Area Analysis

The property is located in the City of Billings Yellowstone County, Montana. Billings is located in south-central Montana, approximately 224 miles southeast of Helena (state capitol), 219 miles southeast of Great Falls, 142 miles east of Bozeman, 132 miles from the Northeast Entrance to the Yellowstone National Park and 120 miles northeast of Cody, Wyoming. The City of Billings and Yellowstone County are the largest in the state with populations of roughly 95,000 and 125,000 respectively. The City of Billings encompasses about 30 square miles, while Yellowstone County covers a 2,666 square mile area.

Yellowstone County is situated in a valley formed by the Yellowstone river and represents a blend of both plains and mountain regions. Sandstone cliffs referred to as the "rimrocks" measure from 300-to 500-feet high and form the northern and eastern boundaries of the city of Billings. Above the "rimrock" cliffs, the land is characterized by rolling to moderately steep hills with high flat tablelands. The southern boundary of Billings is formed by the Yellowstone River, which flows and courses in a northeasterly direction.

Billings was founded in 1882 and began as a railhead for the Northern Pacific Rail road company. Today, Billings is a regional hub for goods distributed over a vast trade area and serves as a regional center of agriculture, finance, medicine, education, industry and tourism. The city is home to two major oil refineries (Conoco and Exxon), two modern and fully-accredited hospitals (Deaconess Billings Clinic and St. Vincent Hospital & Health Center) and a cancer center, Montana State University-Billings and is served by the largest commercial airport in Montana (Logan International Airport). The city's economic base has become increasingly diverse and has undergone a healthy expansion throughout most of the 1990s. The following sections of this report illustrate teh area's health and economic diversification by discussing key economic and demographic statistics.

Employment Base Analysis

In order to assess the demographic forces driving the demand of real estate in the subject market, we have studied the composition and growth patterns (historical) of the area's employment base. The following analysis covers employment by industry type, employment growth trends and identification of significant employers. The source for most of the economic data used in the following analyses is The Billings Economic Handbook, 1999 published by the Billings Chamber of Commerce.

Employment By Industry Type

The following chart illustrates the average 1997 annual employment in Yellowstone County by industry as reported by the Montana Department of Labor and Industry.

AVERAGE ANNUAL EMPLOYMENT BY INDUSTRY

YELLOWSTONE COUNTY, MONTANA

INDUSTRY TYPE	Ave. Annual 1997 Employment	Percent of Total
Agriculture, Forestry, Fish	434	0.7%
Mining	291	0.5%
Construction	3,315	5.4%
Manufacturing	3,520	5.7%
Transportation, Communication & Utilities	3,506	5.7%
Wholesale Trade	5,545	9.0%
Retail Trade	14,404	23.4%
Finance, Insurance & Real Estate	3,138	5.1%
Services	17,442	28.4%
Government	7,879	12.8%

TOTAL	65,594	100%
Source: Montana Department of Labor & Industry, 1997

As Shown above, the service and retail trade sectors account for almost 52% of the area employment. The service sector is by far the larges at 28.4% of total employment followed by retail trade at 23.4%. The next largest employer is local, state and federal government, accounting for 12.8% of the total in Yellowstone County.

Employment Trends

The following table illustrates the employment and unemployment rate trends for the Billings MSA for the eight-year period from 1990 throughout 1998. As shown, Billings' employment growth has expanded at a steady and healthy pace throughout the 1990s while maintaining low unemployment rates between 4.0% and 5.4%. 'The average compound rate of annual employment growth for the eight-year period is 1.8%

BILLINGS MSA EMPLOYMENT TRENDS

Year	1990	1991	1992	1993	1994	1995	1996	1997	1998
Employed	58.800	59,322	61,908	62,826	64,827	63,708	65,218	65,594	67,697
% Change	NA	0.9%	4.4%	1.5%	3.2%	-1.7%	2.4%	0.6%	3.2%
Unemployed	4.8%	5.3%	5.4%	4.8%	4.0%	4.8%	4.4%	4.5%	4.0%
Source: Montana Department of Labor & Industry, 1997

Identification of Significant Employers

The following lists the top fifteen employers in Billings in terms of number of employees as of April 1999

