferior to the subject given its age, location and amenities.

Indicator 5 is the sale of a similar style motel located in Moose Jaw. This property is significantly older and

inferior in terms of condition and amenities. Its location, however, is superior given that the Moose Jaw economy

is stronger and has more demand for hospitality and lodging facilities. Given its condition and age, it is

considered inferior to the subject.

Indicator 6 is a limited service hotel located in Swift Current which is also considered to be superior to Langham.

The location is right off of Highway 1. The hotel features a pool and hot tub, free continental breakfast and high

speed internet, a fitness facility and meeting space. Overall, this hotel is considered superior to the subject based

on its location and amenities.

Indicator 7 is the sale of a hotel located in Lethbridge, Alberta. This property is also considered superior to the

subject as it is in a larger center and offers more amenities. These amenities include complimentary breakfast,

high-speed internet, meeting room, and restaurant. The sale occurred in mid 2009. During this time, the global

economic downturn had a significant impact on the hotel market and in turn, their selling prices.

Indicator 8 is located in Foam Lake on a busy intersection at Highway 16 and Junction 310. This intersection

is between Saskatoon and Yorkton. This establishment is a motel operation only, with a separate living

quarters containing a fully developed basement. This property was in very good condition at its time of sale

and had numerous upgrades including a newer boiler, steel roof and black topped lot. This property is

considered inferior based on its location and age.

Indicator 9 also sold in mid 2009; however, it is located in Estevan which has seen strong market increases over

the past couple of years due to the exploration and production of oil and gas in the area. Indicator 9 is a newer

hotel constructed in 2001. It offers continental breakfast and mini-refrigerators in each room. Given the location

and amenities, this property is considered superior.


23

Indicator 10 is the sale of a limited service motel in Saskatoon. The style is similar; however, the location with a

larger center is considered superior. It offers free continental breakfast and internet. Although the location within

the city itself is inferior, due to being located in a larger center, this property is considered superior.

Many factors are considered when concluding an appropriate price per room for the subject. It is located in a

small village which has limited demand for lodging facilities given that it is within close proximity to Saskatoon;

however, the proposed metals processing plant which is to be located just outside of Langham would bring

some business to the motel operation. There is also a truck stop located adjacent to the property and it has

exposure from Highway 16. The subject rooms offer a small kitchenette in most suites and there will be a take-

out restaurant located on site. The condition of the subject is considered good given that it is new construction.

Overall, the subject is most similar to Indicators 4 and 8 in terms of location; however, both of these properties

are considerably older and inferior in terms of condition. In terms of style, the subject is most similar to Indicators

4, 5, 8 and 10. Indicators 5 and 10 are both located in larger centers than the subject; however, they are

inferior in terms of age and condition. Consideration is given to the condition of the hotel and the fact that there

is a take-out restaurant on site which also generates income for the property. Therefore, a price per room slightly

above Indicator 5 is concluded at $56,000.

Price per Room x Number of Rooms = Value

$56,000 x 25 rooms = $1,400,000

Rounded = $1,400,000

The Gross Revenue Multiplier method is deemed relevant as a cross-check given that motels/hotels are often

bought and sold primarily for their ability to generate a profit from the sale of, rooms and food; accordingly,

a lower priority is given to true real estate value. The total sales multipliers in most circumstances give a good

indication of market value. This is also a commonly referred to ratio when talking to buyers and sellers.

Notwithstanding, the preference for the income-based analysis, some guidance can be gleaned from the

Gross Revenue Multiplier. Restricting the analysis to this unit of comparison is perhaps more rightfully

considered an application of the income approach theory. The most important point for consideration in

applying the Gross Revenue Multiplier analysis is the sales mix included in the subject�s Gross Income. Many

of the comparables noted above have been chosen due to their sales mix being similar to the subject. This

meaning the sales provided had most emphasis on room revenue with some ancillary income provided by on

site restaurants and lounges.

In this regard, all of the indicators are similar, with some degree of variance. The Gross Revenue Multipliers

for the comparable sales with income information available range between 2.45 and 3.99, with a mean of

3.15. As discussed above, Indicators 4, 5, 8 and 10 are given the most weight.

At the value estimated by applying a price of $56,000 per room, an overall value of $1,400,000 is

concluded. At this value, the subject�s gross revenue multiplier is 2.87 ($1,400,000 /$487,295). The

subject gross revenue multiplier falls at the lower end of the range. Given the location, quality/amenities and

earning capabilities of the subject property, the value by the Direct Comparison Approach is considered to be

reasonable.

