Case Study 4.

2: Office Property Valuation

Purpose

The purpose of this analysis is to estimate the current market value of the subject property, as of
December 31, 20X7, using the DCF and direct capitalization approaches. It is our understanding that the
intended use of the appraisal is for fund valuation purposes.
Depending on the Intended Use,
Date of Appraisal the effective date becomes
important when considering
outstanding capital and leasing
The effective date is December 31, 20X7. costs. Auditors want to see all
outstanding costs deducted from
value, whereas if for financing,
Summary of Salient Facts lenders may want to see what the
value is after costs are paid.
Property Identification

The subject property is addressed as 123 Main Street, Mississauga. The property is located within the
Meadowvale Business Park, in the northwest portion of the City of Mississauga. The specific location is
on the south side of Main Street. The location is just west of Mississauga Road, and south of Highway
401. The property is easily and legally accessible from Main Street, and has good access to Highway 401
and Highway 407. The subject is also situated on a Mississauga Transit bus route.

Building Description

Site Area: 5.0 acres (2.023 hectares)

Zoning: E2-1 – Employment

Improvements: Improved with a multiple tenant office building incorporating two,

attached, three-storey towers. The buildings were constructed 18
years ago and have achieved LEED-EB: O&M Certified status, as
well as BOMA BEST Level 3.

The property provides for approximately 335 on-site surface

parking spaces, equivalent to 3.9 spaces per 1,000 square feet.
The building provides for a Class A level of accommodation. The
floor plates are comparatively good at 12,800 square feet.
Currently, the building is fully leased by nine tenants (with two
leases staring in June 20X8). The building’s primary tenant is
Office Tenant H, occupying 50% of the building’s leasable area,
with the majority of their space expiring in four years. There is risk
in this tenant either vacating their space, or downsizing their space.
The subject is located in the Meadowvale Business Park, a major
office node located in northwest Mississauga. The area includes
many large complexes that are tenanted by internationally known
firms. There is also development of new office space occurring in
the area. The subject is a short drive from the Mississauga
Road/Highway 401 interchange.

Leasable Area: 76,800 square feet

Highest and Best Use: Continuation of the existing commercial (office) use
Occupancy Status

TENANCY

The subject complex is fully leased by nine tenants (with two leases commencing June 20X8). The
building’s main tenant is Office Tenant H, occupying the entire Tower 2. A summary of the tenancy is
included below.

TOWER 1

Suite 100
Tenant: Office Tenant A
Term: 5 years
Commencement: June 1, 20X4
Leasable Area: 12,002 square feet
Rent : Years 1 & 2 @ $14.00 per square foot
Years 3-5 @ $15.00 per square foot
Renewal Option: One option for a term of five years at fair market rents.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes. A management fee equal to 15% of operating costs is recoverable
by the landlord.
Remarks: Tenant provided with a tenant inducement of $25.00 per square foot at the beginning of the term, plus
two months free rent.

Suite 101
Tenant: Restaurant
Term: 5 years
Commencement: August 1, 20X5
Leasable Area: 798 square feet
Rent : Years 1-5 @ $13.00 per square foot
Renewal Option: One option for a term of five years.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes. A management fee equal to 15% of operating costs is recoverable
by the landlord.
Remarks: Rent is unchanged from previous five-year lease.

Suite 200
Tenant: Office Tenant B
Term: 5 years
Commencement: November 1, 20X6
Leasable Area: 3,482 square feet
Rent : $13.50 per square foot
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes. A management fee equal to 15% of operating costs is recoverable
by the landlord.
Remarks: 3 months free net rent at beginning of term. Tenant took space ‘as is’.
Suite 201

Tenant: Office Tenant C

Term: 10 years
Commencement: February 1, 20X2
Leasable Area: 3,521 square feet
Rent: Years 1-5 @ $14.00 psf
Years 6-10 @ $14.50 psf
Renewal Option: One option for a term of 5 years, with 9 months’ notice. Rent shall be at fair market rates.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes. A management fee equal to 15% of operating costs is recoverable
by the landlord.
Inducement: $20.00 per square foot in landlord’s work

Suite 202
Tenant: Office Tenant D
Term: 5 years
Commencement: January 1, 20X4
Leasable Area: 4,121 square feet
Rent : Years 1 & 2 @ $13.00 per square foot
Years 3 & 4 @ $14.50 per square foot
Year 5 @ $15.00 per square foot
Renewal Option: One option for a term of 5 years, with 9 months notice. Rent shall be fair market rates, no less than
the rent during the 12 months preceding the renewal.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes. A management fee equal to 15% of operating costs is recoverable
by the landlord.
Inducement: $25.00 per square foot allowance

Suite 203
Tenant: Office Tenant E
Term: 6 years
Commencement: June 1, 20X8
Leasable Area: 1,676 square feet
Rent : Years 1-3 @ $15.50 per square foot
Years 4-6 @ $16.50 per square foot
Renewal Option: One option for a term of 5 years, with 12 months notice.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes
Inducement: $20.00 per square foot allowance

Suite 300
Tenant: Office Tenant F
Term: 5 years
Commencement: December 1, 20X7
Leasable Area: 8,302 square feet
Rent : Years 1-2 @ $13.50 per square foot
Years 3-5 @ $15.50 per square foot
 Renewal Option: Two options, each for a term of 5 years, with 12 months’ notice. Rent shall be fair market rates, no
less than the rent during the 12 months preceding the renewal.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes. A management fee equal to the greater of 4% gross revenue or 15%
of operating costs is recoverable by the landlord.
Inducement: $25.00 per square foot turnkey allowance

