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DAHLEN & DWYER, INC. THE APPRAISAL PROCESS There are three basic valuation methodologies that may be used in estimating the market value of real estate. These three approaches analyze data from the market to develop independent value indications for the subject property. Although the three approaches are applied independently to the subject property, they are interrelated as they are all based on market derived data. These three approaches are the Cost Approach, the Direct Sales Comparison Approach and the Income Approach. The Cost Approach is based on the premise that an informed buyer will pay no more for a property than the cost of constructing a comparable property with similar utility. In this analysis, the cost to reproduce or replace the improvements is depreciation that has occurred. Accrued depreciation includes physical depreciation, functional obsolescence, and external obsolescence. To the depreciated value of the improvements is then added the site value, which is estimated through the direct comparison with other vacant sites that have sold in the area in recent years, with adjustments made for dissimilarities. The Cost Approach is particularly applicable and reliable when the property being appraised is relatively new with little accrued depreciation, or is of a highly specialized design and/or utility for which there exists few market sales comparables. The Direct Sales Comparison Approach has as its premise a comparison of the subject property with others of similar design, utility and features that have sold in the recent past. To indicate a value for the property, adjustments are made to the comparables for dissimilarities with the subject property. This approach is based on the proposition that an informed buyer would pay nor more for a property than the cost of acquiring an existing property with the same utility. This approach is most applicable and reliable when an active market provides sufficient sales of comparable properties for analysis. The Income Approach develops a value estimate for a property predicated on a detailed analysis of its earnings potential and the rate of return on an investment demanded by prudent investors in the marketplace. This analysis converts anticipated benefits and income to be derived from ownership of a property into a value estimate. Detailed income and expense analysis results in a new operating income that the subject is able to generate, which is then converted to a value indication for the property through the capitalization process. Normally, these three approaches will each .indicate a different value for the property being appraised. The last step of the appraisal process involves the appraiser analyzing the strengths and weaknesses of each of the three approaches utilized with the value indications reconciled and correlated to arrive at a final value estimate of the property.