TOP 15 EMPLOYERS BILLINGS, MSA, MONTANA

EMPLOYER	Total Employees
School District #2	2,200
Deaconess Billings Clinic	2,013
St. Vincent Hospital	1,634
City of Billings	1,075
Montana State University - Billings	913
Stillwater Mining Company	625
U.S. Postal Service	526
Albertson's	524
Yellowstone County	433
Sweetheart Bread Bakers	423
Norwest Bank	421
First Interstate Bank	414
Sysco Food Service	413
Montana Rail Link	352
Empire Sand & Gravel Co.	330

Source: Billings Area Chamber of Commerce

As illustrated above, Billings' largest employers are its schools, hospitals and city government. Other than the hospitals, the largest private sector employers are Stillwater Mining Company, Albertson's (grocery stores), Norwest and First Interstate banks and Sysco Foods (distribution). Based on the above, Billings does not appear to be reliant upon one industry type or dominated by any one employer.

Employment Base Conclusions

The previous employment base charts yield the following observations:

Billings' employment is dominated by the service and retail trade sectors and the city has a very limited manufacturing base.
Throughout the 1990s, compound annual employment growth has averaged 1.8%, while the unemployment rate has averages less than 5.0%
Area employment is diverse and contributes to the city's slow but steady historical employment growth patterns.
The area appears to be somewhat insulated from large business cycle swings.

POPULATION BASE ANALYSIS

In order to assess the demographic forces driving the demand of real estate in the subject market, we have also studied the growth patterns (historical and projected) of the area's population base. the following analysis covers only population growth trends for Yellowstone County. The source for this data The The Billings Economic Handbook, 1999 published by the Billings Chamber of Commerce; however, the actual information was taken for NPA Data Services reports.

MONTANA/YELLOWSTONE COUNTY POPULATION TRENDS

Year	1998	1999	2000	2001	2005	2010	2015	2020

Montana	894,360	901,710	909,160	916,160	946,750	986,750	1,029,430	1,075,550
Avg.%/Yr.	NA	0.8%	0.8%	0.8%	0.8%	0.8%	0.9%	0.9%

Yellowstone County	129,400	130,950	132,470	133,950	139,810	147,020	154,430	162,070
Ave. %/Tr.	NA	1.2%	1.2%	1.1%	1.1%	1.0%	1.0%	1.0%

Source: NPA Data Services

As illustrated in the above chart, the State of Montana is expected to experience slow, but steady population growth of 0.8% annually through 2010. However, NPA Data Services model projects that state wide population growth will increase to 0.9% annually from 2010 to 2020. Yellowstone county is projected to experience faster population growth than the state at 1.2% for 1999 and 2000 and then slowing to 1.1% annual growth from 2001 to 2005. The NPA Data Services' model also projects that Yellowstone County's population growth will moderate further to 1.0% annually from 2005 through 2020.

Overall, the State of Montana and Yellowstone County are projected to experience slow but steady population growth over the next 10 to 20 years. This amount of population growth is consistent with historical growth patterns and considered to be logical. Considering the above, the demand for commercial real estate in Yellowstone County driven by population growth should continue at a slow but steady pace in the future.

EFFECTIVE BUYING POWER ANALYSIS

Another statistical measure of economic vitality for MSAs in their Median Household Effective Buying Income (EBI) and total retail sales. These figures are calculated and published by Sales & Marketing Management Journal in their August issue each year. The following table summarizes total retail sales and EBI trend for the Billings MSA from 1987 through 1997.

EBI / TOTAL RETAIL SALES TRENDS-BILLINGS MSA

Year	1990	1991	1992	1993	1994	1995	1996	1997

Median HH EBI $	24,815	30,360	31,932	34,378	36,835	25,519	29,864	31,292
% Change	NA	22.3%	5.2%	7.7%	7.1%	-19.9%	1.2%	4.8%

Total Retail Sales ($Millions)	1,071.7	1,094.0	1,277.9	1,478.8	1,404.2	1,452.4	1,407.7	1,887.5
% Change	NA	2.1%	16.8%	15.4%	-4.8%	3.4%	-3.1%	34.1%
Source: Sales & Marketing Management Journal

The Billings MSA median household EBI increased dramatically from 1990 through 1994, and then plummeted almost 20% in 1995. since 1995, this statistic has increased at a rate above inflation. Overall, median household EBI has increased from 24,815 in 1990 to 31,292 in 1997, representing a compound annual growth rat4 of 3.4%. Total retail sales in Billings has increased rapidly throughout the 1990s. Overall, total retail sales increased form $1.07 billion in 1990 to $1.89 billion in 1997, representing a compound annual growth rate of 8.4%. Base upon these analyses, the Billings MSA has been undergoing strong retail sales growth as supported by healthy increases in median household EBI. These statistics indicate a healthy and growing economy.