Suite 301
Tenant: Office Tenant G
Term: 6 years
Commencement: June 1, 20X8
Leasable Area: 4,498 square feet
Rent: Year 1 @ $15.00 per square foot
Year 2 @ $15.50 per square foot
Years 3-6 @ $16.25 per square foot
Renewal Option: The lease does not provide a renewal option.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes.
Inducement: $5.00 per square foot allowance

TOWER 2
Tenant: Office Tenant H
Term: 10 years
Commencement: February 1, 20X1
Leasable Area: 38,400 square feet
Rent : Years 1-5 @ $12.50 per square foot
Years 6-10 @ $14.50 per square foot
Renewal Option: One option for a term of five years.
Additional Rent: The lease provides for rent on a fully net basis, whereby the tenant is responsible for payment of
operating costs and realty taxes. A management fee equal to 15% of operating costs is recoverable
by the landlord.
Remarks: Brokers report that the tenant may be looking to downsize the space (although there are a number of
scenarios the tenant is contemplating, leasing personnel are conservatively estimating that the tenant
will downsize into roughly half their existing space.
Tenant received a $27.00 per square foot tenant inducement allowance at the beginning of the term.

RECOVERY INCOME
▪ The leases provide for rent on a fully net basis whereby the tenants are responsible for their base rent,
plus the realty taxes and operating costs. The landlord recovers a management fee of 15% of
operating costs (excluding realty taxes).
Although not applicable in this case, some ground floor retail or
restaurant tenants will not pay operating costs that pertain to the rest of
the office building, i.e., costs of shared elevators may not be paid by
ground floor tenants.
 Storage, parking, and telco income are the
largest miscellaneous income items for office
buildings.

STORAGE INCOME
▪ The building generates storage income from a number of the office tenants, as well as the restaurant
tenant. According to the landlord’s 20X8 budget, storage income is projected at $20,640 for 20X8,
which is consistent with 20X7. We have incorporated this income, and kept it flat over the investment
term.

GROSS RENT LOSS AND OUTSTANDING COSTS

▪ We have deducted the gross rent loss until the leases for Office Tenant E and Office Tenant G, which
both commence on June 1, 20X8. The details of the gross rent loss are summarized below. We have
deducted each of these figures from the capitalized value.
There are five months between the effective date and the start
of the leases that must be deducted from the capitalized value.
Vacancy Gross Rent Loss
Posted
Additional
Unit Tenant Size SF Net Rent Rent* Annual Rent Months Total Remarks
Commences Jun-
203 Office Tenant E 1,676 $15.50 $14.21 $49,794 5 $20,747
20X8
Commences Jun-
301 Office Tenant G 4,498 $15.00 $14.21 $131,387 5 $54,744
20X8
6,174 $75,492
* ADDITIONAL RENT IS FOR TAXES, MAINTENANCE, AND INSURANCE

▪ We have also deducted the leasing costs for both Office Tenant E and Office Tenant G. The lease to
Office Tenant E has an outstanding tenant inducement of $20.00 per square foot ($33,520 total).
There is also an outstanding tenant inducement of $5.00 per square foot for Office Tenant G (totalling
$22,490). Leasing commissions have reportedly been paid.

Unit Tenant Size SF TIs Comm. Total

203 Office Tenant E 1,676 $20.00 $0.00 $33,520
301 Office Tenant G 4,498 $5.00 $0.00 $22,490
6,174 $56,010 A lease expiry schedule
is a useful consideration
in determining an OCR.
LEASE EXPIRATIONS
▪ The following chart details the expiries for the next five years. The lease with Office Tenant H
expires in Year 4, which accounts for 50% of the complex. The risk in any of the tenants expiring is
also partially offset by the allowance for lag time, the renewal probability, and the tenant inducements
and leasing commissions incorporated into the analysis.

EXISTING VACANCY YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Square Feet Expiring 0 sf 4,121 sf 12,002 sf 798 sf 41,882 sf 11,823 sf
Percentage of GFA 0.0% 5.37% 15.63% 1.04% 54.53% 15.39%

VACANCY/CREDIT LOSS ALLOWANCE

▪ A vacancy rate of 5% is considered to be a stabilized rate, and consistent with quoted figures for the
Meadowvale Office Node.
▪ Given the existing tenancy, a vacancy allowance of 5% of the potential gross income is considered
appropriate in the stabilized income and expense Statement. In the discounted cash flow analysis, we
have used a similar vacancy allowance of 5%. The discounted cash flow analysis has also
incorporated a 9 and 12-month lag time vacancy between new tenants (9 months for the split floors
and 12 months for the full tenant floors). A lag vacancy of 6 to 12 months is consistent with that
projected by investors active in the Greater Toronto Area (GTA) for similar office properties.

