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W <br />MARKET VALUE <br />The market value of a commercial building is based on the quality of the lease(s) attached to <br />the property and how the lease equates to free cash flow (calculated as all income minus all <br />expenses (depreciation, original costs, capital expenses, operating expenses, etc.). The <br />quality of the lease is based on the price per square foot, length of the lease, and credit <br />worthiness of the lease holder. Free cash flow is then. The challenge in extrapolating this <br />type of valuation of a commercial property to County facilities is the lack of current leases, and <br />the fact that Orange County does not calculate free cash flow for their properties. <br />ECS used a local licensed commercial real estate broker to assist in determining a fair <br />market cost per square foot for buildings similar to those owned by Orange County, without <br />tenants. Without tenants (and associated leases) the value of a building is based on location, <br />condition of the building, strength of the rental submarket and demand for single- tenant, <br />owner occupied buildings. In reviewing the prospectus report of class A, B and C rental <br />space in Orange County, an average market value of $95 to $115 per square foot is a <br />reasonable starting point for fair market evaluation, included here as Appendix 3, presents the <br />annual operating cost per square foot, and Market Rental Cost per square foot for County <br />facilities where readily comparable facilities exist in the private market place. <br />If Orange County would attempt to sell these buildings with a long -term lease back condition <br />(Orange County would occupy but not own the buildings), the value of the properties would be <br />expected to increase, due to the free cash flow of the leases attached to the properties. The <br />amount of this increase would be dependent on the length of the lease and free cash flow <br />generated. <br />4 These classes represent a subjective quality rating of buildings which indicates the competitive ability of each building to attract <br />similar types of tenants. A combination of factors including rent, building finishes, system standards and efficiency, building <br />amenities, location /accessibility and market perception are used as relative measures. <br />Class A <br />Most prestigious bui9ldings competing for premier office users with rents above average for the area. Buildings have high quality <br />standard finishes, state of the art systems, exceptional accessibility and definite market presence. <br />Class B <br />Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for <br />the area. Building finishes are fair to good for the area and systems are adequate, but the building does not compete with Class A <br />at the same price. <br />Class C <br />Buildings competing for tenants requiring functional space at rents below the average for the area. <br />-17- <br />