TRADE AREA

Billings is the largest community in Montana and Wyoming and serves as the major trade center for eastern Montana and northern Wyoming. The primary trade area consists of Yellowstone county and 14 surrounding counties. There are an additional 19 counties in the secondary trade area that utilize Billings as their hub for transportation, trade, goods, and services. This expanded trade area drive Billings' economy beyond the normal limits that seem to be imposed by the statistics within the defined MSA. Therefore, Billings'' effective population, employment and consumer base is actually significantly larger than revealed by our statistical analysis of the MSA and was taken into consideration in our analysis.

CONCLUSIONS

Based on analyses of the Billings MSA / Yellowstone county employment base, population base and effective buying power, it appears that the area has experienced healthy growth patterns during the 1990s. This growth ahs been c0-cyclical with the national economic expansion that has persisted since 1991 and continues at a record-breaking paces as of the date of this report. However, many economists warn that the likelihood of a national economic slowdown is increasing. considering the above and the history of the Billings economy, a prudent investor would most likely project moderate and steady economic growth for the greater Billings area in the future.

SITE AND PROJECT DESCRIPTION

SITE ANALYSIS

The subject is presently a tract of farmland used for hay production. However, the Montana Department of Transportation has already constructed Zoo Drive through the property and is in the process of building the crossover and ramps to connect eh road with Interstate Highway90. Industrial Planning Associates has developed a proposed master plan that will subdivide the land into a number of smaller parcels and the proposed development name is Midland Empire Industrial and Commerce Center. However, the proposed plat has not been legally recorded as of the date of this appraisal and is subject to alterations. The following analysis focuses on the physical attributes of the site "as is" and the following Project Description will focus on the proposed platted lots for the subdivision of the property.

Location

The site is located in West Billings, Montana along the northwest side of Interstate Highway 90, the east side of Shiloh Road and the south side of Hesper Road. This site extends eastward almost all the way to south 32nd Street, but is separated from this artery by several smaller ownerships. The subject borders the IH-90 right-of-way east of the new Zoo Drive and is separated from direct interstate frontage by both the Montana Rail Link right-of -way and a concrete-lined water supply ditch.

The subject is presently surrounded by agricultural land on all sides. Zoo Montana and a gravel pit and farmland are immediately west of the property, across Shiloh road. The gravel pit and farmland are owned by the JTL Group, Inc. Farmland owned by the Walter family and farmland owned by the Big Sky Economic Development Authority are located north of the subject across Hesper Road. The land owned by the Walter family is envisioned as a future expansion of the subject subdivision by Industrial Planning Associates. The economic development entity has already platted their farmland into smaller subdivision lots and is marketing the project as the TrasTech Center. A wedge of various smaller ownerships used for agricultural uses and homes on acreage is located immediately east of the subject. South of the subject (across the interstate) is farmland with three proposed commercial subdivisions. (Hancock, R.F. Development Properties and Harnisch Trade Center). These proposed developments are not located in the he city limits of Billings, will not be served with public water and sewer lines are considered inferior to the subject. A 70-acre tract of farmland lies between the subject and IH-90 west of Zoo Drive. Ron Pierce, who plans to develop the site for his manufactured home and RV sales businesses, recently purchased this parcel W. note that this tract is not in the city limits of Billings and is not served by public water and sewer lines.

The subject has a strategic location at Billings' newest highway interchange and is currently surrounded by farmland transitioning to higher uses. Construction of the new interchange is expected to greatly enhance moblity in the area and attract a myraid of new commercial developments to the intersection.

Size and Shape

The subject property contains approximately 86 gross acres and is irregular in shape.