VALUE INDICATED BY THE DIRECT COMPARISON APPROACH

$1,400,000


24

THE INCOME APPROACH

The estimates of income and expenses play a big role in the application of the Income Approach. Such

previous analysis focused on a reasonable forecast of net income. This estimate of net income is then

converted to an expression of value through a Direct Capitalization technique. The type of "net earnings"

used in the appraisal process is the net operating income produced by the property. The net operating

income of a property represents the residual amount of income after deducting expenditures which are

directly associated with, or are incidental to, the production of income for the going concern operation.

The income capitalization approach is based on the principle that the value of a property is indicated by its

net return as a going concern, which tends to be defined as the present worth of future benefits. The future

benefits of an income-producing property such as a hotel or motel consist of not only its net income before

debt service and depreciation, but also accounts for the eventual sale of the property.

There are several methods upon which an overall capitalization rate can be calculated. The method chosen

for the purposes of this report is an analysis of the capitalization rates indicated by the sales presented in the

Direct Comparison Approach in the following section.

The hotel/motel sales are buildings that have transacted in a variety of communities throughout Saskatchewan

and Alberta. An overall capitalization rate is derived from the analysis of market sales. A review of the

hotel/motel sales under the Direct Comparison Approach show a range in capitalization rates between

10.50% and 16.77% with a mean of 12.71%. Indicator 1 represents the lowest capitalization rate. The sale

is slightly dated, but is a full service hotel located in Saskatoon. The amenities offered, location and therefore,

income potential of this property are superior to the subject which all contribute to its lower capitalization

rate. Indicators 2, 3, and 10 are also on the low end of the range. All of these sales are located within

larger centers such as Saskatoon and Prince Albert. Indicators 4 and 8 have the highest capitalization rates.

The locations are considered comparable; however, the buildings are older and in inferior condition.

Capitalization rates have trended upwards in the past couple of years, which is reflective of the market

uncertainty and associated risk due to the global recession and tightening of credit. Although the market is

starting to become more stable, investors are still careful of investment decisions, especially as interest rates

are now rising.

Overall, all factors considered, Langham has been experiencing some economic growth as a satellite

community of Saskatoon. If the proposed metal processing plant is constructed, the community will

experience even more growth. Fortune Minerals indicates that they expect to obtain permits for the

construction mid to late this year. Given that a lot of hotel/motel sales within larger centers are included in

the analysis above, the mean is slightly skewed. Typically properties in smaller centers will have higher

capitalization rates which are represented by Indicators 4 and 8. Although the subject is located in a smaller

center, it is a new building with potential to generate income from industry workers, truck drivers and local

visitors. Therefore, a capitalization rate slightly above the mean is concluded at 13.25%


25

CAPITALIZATION OF INCOME

In the final analysis, consideration is given to the current economic conditions and the quality/amenities of the

subject operation. Given that the subject is a new building in a small center, a capitalization rate slightly

above the mean is justified. Considering that there is an optimistic outlook for the Langham area with the

potential opening of a metal processing plant, a rate of 13.25% is used to convert the stabilized net operating

income of the subject operation to an expression of value.

Net Operating Income ÷ Capitalization Rate = Value

Net Operating Income $191,628

Capitalization Rate 13.25%

Value $1,446,249

VALUE INDICATED BY THE INCOME APPROACH (rounded)

$1,445,000


26

THE COST APPROACH

The third approach that can be used to provide an estimate of value is the Cost Approach. It is based on the

principle of substitution, which affirms that where a property is replaceable; its value tends to be set by the cost of

acquiring an equally desirable substitute property, assuming that no unreasonable time delay is involved. The

reference to acquisition also considers the actual cost of construction. The value of the property is derived by

adding the estimated value of the land to the estimated cost of reproduction new of the improvements, after

appropriate deductions for depreciation.

This approach is pertinent for new construction and often used as a cross-check to either the Direct

Comparison or Income Approaches to value. The premise that the value of the individual components can

simply be added together in an estimate of market value is a major weakness. It is difficult to assign to any

single component the measure of its contribution to the composite productivity of the whole property.

The Cost Approach is often used in estimating the market value of unique or special-purpose properties. It may

be the sole approach to value when sales information is unavailable or scarce.

The Cost Approach is seldom used to value existing properties, as building and other improvements age and

depreciate the resultant loss in value becomes difficult to quantify. This approach loses its reliability the older

the improvements are, because of the magnitude of the depreciation estimate, and the assumptions required

in estimating the cost of reproduction new.

When considering the value by the Cost Approach, it is recognized that cost and value are not synonymous.

Value is the relationship between a commodity and the desire for purchase. Value may be higher or lower

than the cost depending on demand conditions. The cost to produce an item and what that item will sell for

on the open market are two very separate concepts.

The Cost Approach tends to be unrealistic and subjective in nature, as buyers in the marketplace infrequently

use it. The Cost Approach is, therefore, not presented in this report; it being concluded that it would not add

to the validity or credibility of the appraisal result.


