Common use of Liquidation Analysis Clause in Contracts

Liquidation Analysis. The Purchaser determined that the fair value of each Unit falls within a range of $508 to $640 based upon the liquidation analysis described below. The Purchaser calculated this range on the basis of its estimate of the proceeds that could be realized from the sale of the Properties and the Partnership's other assets, less mortgage debt and other liabilities. To determine the prices at which the Properties could be sold by the Partnership, the Purchaser applied a capitalization rate of 9% to the net cash flow expected to be generated by the Properties in 1999, adjusted to reflect factors that a third party purchaser would consider relevant in evaluating the purchase of the Properties, and then subtracted amounts related to necessary capital improvements (i.e., the Capital Plan) and transaction costs associated with the purchase of the Property. In deriving the net cash flow attributable to the Properties, the Purchaser made the following adjustments to 1999 budgeted cash flow: (a) an increase to current gross rents to reflect varying growth rates of between 1.5% and 3% per annum, offset by vacancy and bad debt expense at a rate of 7%; and (b) adjustments to expenses associated with the Properties following a sale to a third party, including insurance costs, varying levels of replacement reserves, taxes and management fees. This resulted in estimated aggregate cash flows for the Properties of between $3,753,000 and $4,065,000, against which the Purchaser applied a capitalization rate of 9% and deducted (a) estimated closing costs associated with such sales of 3% and (b) the estimated cost of the Improvements of $10,000,000 to arrive at an aggregate gross value of the Properties of between $30,467,000 and $33,828,000. The addition of approximately $1,614,000 of cash and other assets of the Partnerships, less $19,205,000 of mortgage debt and other liabilities associated with the Partnership, resulted in a value range for the Units of between $508 and $640. Projections are by their nature speculative and no assurance can be given that a projection will accurately reflect the rental income actually achieved. A capitalization rate is a rate of return commonly applied by buyers of real estate to property income to determine the present value of income property. The choice of capitalization rate is subjective and based on, among other things a buyer's evaluation of a property's location and condition. The lower the capitalization rate utilized, the higher the value produced, and the higher the capitalization rate utilized, the lower the value produced. The Purchaser utilized a capitalization rate of 9% to determine the value of the Properties. The Madison Offer utilized a capitalization rate of 12.43%, which ▇▇▇▇▇▇▇ stated was within the range of capitalization rates currently employed in the marketplace for apartment buildings of the Properties' age and quality. In connection with a third-party tender offer in 1996, the General Partners estimated the value of a Unit at $661. Such valuation was based on market and other conditions at the time, and did not reflect the current market conditions and the expenditures that would be required to implement the Capital Plan. Although the Purchaser believes that the values calculated utilizing the method described above fairly represent the value of the Properties and the value of the Units, an actual sale of the Properties at this time or in the future might generate a sale price either higher or lower than the range of values calculated above. Further, the Purchaser believes that the per Unit proceeds which would be realized by Unitholders upon a liquidation of the Properties would be further reduced by contingent liabilities associated with the Properties. The range of values estimated above does not take into account timing considerations, market uncertainties and legal and other expenses that would be incurred in connection with a liquidation of the Partnership. An actual liquidation of the Partnership now, or in the future, might generate a higher or lower value for each Unit. As noted above, the General Partners have not yet determined how the Partnership would respond to the market developments described above in the event the Offer and the transactions contemplated hereby are not consummated. However, in the event the General Partners determine to sell the Properties in the future, the proceeds of such a sale would be subject to uncertainties in the real estate and financing markets at the time, as well as to possible adverse effects upon the cash flows generated by the Properties by the additions to the housing base in the markets served by the Properties. In view of the developments occurring in the markets described above, the expenditures required by the Capital Plan and the potential inability of the Partnership to finance the Improvements internally and through additional borrowings, the Purchaser believes that the liquidation analysis described above is the most appropriate valuation methodology.

Liquidation Analysis. The Purchaser determined that the fair value of each Unit falls within a range of $508 to $640 based upon the liquidation analysis described below. The Purchaser calculated this range on the basis of its estimate of the proceeds that could be realized from the sale of the Properties and the Partnership's other assets, less mortgage debt and other liabilities. To determine the prices at which the Properties could be sold by the Partnership, the Purchaser applied a capitalization rate of 9% to the net cash flow expected to be generated by the Properties in 1999, adjusted to reflect factors that a third party purchaser would consider relevant in evaluating the purchase of the Properties, and then subtracted amounts related to necessary capital improvements (i.e., the Capital Plan) and transaction costs associated with the purchase of the Property. In deriving the net cash flow attributable to the Properties, the Purchaser made the following adjustments to 1999 budgeted cash flow: (a) an increase to current gross rents to reflect varying growth rates of between 1.5% and 3% per annum, offset by vacancy and bad debt expense at a rate of 7%; and (b) adjustments to expenses associated with the Properties following a sale to a third party, including insurance costs, varying levels of replacement reserves, taxes and management fees. This resulted in estimated aggregate cash flows for the Properties of between $3,753,000 and $4,065,000, against which the Purchaser applied a capitalization rate of 9% and deducted (a) estimated closing costs associated with such sales of 3% and (b) the estimated cost of the Improvements of $10,000,000 to arrive at an aggregate gross value of the Properties of between $30,467,000 and $33,828,000. The addition of approximately $1,614,000 of cash and other assets of the Partnerships, less $19,205,000 of mortgage debt and other liabilities associated with the Partnership, resulted in a value range for the Units of between $508 and $640. Projections are by their nature speculative and no assurance can be given that a projection will accurately reflect the rental income actually achieved. A capitalization rate is a rate of return commonly applied by buyers of real estate to property income to determine the present value of income property. The choice of capitalization rate is subjective and based on, among other things a buyer's evaluation of a property's location and condition. The lower the capitalization rate utilized, the higher the value produced, and the higher the capitalization rate utilized, the lower the value produced. The Purchaser utilized a capitalization rate of 9% to determine the value of the Properties. The Madison Offer utilized a capitalization rate of 12.43%, which ▇▇▇▇Madison stated was within ▇▇▇ stated was within the range ▇▇nge of capitalization rates currently employed in the marketplace for apartment buildings of the Properties' age and quality. In connection with a third-party tender offer in 1996, the General Partners estimated the value of a Unit at $661. Such valuation was based on market and other conditions at the time, and did not reflect the current market conditions and the expenditures that would be required to implement the Capital Plan. Although the Purchaser believes that the values calculated utilizing the method described above fairly represent the value of the Properties and the value of the Units, an actual sale of the Properties at this time or in the future might generate a sale price either higher or lower than the range of values calculated above. Further, the Purchaser believes that the per Unit proceeds which would be realized by Unitholders upon a liquidation of the Properties would be further reduced by contingent liabilities associated with the Properties. The range of values estimated above does not take into account timing considerations, market uncertainties and legal and other expenses that would be incurred in connection with a liquidation of the Partnership. An actual liquidation of the Partnership now, or in the future, might generate a higher or lower value for each Unit. As noted above, the General Partners have not yet determined how the Partnership would respond to the market developments described above in the event the Offer and the transactions contemplated hereby are not consummated. However, in the event the General Partners determine to sell the Properties in the future, the proceeds of such a sale would be subject to uncertainties in the real estate and financing markets at the time, as well as to possible adverse effects upon the cash flows generated by the Properties by the additions to the housing base in the markets served by the Properties. In view of the developments occurring in the markets described above, the expenditures required by the Capital Plan and the potential inability of the Partnership to finance the Improvements internally and through additional borrowings, the Purchaser believes that the liquidation analysis described above is the most appropriate valuation methodology.