Large recognized tenants with strong lease covenants can often be excluded from the vacancy
allowance when on long-term leases.
 REALTY TAXES AND OPERATING COSTS
Recoverable Costs According to the final tax bill for 20X7, realty taxes totalled $280,000 or
$3.65 per square foot. We have been provided with a 20X8 budget that
projects a realty tax figure of $286,300 ($3.73 psf) for 20X8, representing an
increase of 2.25% over the 20X7 amount, which is deemed reasonable. For
the purpose of this appraisal, we have incorporated this projected expense in
our income and expense calculations.
Operating costs include utilities, general maintenance and repair, cleaning,
insurance, and some administrative costs. We have been provided with
budget figures for 20X8, along with actual figures for 20X7. For the purpose
of this appraisal, we have adopted the 20X8 budget figures in our analysis. A
summary of these expenses is included in the following chart:

123 Main Street, Mississauga

Recoverable Operating Costs and Expenses

20X7 20X8
Expenses Actual PSF Budget PSF
Cleaning $102,500 $1.33 $103,000 $1.34
HVAC $115,000 $1.50 $117,000 $1.52
Elevators & Escalators $12,700 $0.17 $13,700 $0.18
Security and Safety $6,500 $0.08 $7,000 $0.09
Landscaping and Grounds $32,750 $0.43 $35,000 $0.46
Repairs & Maintenance $31,200 $0.41 $30,000 $0.39
General Office $31,500 $0.41 $32,750 $0.43
Utilities $121,750 $1.59 $125,000 $1.63
Property Insurance $10,000 $0.13 $10,800 $0.14
Total Operating Costs $463,900 $6.04 $474,250 $6.18

Realty Tax $280,000 $3.65 $286,300 $3.73

Total Expenses $743,900 $9.69 $760,550 $9.90

Recoverable operating costs (excluding realty taxes, management fees, and

amortization recoveries) are projected at $474,250 or $6.18 per square foot
for 20X8. The indicated operating costs are considered reasonable and
comparable to other Class A office buildings in the City of Mississauga.
It should be noted that amortization recoveries have been stripped out of the
expenses in the table shown above (amortization has been accounted for
separately in the section below). We have also excluded the landlord’s
management expense in favour of our own market-based figure, as outlined
below.

Capital Amortization
The capital amortization should be
stripped out of the above-noted
operating cost figures or will be a
separate line item in an owner’s
budget.
Amortization of capital expenditures is recovered from each of the tenants as
part of operating costs. As shown below, the present value of all future
amortization recoveries is $989,999 (discounted at 7.5% per annum), which
has been added to the capitalized value.
The amortization schedule below illustrates the recovery of each item over
the 10-year investment period on a straight-line basis, assuming a sinking
fund with a 5% interest rate, compounded monthly. Note that the recovery of
the entire amortization balance within the 10-year investment period, means
the DCF will require no recovery in the reversion year. The present value of
any additional years is incorporated into Year 10 as a balloon payment.
 Interest
Description Principal Rate Term Start Amt/Mo
Chiller Replacement $122,300 5.00% 180 Apr-X4 $967.14
VAV Controls $132,500 5.00% 120 Apr-X4 $1,405.37
Boiler Replacement $75,000 5.00% 120 Apr-X4 $795.49
Elevator Modernization $125,000 5.00% 84 Apr-X4 $1,766.74
Roof (Phase 1) $225,626 5.00% 120 Aug-X5 $2,393.11
Ashphalt $25,000 5.00% 60 Oct-X5 $471.78
Roof (Phase 2) $157,948 5.00% 180 Jul-X6 $1,249.04
External Signage $18,321 5.00% 60 Oct-X6 $345.74
Fire Alarm System Replacement $99,706 5.00% 240 Oct-X7 $658.02
Washroom Upgrade $52,321 5.00% 120 Oct-X7 $554.95
Replace Exterior Lighting $22,320 5.00% 72 Nov-X7 $359.46
LED Retrofit $119,000 5.00% 60 Dec-X7 $2,245.68
Roof-Top Unit Replacement $45,000 5.00% 120 Jun-X8 $477.29
Building Envelope Glazing $50,000 5.00% 120 Jul-X8 $530.33
Entrance Lobby Refurbishment $25,000 5.00% 72 Sep-X8 $402.62
Lighting Automation $60,000 5.00% 120 Sep-X8 $636.39

Annual Amortization Recoveries: Year 1 covers the period January 20X8 - December 20X8
Investment Year 1 2 3 4 5 6 7 8 9 10
Annual Recovery $169,229 $183,110 $181,695 $160,511 $149,853 $124,432 $99,419 $77,630 $60,878 $180,268

NPV @ 7.5% = $989,999

Management Expense According to the information provided, a management fee equal to 15% of
operating costs is recoverable from the tenants. For the purpose of this
appraisal we have adopted a similar management fee figure and offset it with
a market management fee expense equal to 3% of the effective gross income
in our income and expense calculations.

Non-Recoverable The 2X18 budget also allows for some non-recoverable costs that are expected
Allowance to vary significantly between years, wherein we have provided for an
allowance of 0.50% of the effective gross income.

Structural Allowance In our analysis, we have incorporated an allowance of 1% of the effective

gross income to amortize potential non-recoverable structural repairs
required over the term of the investment.

Future Recoverable The landlord has provided us with a schedule of future capital projects that
Capital are projected for 20X8. These projects are expected to be amortized and
recovered from the tenants as part of operating costs. A summary of the
unspent future capital is included below:
Appraisers should be aware that some Estimated Estimated
landlord’s non-recoverable costs may Description Cost Completion
include leasing costs to lease-up vacant Roof-Top Unit Replacement $45,000 Jun-X8
space. As shown earlier, we have
Building Envelope Glazing $50,000 Jul-X8
incorporated our own market leasing
costs rather than the owner’s non- Entrance Lobby Refurbishment $25,000 Sep-X8
recoverable costs. Lighting Automation $60,000 Sep-X8
$180,000

The noted costs are estimates provided by the landlord, and are assumed to
be accurate. The initial costs have been deducted from the capitalized value
and in year one of the DCF. The annual allocation of the amortized costs are
recovered from the tenants as part of their proportionate share of their
Addition Rent.
Future Non-Recoverable According to the 20X8 budget, there are no non-recoverable capital projects
Capital planned.