27

RECONCILIATION AND FINAL ESTIMATE OF VALUE

Direct Comparison Approach $1,400,000

Income Approach $1,445,000

The value by the Direct Comparison Approach is usually considered reliable. It is significant as it directly

reflects the actions of real estate investors and owner-operators. This value estimate was based on the

analysis of six indicators. The properties are a combination of limited and full service hotel operations

located in various communities throughout Saskatchewan. This approach is undertaken based on the Gross

Revenue Multiplier. This is considered as a reliable test of value, as it mirrors one of the approaches investors

use in assessing hotel properties.

The final estimate of value is considered to be $1,440,000. This estimate places most weight on the Direct

Comparison approach to value. Typically, operations such as the subject located in smaller centers are

purchased for an owner-occupied use as a family operated business. As such, the Direct Comparison

Approach is deemed most reasonable. This lower end value is also considered appropriate given the

volatility still associated with the local mill in Hudson Bay which has a strong impact on the local economy, as

well as the higher vacancy rates for the subject�s leasable areas. Two of the smaller leasable areas have

been empty for a long period of time, while the restaurant space in currently only subject to a one year lease,

which offers additional risk for the main leasable area. Considering this, more weight on a lower end value is

justified. The Cost Approach has not been developed as part of this valuation; the judgement being made that it

would not contribute to the validity of the result.

In accordance with generally accepted appraisal reporting standards a comment is required on the probable

exposure time in order to achieve a sale at the reported market value. This comment is intended to set the

context within which the market value conclusion is rendered. Normal exposure time for non-residential real

estate is considered to be 6 to 9 months. For the subject property, an exposure time of twelve to twenty four

months could be anticipated. This is not a direct function of the value estimate but rather suggests that a

longer exposure time is required to affect the sale of this type of property in this market. The due diligence

process for hotel properties typically takes longer than other types of commercial property.

In conclusion, keeping in mind at all times an unbiased and impartial point of view, the going concern market

value of the subject property located at 320 Park Avenue, Langham, Saskatchewan, as of January 7, 2011,

is:



$1,440,000

On behalf of,

SUNCORP VALUATIONS

Jana Okrainetz, B.Comm., AACI, P.App


28

ASSUMPTIONS AND LIMITING CONDITIONS

This report has been prepared at the request of Mr. Simarjit Singh, for the purpose of providing an estimate of

the market value of the fee simple interest of the property located at 320 Park Avenue, Langham,

Saskatchewan. Intended use of the report is for securing first mortgage financing. Accordingly, the client and

their first mortgage lender are considered the only intended users of this document. Liability to unintended

users or for unintended uses of this report is expressly denied.

Possession of this report, or a copy thereof, does not carry with it the right to reproduction or publication in

any manner, in whole or in part, nor may it be disclosed, in whole or in part, without the prior written consent

and approval of the author as to the purpose, form, and content of any such disclosure.

This assignment is subject to an extraordinary assumption and hypothetical condition. The subject property is

being appraised on an "As Complete" basis based upon the plans and specifications provided by the client.

Good quality materials and workmanship are assumed in the construction, meeting, or exceeding current

building code. Any change to the proposed plans as outlined by the client, may cause the opinion of value

stated in this report to change. The hypothetical condition relevant to this assignment is that the motel building

is new as per the plans and specifications as supplied by the client.

The estimate of value contained in this report is founded upon a thorough and diligent examination and

analysis of information gathered and obtained from numerous sources. Some information has been accepted

at face value, especially if there was no reason to doubt its accuracy. Other data required interpretation and

analysis pursuant to the objectives of this appraisal. Certain inquiries were outside the scope of this mandate.

For these reasons, the analyses, opinions, and conclusions contained in this report are subject to the following

assumptions and limiting conditions:

No responsibility is assumed for legal matters, questions of survey, opinions of title, hidden or

unapparent conditions of the property, soil or sub-soil conditions, engineering or other technical

matters that might render this property more or less valuable than as stated herein. If it came to our

attention as the result of our investigation and analysis, that certain problems may exist, a cautionary

comment is noted in the report.

The appraiser is not qualified to comment on environmental issues that may affect the market value of

the property appraised, including but not limited to pollution or contamination of land, buildings,

water, groundwater or air. Unless expressly stated, the property is assumed to be free and clear of

pollutants and contaminants, including but not limited to moulds or mildews or the conditions that

might give rise to either, and in compliance with all regulatory environmental requirements,

government or otherwise, and free of any environmental condition, past, present or future, that might

affect the market value of the property appraised. If the party relying on this report requires

information about environmental issues, then that party is cautioned to retain an expert qualified in

such issues. We expressly deny any legal liability relating to the effect of environmental issues on the

market value of the property appraised.