Topography/Terrain

The subject property is mostly level and at, or just below, street grade. The road grade slopes upward at the intersection of Shiloh Road and Hesper Road and the portion of the subject near this intersection is well below street level. Zoo Drive also slopes upward significantly as it approaches the IH-90 elevated interchange/overpass and the subject is well below street level near this intersection as well.

Soils and Drainage

Mr. Merle Listoe with Terracon (406) 656-3072 recently performed a soil analysis for the adjoining Pierce property. According to the Mr. Listoe, the farmland soils in vicinity of the subject are mostly lean, sandy-clays with underlying gravel and adequate to support most improvements. However, large structures such as office buildings, heavy-duty industrials and multistory hotels will likely require some add ional site work or enhanced foundations. Based upon his nearby analysis of the Pierce property, Mr. Listoe does not believe the subject will be affected by any abnormal soil conditions. Mr. Listoe also indicated that the farmland soils drain well and should not hamper development so long as proper drainage ins engineered into the development.

Access

Access to the subject is presently good and will be greatly enhanced once the interchange with Zoo Drive and the IH-90 interchange/overpass is completed in September of 2000. As currently configured, much of the site can be accessed from Shiloh and Hesper Roads as well as Zoo Drive. However, back lands are not accessible by road and street improvements will have to be added in the future in order to make the remainder of the subject developable.

Water and Sewer

The subject is in the city limits of Billings and the city agreed to serve the subject with water and sewer when the property was annexed. City representatives have stated to us that adequate water and sewer capacity exists to serve the entirety of the subject property as it becomes built-out. The city extended trunk water and sewer lines along Hesper Road to the approximate center of the subject at the proposed future intersection of Hesper Road and Gavel Road. Therefore, water and sewer lines are immediately available to serve the subject, however, significant sums will have to be spent for water and sewer service to reach the interior of the property.

Other Utilities

The subject site is not presently served by any other utilities; however, the following are available and will be installed as the property is developed:

Electricity: Northwestern Energy

Natural Gas: Montana Dakota Utilities Co.

Telephone: Quest

Zoning

The subject is located in the City of Billings and is subject to its zoning regulations. The subject is zoned CI "Controlled Industrial" and is the most liberal zoning for commercial development. After reviewing the list of permitted uses for the CI Zone we found that almost all forms of commercial development are allowed including office, light and heavy industrial, office warehouse/distribution, hotels and motels, restaurants, casinos, gas stations and convenience stores, automobile dealerships and recreational faculties. We also found that single and multi-family development is potentially allowable , but subject a special review committee. Based on this analysis, the subject's zoning does not limit the likely potential uses for the property.

Flood Zone

According to community Panel Number 300142-1015A of the FEMA maps, dated November 18, 1981, the subject is located n Zone C and not within a flood hazard area. Zone C is further described as "areas of minimal flooding" by FEMA. Therefore, the subject is not within a flood prone area.

Easements and Encumbrances

According to two title reports, the property is subject to several easements and encumbrances. The most noteworthy easement is the 20-foot wide Canyon Creek Ditch that courses northeasterly from the subject's most southwesterly point intersecting with Shiloh Road. The ditch affects the functional utility of the subject's Shiloh Road frontage south of Zoo Drive. This ditch courses northerly, then easterly and northerly again before existing at Hesper Road approximately half way between the proposed new Gable Road/Hesper Road intersection and the subject's most northeasterly corner. A 10-foot wide telecommunications easement runs parallel to the northern bank of this ditch in favor of U.s. West Communications. A 35-goot wide permanent easement and a 20-foot wide temporary easement also affect the portions of the site bordering Shiloh Road, north of Zoo Drive. A 40-foot wide permanent easement and a 20-foot wide temporary easement runs along the northern boundary of Zoo Drive starting from its intersection with the rail road right-of-way extending northwesterly approximately 930 feet. The subject is also traversed by a number of smaller easements for various temporary uses associated with improvements to Zoo Drive and Shiloh Road as well as utilities. Given the size of the subject and the relative location of the various easement described above, none are considered detrimental to the subject's development.

The subject is cut-off from the hard southeast corner of Shiloh Road and Hesper Road by the B.B. W. A. Canal. This portion of the subject is significantly below street grade and adversely influenced by the canal and could not be developed as a retail corner site without significant expense. Our analysis assumes that this corner will not be utilized as a corner retail site.