MARKET RENT
The key in determining the long-term income potential of the subject property is the establishment of the
market rent. Reference to the market rent has also been made in order to relate the current contract rent to
prevailing market levels. In establishing the market rent for the subject building, we have investigated,
and analyzed, recent leases and current asking rates involving comparable office buildings located
throughout the Meadowvale office node and other areas in the GTA West.

RECENT LEASING ACTIVITY AT THE SUBJECT

SUITE TENANT START DATE AREA NET RENT (PSF) REMARKS
203 Office Tenant E 06/X8 1,676 sf Yrs. 1-3 @ $15.50 - $20.00 psf tenant inducement
Yrs. 4-6 @ $16.00 allowance

301 Office Tenant G 06/X8 4,498 sf Yrs. 1 & 2 @ $15.00 - New lease
Yrs. 3 & 4 @ $15.50 - Turnkey allowance of $5.00 psf
Yrs. 5 & 6 @ $16.25

COMPARABLE RENTAL RATES

In estimating the market rent for the property we have carried out a survey of lease information involving
office space in comparable and competitive properties in the vicinity of the subject. The survey has been
excluded from this analysis.
The comparable lease data shows face rents in the range of $11.25 to $17.50 per square foot (net). The
indicated range refers to the rent payable in the first few years of leases that range in length from 3-10
years. Most of the comparable lease deals have rent escalations over the term. Many of the comparable
lease deals were also negotiated with some sort of tenant inducement, either involving free rent, cash
allowance or equivalent tenant inducement.
The variance in rates is a function of the location and level of accommodation, as well as the amount of
tenant inducement given. The comparable lease deals further illustrate a range in net effective rates of
approximately $7.50 to $12.00 per square foot.
Generally, lease deals at the low end of the range were achieved in older office buildings that have a
much higher additional rent figure than the subject. Conversely, rates at the upper end of the range refer to
newer buildings achieved in conjunction with higher tenant inducements. Appraisers should analyze comparable office lease
deals based on their face rate, tenant inducements
SUMMARY OF MARKET RENTAL RATES provided to achieve the face rate, and the net effective
rent
In this analysis, we will use a net face rate of $15.00 per square foot flat for a five-year lease term. In
achieving this face rate, the landlord will provide a tenant inducement of $20.00 per square foot for new
lease deals and $10.00 per square foot for lease renewals. Lease commissions are set at $6.00 per square
foot for new deals and $3.00 per square foot for renewals. As shown below, the net effective rents (NER)
are calculated to be $8.43 per square foot for a new lease, and $11.71 per square foot for a lease renewal.
Applying a 75% retention ratio results in a blended NER of $10.89 per square foot (assuming discounting
at a rate of 0.83% per month over the lease terms).
R E N T A L R A T E S T R U C T U R E
FACE RENT TENANT INDUCEMENTS COMMISSIONS NER BLENDED
NEW/RENEWAL NEW/RENEWAL NEW & RENEWAL NEW/RENEWAL NER*
$15.00 / $15.00 $25.00/$10.00 $6.00/$3.00 $8.43/$11.71 $10.89
*Based on 75% retention
STABILIZED INCOME AND EXPENSE STATEMENT
Based upon the preceding discussion, a stabilized statement has been prepared for the subject property.
Reference to this statement has been made in order to calculate the net operating income to be capitalized
in the overall capitalization rate method, and to provide a framework for projecting the income and
expenses in the discounted cash flow method. The statement is presented below.
If leases escalate in next few months,
appraisers should use higher
Stabilized Statement contractual rent in the income
calculations.
123 Main Street, Mississauga
Annual
Unit Tenant Area (SF) Rate PSF Rent Remarks
Tower 1
E100 Office Tenant A 12,002 $15.00 $180,030
E101 Restaurant 798 $13.00 $10,374
E200 Office Tenant B 3,482 $13.50 $47,007
E201 Office Tenant C 3,521 $14.50 $51,055
E202 Office Tenant D 4,121 $15.00 $61,815
E203 Office Tenant E 1,676 $15.50 $25,978 Commences Jun-20X8
E300 Office Tenant F 8,302 $13.50 $112,077
E301 Office Tenant G 4,498 $15.00 $67,470 Commences Jun-20X8

Tower 2
W100 Office Tenant H 12,800 $14.50 $185,600
W200 Office Tenant H 12,800 $14.50 $185,600
W300 Office Tenant H 12,800 $14.50 $185,600
76,800 $14.49 $1,112,606

Revenue
Rental Income $1,112,606
Storage Income $20,640
Recoverable Income $831,688

Potential Gross Income $1,964,933

Less Vacancy @ 5% $98,247

Effective Gross Income $1,866,686

Expenses
Operating Costs $474,250
Realty Taxes $286,300
Management Expense @ 3% $56,001
Non-Recoverable Allowance @ 0.5% $9,333
Structural Allowance @ 1% $18,667

Total Expenses $844,551

Net Operating Income $1,022,135

NOI per square foot $13.31
OVERALL CAPITALIZATION RATE ANALYSIS
In estimating the overall capitalization rate applicable to the subject property we have analyzed recent sales of
similar investment properties. Specific emphasis has been given to sales of Class A and Class B office buildings
located throughout the City of Mississauga. Pertinent details with respect to these sales are summarized in the
chart below.