No investigation of environmental and/or historical use of the property was undertaken. This limited

scope of investigations did not provide an opportunity to thoroughly investigate such matters. Only

those problems that came to our attention during a brief visit of the site are commented upon in the

body of this report.


29

The legal description of the property and the area of the site were obtained from the compiled maps

of the municipality or from land titles. Further, the plans and sketches contained in this report are

included solely to aid the recipient in visualising the location of the property, the configuration and

boundaries of the site and the relative position of the improvements on the said lands.

It is assumed that the real estate is free and clear of all value influencing encumbrances,

encroachments, restrictions, or covenants, except as may be noted in this report and except those that

may be in progress but have not come to our attention.

It is assumed that the real estate complies in all material respects with any restrictive covenants

affecting the site, and that any improvements have been built and are occupied and operated in full

compliance with all requirements of law.

Investigations have been undertaken respecting matters that regulate the use of land. However, no

inquiries have been placed with the fire department, the building inspector, the health department, or

any other government regulatory agency, unless such investigations are expressly represented to have

been made in this report.

The data and statistical information contained herein were gathered from reliable sources and are

believed to be correct. The data is not guaranteed, although reasonable attempts have been made to

verify the accuracy of this information.

The appraiser assumes no responsibility for any loans made on the appraisal property where the

borrower lacks the ability or motivation to repay the loan, or where a lender has not followed prudent

lending practices. The appraisal assignment is completed on the basis of a lender completing a

thorough due diligence investigation that reasonably concludes that the applicant/borrower has the

capacity and intention to repay the loan. This appraisal report must not be viewed as the sole

comfort for any loan extended on the appraisal property. The report is only a part of a process

employed by a prudent lender directed at protecting the source of the mortgage funds.

The appraiser assumes no responsibility for any alternate use of the report other than that use outlined

in the purpose and function of this report. This includes but it is not limited to use of the report for the

purposes of insurance replacement values; which, the values outlined in this report are not reflective

of.

All copyright is reserved to the author.

Should the author of this report be required to give testimony or appear in court or at any administrative

proceeding relating to this appraisal, prior arrangements shall be made, therefore, including provisions for

additional compensation to permit adequate time for preparation and for any appearances which may be

required.

Because market conditions, including economic, social and political factors, change rapidly, and on occasion

without notice or warning the estimate of market value expressed herein cannot necessarily be relied upon as

of any date other than the effective date without subsequent advice of the author.

This report is only valid if it bears the original signature of the author.

These Assumptions and Limiting Conditions shall be read with all changes in number and gender as may be

appropriate or required by the context or by the particulars of this mandate.


30

CERTIFICATION

A personal inspection of the subject property was conducted on January 7, 2011, by Jana Okrainetz,

B.Comm., AACI, P.App. Data collection and report preparation was completed by Jana Okrainetz,

B.Comm., AACI, P.App. The report has been made in conformance with and is subject to the requirements of

�The Standards� of the Appraisal Institute of Canada. In accordance with those standards, it is hereby

certified that:

To the best of my knowledge and belief, the statements of fact contained in this report are true and

correct and verified where possible;

All pertinent factors affecting the subject property value were considered to the extent felt necessary in

rendering a reasoned opinion of value;

There is no past, present, or contemplated personal interest in the property, nor any personal interest

or bias with respect to the parties involved. Furthermore, the compensation is in no way contingent

upon reporting predetermined results, the amount of the value estimate or a conclusion favouring the

cause of the client;

As of the date of this report, the undersigned has fulfilled the requirements of the Appraisal Institute of

Canada Continuing Professional Development Program for designated members and candidate

members;

I have the competence to complete this assignment;

The report is subject only to the assumptions and limiting conditions listed in the report, and the report

identifies all of the limiting conditions including terms of the assignment imposed by the appraiser;

The opinions expressed herein are unbiased professional opinions. No significant professional

assistance was provided except for those individuals identified herein.

In my considered and professional opinion, the going concern market value of the property located at 320

Park Avenue, Langham, Saskatchewan, as of January 7, 2011, is:



$1,440,000

On behalf of,

SUNCORP VALUATIONS

January 19, 2011

Jana Okrainetz, B.Comm., AACI, P.App Date Prepared

PHOTOGRAPHS OF SUBJECT PROPERTY

320 Park Avenue


FRONT VIEW STREET SCENE

REAR VIEW - MOTEL REAR � EXISTING RETAIL BUILDING

KITCHEN - EXISTING RETAIL BUILDING EXISTING RETAIL BUILDING

PHOTOGRAPHS OF SUBJECT PROPERTY

320 Park Avenue


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