Environmental Considerations

During our site inspection of the subject property, we did not notice any obvious environmental hazards associated with the subject property. However we are not qualified to detect such hazards, and the valuation herein assumes that the site is free and clear of any environmental problems.

Property Taxes

This expense covers ad valorem taxes associated with the subject's real property. Presently, the subject land is being used as farmland and the land is being assessed in aggregate under a policy whereby the value of the land is assessed based upon its agricultural production value. In Montana, reassessments occur every five years and tax liabilities are calculated using both a mil levy and an assessment ratio (taxable rate). The process involves determine the assessed value, applying the assessment ratio (3.71%) to obtain the resulting taxable value and ten applying the mil levy (0.39201) to arrive at the final tax liability. The last reassessment took effect in January 1997 and the next reassessment is scheduled for January 2002. Since ad valorem property taxes are paid in arrears, the affect of the reassessment will not impact the tax liability until the subsequent year.

Existing Structures and Improvements

On the date of inspection, several structures and improvements were noted upon the subject. A house and a separate shed were observed along the south side of Hesper Road near the northeast corner of the subject. In addition, a house, a metal office warehouse building and a wooden barn were noted along the east side of Shiloh Road, out of its intersection with Zoo Drive. Our analysis assumes that these structures and improvements have not contributory value to the site and will be demolished an removed at the beginning of our analysis at a nominal cost.

CONCLUSIONS

Considering all the physical characteristics of the subject site, the property is large enough to support any number of potential commercial uses allowed by its liberal CI zoning. The site will have excellent access and visibility fro IH-90, Zoo Drive, Shiloh and Hesper Roads and is expected to attract a myriad of commercial users to the new interchange. There are no known adverse easements, environmental conditions or zoning restrictions that would limit the potential utilization of the property. Al utilities are immediately available to serve the site.

COMMERCIAL REAL ESTATE MARKET ANALYSIS

Value of Permits

It is also prudent to study the value of permit activity as a barometer of an area's economic strength. Therefore, we obtained statistics from the Building Inspection Division of the Planning Department and summarized the date, graphing the relationship between the whole metro area versus the city of Billings. Reference is made to the following page for the Historical Billings City / Metro Area Permit Activity chart that summarizes the value of permit data from 1991 through 1998.

As illustrated in the following chart, the value of all permit activity in the metro area was low (approximately $40 million) in 1991 due to the effects of a lingering national recession that curbed real estate activity in most MSAs across the nation. During the following three-year period, permit activity in the metro area increased at a rate of approximately 15% per year, or from $65 million in 1992 to $75 million in 1993 and to $95 million in 1994. Therefore, the value of all permits more than doubled from 1991 to 1994. Over the next three years from 1995 through 1997, the value of all permits in the metro area hovered around the $80 million t $95 million mark and appeared to be peaking. This notion was discounted in 1998 as the value of all permits jumped another 18% to break the $100 million barrier for the first time ever. Overall, the value of all permits in the metro area increased a total of 150% during the seven-year period from 1991 through 1998

Although the above represents a remarkable increase during a seven-year period, the increase in the value of all commercial permits is even more surprising. The value of commercial permits increased roughly 200% during the same time span. The value of commercial permits was roughly $17.5 million in 1991 and only ranged up to $20.1 million over the following tow years. However, the value of commercial permits in the metro area increase roughly 85% to $33.2 million n 1994, and fluctuated between $25.7 million and $34.4 million over the next three years. It appeared that the value of commercial permits was peaking during this time frame when over a 50% increase to an all time high of %52.5 million was recorded in 1998. We observe that the percentage of value of commercial permits captured by the city of Billings ha typically ranged from about 75% to 80% of the metro total and the average over the last five year is near 76%. We also note that the City of Billings appears to be sipping in regards to the overall value of permit capture rate that has declined from 81.6% in 1991 to 76.1% in 1998. Again, this appears to be attributable to an increase in single family development outside of the city limits.

In conclusion, permit activity for commercial properties has increased dramatically over the last seven years and does show signs of strengthening given the almost 53% increase in the value of commercial permits from 1997 to 1998. Again, reference is made to the following charts and graphs summarizing the value of permit data.

Click the link below to view charts:

Historical Billings City / Metro Area Permit Activity Top