INDEX LEASABLE AREA NOI STABILIZED

(DATE) ADDRESS CONSIDERATION (OCCUPANCY) PSF OCR
1 123 Century Avenue $25,500,000 152,325 sf $10.55 6.3%
(08/X7) Mississauga (96%)

2 123 Argentia Road, $30,250,000 140,366 sf $14.01 6.5%

(07/X7) Mississauga (86%)

3 456 Century Avenue $14,000,000 73,339 sf $12.60 6.6%

(06/X7) Mississauga (100%)

4 123 Millcreek Drive $27,750,000 145,250 sf $12.99 6.8%

(05/X7) Mississauga (100%)

5 123 Meadowvale Boulevard $28,000,000 167,321 sf $11.71 7.0%

(04/X7) Mississauga (100%)

In summary, the sales indicate a range in initial or “going in” overall capitalization rates, from 6.3% to
upwards of 7.0%. Adjustments have been made based on the subject’s tenancy, including occupancy, as well
as the location and level of accommodation of the complex. Consideration has also been given to the risk in
continued occupancy by Office Tenant H after their lease expires. After adjustments, an overall capitalization
rate of 6.5% is considered appropriate. Utilizing an overall capitalization rate of 6.5%, applied to the
subject’s stabilized net operating income, and adding the present value of the recoverable amortization
and deducting the anticipated leasing costs, results in a value estimate as follows:

$1,022,135 capitalized @ 6.5% = $15,725,161

Plus: PV of Amortization + $989,999

Less : Outstanding Leasing Costs - $56,010

Less : Gross Rent Loss - $75,492
Less: 20X8 Recoverable Capital - $180,000

Final Value Estimate = $16,403,658

Rounded $16,400,000

VALUE BY THE OVERALL CAPITALIZATION RATE METHOD … $16,400,000

DISCOUNTED CASH FLOW ANALYSIS
The basic premise of this method is the present worth of the property equals the discounted value of the
future benefits, specifically the net annual cash flows over the investment term, plus the net proceeds
from a forecasted re-sale of the property at the end of this term. The analysis has been carried out using
the Argus Enterprise Financial Software Program. Parameters incorporated into the analysis include the
following:

GROWTH RATE
▪ Investment surveys continue to suggest that most investors incorporate long term growth assumptions
in the range from 2% to 3%. The current mandate of the Bank of Canada is to keep inflation at a rate
at 2%, which is the mid-point of the 1% to 3% range.
▪ We have also investigated the Consumer Price Index for Toronto, Ontario, and Canada. The average
annual increase in CPI over the past 10 years is typically between 1.0% and 2.5%, as shown below.

7 6 5 4 3 YEARS 2 YEARS LAST

10 9 8
YEARS YEARS YEARS YEARS AGO AGO YEAR
YEARS YEARS YEARS
AGO AGO AGO AGO (20X4) (20X5) (20X6)
AGO AGO AGO
(20X0) (20X1) (20X2) (20X3)
City of Toronto 2.1% 2.4% 0.4% 2.6% 3.0% 1.5% 1.2% 2.5% 1.5% 2.0%
Ontario 2.1% 2.3% 0.4% 2.5% 3.1% 1.4% 1.0% 2.4% 1.2% 1.8%
Canada 2.2% 2.3% 0.3% 1.8% 2.9% 1.5% 0.9% 2.0% 1.1% 1.4%
Source: Statistics Canada

▪ Various leases that provide for rent increases throughout the term provide for similar rates. The Bank of
Canada predicts average economic growth for 20X7 of 2.3%.
▪ On this basis, a growth rate of 2.25% per annum is considered appropriate for both the market rent
and expenses.

RENEWAL PROBABILITY AND LAG VACANCY

▪ We have used a renewal probability of 75% for each tenant, which is consistent with that used by
investors in the marketplace. For Office Tenant H, we have conservatively incorporated a 50%
renewal probability, as there is risk in maintain their occupancy beyond the expiry of their lease.
▪ We have used a 9-month lag vacancy (i.e. the vacancy period between tenancies) between new
smaller tenants, and a 12-month lag vacancy between new full floor tenants. The general vacancy
allowance is reduced by the lag vacancy allowance.

INVESTMENT TERM
▪ Typically based on an investment term of 10 years, being the standard “hold period” for investment
real estate. Slightly longer terms (i.e., 11 years) can be used depending on the roll-over at the end of the term. The NOI at the
reversion year should be stabilized.

REVERSIONARY CAPITALIZATION RATE

▪ Typically based on the initial or “going in” rate of return, with a slight upward adjustment to allow for
the risk in negotiating new leases and lease renewals, the older age, and the risk in projecting a future
sale.
▪ The risk associated with on-going lease expiries has been offset somewhat as we have made provision
for the potential costs associated with the lease expiries, including lag vacancy, and leasing costs.
▪ In addition, at the time of the reversion we have projected the building to have contract rents that are
in-line with market conditions and that the building will be maintained to a good standard.
▪ Most surveys suggest an upward adjustment of 0 to 50 basis points.
▪ On the basis of the foregoing, a reversionary overall capitalization rate of 6.5%, same as the going-in
rate.

DISCOUNT RATE
▪ Deriving discount rates from the market place is difficult and very sensitive to the assumptions
utilized in the development of the cash flows. Issues such as market rents, vacancy, and growth
factors can significantly influence the resultant internal rate of return.
▪ In order to derive discount rates, we have analyzed recent sales of similar investment properties, and
an analysis of yields for alternative investments.
▪ At the time the appraisal was being prepared, 10-year Canada bond yields are approximately 2%. We
have also considered the yields for good quality corporate bonds, specifically the following bonds:

ISSUER AND MATURITY DATE CURRENT YIELD

Brookfield, 10 years 3.75%
Enbridge, 10 years 3.64%
Bell Canada, 9 years 4.25%
Royal Bank, 8 years 2.24%

▪ An upward adjustment of at least 2% to 5% is normally made in order to allow for the increased risk
associated with real estate investments, as well as factors such as the lack of liquidity and the need for
ongoing management and/or capital.
▪ Reference has also been made to an analysis of recent sales of similar investment properties. These
sales reflect initial yields from 6.3% to 7.0%.
▪ Rates at the low end of the range are indicated in sales of single-tenant properties, with strong lease
covenants, most of which have the benefit of long-term leases (10 to 15 year), with escalations
throughout the term. Rates toward the low end of the range are also indicated for prominent Class A
office buildings located in the Financial Core of the City of Toronto, with a strong tenancy.
▪ According to the InSite Investment Trends Survey for the third quarter of 20X7 for their benchmark
Suburban Class A office building, the average overall capitalization rate is 5.9%, the terminal cap rate
is 6.3%, and the indicated internal rate of return is 6.9%.

NOTE: Data is from Q3 of each year.

Source: Altus InSite Q3 2017 Investment Trend Survey
▪ Given the prevailing economic climate as well as considering the attributes of the subject complex
discount rates ranging from 6.75% to 7.25% have been utilized in the valuation.

SUMMARY
In summary, therefore, relevant parameters incorporated into the analysis include the following:

General Growth Rate: 2.25% per annum

Investment Term: 10 years
Reversionary Cap Rate: 6.50%
Discount Rates: 6.75% to 7.25% (annual)

The printouts of the discounted cash flow analysis are presented at the end of this analysis. The printouts
comprise the schedule of prospective cash flow, which shows the anticipated income and expenses over
the investment term. Also presented is the printout of the prospective present value, which shows the
annual cash flow in each year of the investment term, the present value at each of the selected discount
rates, and the present value of the reversion.

On the basis of the above noted parameters, the analysis indicates a value range as follows.

Rounded
Discounted @ 7.00% = $16,413,140 $16,400,000
Discounted @ 7.25% = $16,105,431 $16,100,000
Discounted @ 7.50% = $15,804,972 $15,800,000

The analysis indicates a value range that corresponds to the different discount rates, from $15.8 million to
$16.4 million. Given the parameters incorporated into the analysis, we have used a discount rate and
value in the middle of the range. A discount rate of 7.25% is considered appropriate, and results in a value
estimate of $16,100,000.

VALUE BY THE DISCOUNTED CASH FLOW METHOD … $16,100,000

DIRECT COMPARISON APPROACH

The direct comparison approach is a valuation method whereby the property being appraised is
compared with similar properties that have recently been sold or offered for sale. The assumption is
that if the subject had been exposed to the market, it would have been in competition with the
comparable properties, dealing with the same type of purchaser under similar market conditions. Since
no two properties are completely alike, adjustments must be made to compensate for differences
between the comparable and the subject properties. In arriving at a value conclusion by this method, the
greatest weight is given to the sales of truly comparable properties sold at or nearest the effective date
of appraisal in order to reflect comparable economic conditions.
In estimating the market value of the subject property by the direct comparison approach, a further
analysis has been made to the sales presented earlier in the overall capitalization rate method of the
income approach. For purposes of the direct comparison approach, the sales have been analyzed on the
basis of the indicated price per square foot of the leasable floor area. Although it is difficult to analyze
major income producing/investment properties on this basis, the analysis provides a good indication as to
an appropriate value range, particularly when consideration is also given to the occupancy and the
average NOI or contract rent per square foot. For analysis purposes, pertinent details are summarized in
the chart on the next page.
 INDEX LEASABLE NOI PRICE
(DATE) ADDRESS CONSIDERATION AREA PSF PSF
1 123 Century Avenue $25,500,000 152,325 sf $10.55 $167.41
(08/X7) Mississauga (96%)
2 123 Argentia Road, $30,250,000 140,366 sf $14.01 $215.51
(07/X7) Mississauga (86%)
3 456 Century Avenue $14,000,000 73,339 sf $12.60 $190.89
(06/X7) Mississauga (100%)
4 123 Millcreek Drive $27,750,000 145,250 sf $12.99 $191.05
(05/X7) Mississauga (100%)
5 123 Meadowvale Boulevard $28,000,000 167,321 sf $11.71 $167.34
(04/X7) Mississauga (100%)

As noted above, the sales indicate a range in values equivalent to rates from $167.00 per square foot to
upwards of $215.50 per square foot. The noted range reflects differences in the location of the property,
the age and condition of the building, and the tenancy. Some of these differences are also reflected in the
average rent/NOI per square foot and the analysis generally shows a good correlation between the NOI
per square foot at the time of sale and the indicated price per square foot. In determining a rate applicable
to the subject property, consideration has been given to the following:

PROPERTY RIGHTS TRANSFERRED

▪ For each of the sales, the property rights transferred were those of the leased fee interest (fee simple
subject to existing leasehold tenancies), wherein no adjustments are required.

FINANCING
▪ Each of the comparable sales were acquired on an “all cash” basis or using financing consistent with
current interest rates. No adjustment is considered appropriate.

SALE CONDITIONS
▪ To the best of our knowledge, each of the sales was an open market transaction between willing
sellers and willing buyers, wherein no adjustment is required.

DATE OF SALE
▪ The various sales occurred between April 20X7 and August 20X7. Given the relatively recent date of
each of the sales, no adjustments are considered appropriate for changing market conditions.
LOCATION
▪ Each of the comparable sales is located throughout the City of Mississauga.
▪ Each of the sales has good curb appeal and exposure on an interior or arterial roadway.
▪ It should be emphasized that any locational differences are inherent in the subject’s and comparables’
average rent per square foot/net operating income per square foot. Thus, the adjustment for
differences in location can be obtained by looking at the variances in NOI per square foot.

AGE/CONDITION/QUALITY OF SPACE
▪ In terms of comparing physical factors, all of the comparable sales, like the subject, offer good quality
office accommodation.
▪ Differences in the size, condition, and quality of space, etc. are also a function of the variance in the
average contract rent/NOI per square foot between the subject and the comparable sales.
OCCUPANCY/TENANCY
The comparable sales illustrate that there is a good correlation between the NOI per square foot at the
time of sale and the corresponding sale price. In order to take into consideration differences in NOI
and rent, a multiplier can be calculated based on the net operating income per square foot and the sale
price. This results in an income multiplier for the comparable sales as follows:
INDEX PRICE PSF NOI PSF MULTIPLE
1 $167.41 $10.55 15.87
2 $215.51 $14.01 15.38
3 $190.89 $12.60 15.15
4 $191.05 $12.99 14.71
5 $167.34 $11.71 14.29

▪ The range in multipliers extends from 14.29 to 15.87 times. The average multiple is 15.08 times.
▪ Applying an income multiple of 15.5 to the subject’s stabilized NOI per square foot of $13.31 results
in a value estimate of $205.00 per square foot (rounded).

SUMMARY
As previously noted, the sales indicate a range in values equivalent to rates from $164.00 per square foot
to upwards of $310.00 per square foot. The range reflects differences in the level of accommodation
and/or the location. Such differences are also reflected in the average net rent and the estimated market
rent, and there is a strong correlation between the NOI per square foot at the time of sale, and the
corresponding sale price. Adjustments were made to the comparable sales primarily for differences in the
Net Operating Income per square foot. After adjustments, the sales indicate a rate of $205.00 per square
foot. Utilizing this rate, applied to the subject’s rentable area, results in a value estimate as follows:

76,800 square feet @ $205.00 psf = 15,744,000

Plus: PV of Amortization + $989,999

Less : Outstanding Leasing Costs - $56,010

Less : Gross Rent Loss - $75,492
Less: 20X8 Recoverable Capital - $180,000

Final Value Estimate = $16,422,497

Rounded $16,420,000 Same adjustments to

the OCR should be
VALUE BY THE DIRECT COMPARISON APPROACH ... $16,420,000
made to the direct
comparison approach.
RECONCILIATION AND FINAL VALUE ESTIMATE

The value estimates for the subject property, utilizing the two approaches to value, are as follows:

Value by the Income Approach

Overall Capitalization Rate Method $16,400,000
Discounted Cash Flow Method $16,100,000
Value by the Direct Comparison Approach $16,420,000

The subject property is an income-producing/investment property for which the income approach to value
is the most appropriate. Two methods of income analysis have been utilized in order to provide an
indication as to the value based on the existing net income, and the projected income over the term of the
investment. Both methods of income analysis indicate a generally similar value estimate, which is also
supported by the direct comparison approach. In reconciling the value estimates, a rate between the two
methods of income analysis is considered appropriate.

A final value of $16,250,000 equates to an internal rate of return of approximately 7%, and a price per
square foot of $211.59. The value further corresponds to the following yields over the term of the
investment forecast.

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Net Operating Income $1,123,630 $1,187,227 $1,238,309 $826,917 $1,260,535

Return on Investment 6.91% 7.31% 7.62% 5.09% 7.76%

Having considered the data investigated, and all other factors that may affect value, it is our opinion that
the current market value for the subject property, as of December 31, 20X7, is:

SIXTEEN MILLION, TWO HUNDRED AND FIFTY THOUSAND DOLLARS

$16,250,000

MARKETING TIME
Assuming that there is no change in the current market conditions, and the subject is properly marketed, it
is our opinion that the time required to realize the indicated value estimate is three to six months.
Cash Flow Report

123 Main Street, Mississauga

Valuation Date: December 31, 20X7
Year 1 is period ending December 31, 20X8
Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11
Rental Revenue
Potential Base Rent 1,073,669 1,119,055 1,139,760 1,198,911 1,219,877 1,230,316 1,248,510 1,264,875 1,296,172 1,350,255 1,366,967
Absorption & Turnover Vacancy 0 -41,214 -2,086 -317,187 -20,965 -11,599 -63,704 -2,331 -172,056 -21,389 -25,927
Scheduled Base Rent 1,073,669 1,077,840 1,137,674 881,725 1,198,911 1,218,718 1,184,806 1,262,544 1,124,116 1,328,866 1,341,040
Total Rental Revenue 1,073,669 1,077,840 1,137,674 881,725 1,198,911 1,218,718 1,184,806 1,262,544 1,124,116 1,328,866 1,341,040

Other Tenant Revenue

Expense Recoveries
Operating Costs 458,364 467,954 494,973 376,410 509,764 525,284 515,760 553,220 495,818 570,593 581,761
Realty Taxes 276,710 282,499 298,810 227,235 307,739 317,109 311,359 333,973 299,320 344,461 351,203
Admin Fee 15% 68,755 70,193 74,246 56,461 76,465 78,793 77,364 82,983 74,373 85,589 87,264
Amortization 157,144 182,981 189,699 136,979 147,358 123,311 94,608 77,496 53,268 177,528 0
Total Expense Recoveries 960,973 1,003,626 1,057,728 797,084 1,041,326 1,044,496 999,091 1,047,672 922,779 1,178,171 1,020,229
Total Other Tenant Revenue 960,973 1,003,626 1,057,728 797,084 1,041,326 1,044,496 999,091 1,047,672 922,779 1,178,171 1,020,229

Total Tenant Revenue 2,034,642 2,081,467 2,195,402 1,678,809 2,240,237 2,263,214 2,183,897 2,310,216 2,046,895 2,507,037 2,361,269

Other Revenue
Storage Income 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640
Total Other Revenue 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640 20,640

Potential Gross Revenue 2,055,282 2,102,107 2,216,042 1,699,449 2,260,877 2,283,854 2,204,537 2,330,856 2,067,535 2,527,677 2,381,909

Vacancy & Credit Loss

Vacancy Allowance -102,764 -65,952 -108,821 0 -93,127 -103,174 -49,708 -114,328 0 -106,064 -94,465
Total Vacancy & Credit Loss -102,764 -65,952 -108,821 0 -93,127 -103,174 -49,708 -114,328 0 -106,064 -94,465

Effective Gross Revenue 1,952,518 2,036,155 2,107,221 1,699,449 2,167,750 2,180,680 2,154,829 2,216,528 2,067,535 2,421,613 2,287,444

Operating Expenses
Operating Costs 474,250 484,921 495,831 506,988 518,395 530,059 541,985 554,180 566,649 579,398 592,435
Realty Taxes 286,300 292,742 299,328 306,063 312,950 319,991 327,191 334,553 342,080 349,777 357,647
Management Expense 58,576 61,085 63,217 50,983 65,033 65,420 64,645 66,496 62,026 72,648 68,623
Non-Recoverable Allowance 9,763 10,181 10,536 8,497 10,839 10,903 10,774 11,083 10,338 12,108 11,437
Total Operating Expenses 828,888 848,928 868,913 872,532 907,216 926,374 944,595 966,311 981,093 1,013,932 1,030,142

Net Operating Income 1,123,630 1,187,227 1,238,309 826,917 1,260,535 1,254,306 1,210,234 1,250,217 1,086,442 1,407,681 1,257,302

Leasing Costs
Tenant Improvements 0 201,538 9,975 576,000 87,538 103,775 278,713 9,975 480,000 87,538 103,775
Leasing Commissions 0 60,461 2,993 172,800 26,261 31,133 83,614 2,993 144,000 26,261 31,133
Total Leasing Costs 0 261,999 12,968 748,800 113,799 134,908 362,326 12,968 624,000 113,799 134,908

Capital Expenditures
Structural Allowance 19,525 20,362 21,072 16,994 21,678 21,807 21,548 22,165 20,675 24,216 22,874
2018 Recov. Capital 180,000 0 0 0 0 0 0 0 0 0 0
Office Tenant E TI @ $20.00 33,520 0 0 0 0 0 0 0 0 0 0
Office Tenant G TI @ $5.00 22,490 0 0 0 0 0 0 0 0 0 0
Total Capital Expenditures 255,535 20,362 21,072 16,994 21,678 21,807 21,548 22,165 20,675 24,216 22,874

Total Leasing & Capital Costs 255,535 282,360 34,040 765,794 135,476 156,714 383,875 35,133 644,675 138,015 157,782

Cash Flow Before Debt Service 868,095 904,867 1,204,269 61,123 1,125,058 1,097,592 826,359 1,215,084 441,767 1,269,666 1,099,520
Present Value Report

123 Main Street, Mississauga (Amounts in CAD)

Valuation Date: December 31, 20X7 (Year 1 is period ended December 31, 20X8)
Discount Method: Annual

PV of PV of PV of
Analysis Cash Flow Cash Flow Cash Flow Cash Flow
Period Before Debt Service @ 6.75 % @ 7.00 % @ 7.25 %
Year 1 868,095 813,203 811,303 809,412
Year 2 904,867 794,052 790,346 786,665
Year 3 1,204,269 989,965 983,042 976,184
Year 4 61,123 47,069 46,630 46,197
Year 5 1,125,058 811,588 802,151 792,845
Year 6 1,097,592 741,709 731,372 721,202
Year 7 826,359 523,111 514,615 506,277
Year 8 1,215,084 720,549 707,190 694,109
Year 9 441,767 245,404 240,292 235,298
Year 10 1,269,666 660,710 645,434 630,546
Totals 9,013,881 6,347,360 6,272,376 6,198,736
Property Resale @ 6.50 % Cap Rate 19,343,108 10,065,780 9,833,055 9,606,236
Total Unleveraged Present Value 16,413,140 16,105,431 15,804,972

Percentage Value Distribution

Income 38.67% 38.95% 39.22%
Net Sale Price 61.33% 61.05% 60.78%
100.00% 100.00% 100.00%