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Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
Cpa Cpe   Why Consider A Real Estate Investment In The Current Market July 2009
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Cpa Cpe Why Consider A Real Estate Investment In The Current Market July 2009

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  • This Chart shows how private commercial real estate has performed compared to other asset classes during the last 3, 5 and 10 years. Historically private real estate has performed better on the upside than the other comparable asset classes.
  • It could be said that real estate investing is an art and science. Different types of real estate have various benefits and features for just about every client. Financial advisors need to consider what works best for their clients and their practice. By incorporating non-traded, directly owned real estate into a client portfolio, financial advisors may be able to lower risk and increase returns because real estate is not directly correlated to the daily fluctuations of the broader markets. This chart illustrates 3 hypothetical portfolios. The first portfolio consists of a blend of stocks, bonds and 30-day T-Bills (as represented by the S&P 500, the Lehman Bros. Bond Index and T-bill yields). The average annual return from 1989 to 2008 is 8.3% with a standard deviation of 8.2% The second and third portfolios illustrate that by including real estate to the portfolio (10% and 20% of the respectively) the average yield increased and the standard deviation decreased. Source: Morningstar (Data as of 12/31/08) – This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Stocks are represented by the S&P 500, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the 5-yr US Govt. Bond, Treasury bills by the 30-day US Treasury bill, and direct real estate by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. The average return and risk are represented by the arithmetic average return and standard deviation respectively. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability and thus risk of the investment returns.
  • Transcript

    • 1. Why Consider a Real Estate Investment in the Current Market Qtr 3 - 2009 Presented by: Richard Zimmerman, Founder 1031 Exchange Provider CPA Continuing Education Series
    • 2. Focus on the Opportunity
    • 3. Why You Should Consider Real Estate Now <ul><li>“ Buy land. They aren’t making any more of it.” </li></ul><ul><li>- Will Rogers </li></ul><ul><li>“ Buy when people want to sell. Sell when people want to buy.” </li></ul><ul><li>- Warren Buffett </li></ul><ul><li>“ Buy when there’s blood in the streets.” </li></ul><ul><li>- Baron Rothschild </li></ul><ul><li>“ At our price. On our terms. It’s our time.” </li></ul><ul><li>- Savvy Real Estate Investors </li></ul>
    • 4. The Forces Creating a Buyer’s Market
    • 5. Key Themes as of Q1 2009 <ul><li>CRE Fundamentals dramatically weaker across most major property segments and markets </li></ul><ul><ul><li>Price declines of 35%-45% (or more) expected, exceeding those of early 1990s </li></ul></ul><ul><ul><li>Rent declines and vacancy rates may approach those of the early 1990s </li></ul></ul><ul><ul><li>Current downturn is recessionary demand induced versus over-supply induced downturn of early 1990 </li></ul></ul><ul><li>Conduit collateral performance deteriorating at historically fast pace </li></ul><ul><ul><li>Total delinquency rate close to 2003 peak, and likely to exceed 3.5% by year-end </li></ul></ul><ul><ul><li>May reach 6% by 2010 (peak delinquency rates in early 1990s were 6%-7%) </li></ul></ul><ul><li>However, by far the greatest risk facing CMBS is maturity default/extension risk, not term default risk </li></ul><ul><ul><li>Large percentage of CMBS loans made in 2005-2008 will not qualify for refinancing without substantial equity injections due to: </li></ul></ul><ul><ul><ul><li>Much tighter underwriting standards </li></ul></ul></ul><ul><ul><ul><li>Massive price declines </li></ul></ul></ul><ul><ul><ul><li>Declining cash flow </li></ul></ul></ul>Source: Deutsche Bank
    • 6. Key Themes (cont) <ul><li>Government programs needed to avoid hundreds of billions of dollars of distressed CRE hitting the market and perpetuating a downward spiral on CRE Prices </li></ul><ul><ul><li>Damage to bank portfolios </li></ul></ul><ul><ul><li>Damage to insurance company portfolios </li></ul></ul><ul><ul><li>Other financial institutions </li></ul></ul><ul><li>TALF and PPIP </li></ul><ul><ul><li>Legacy AAA CMBS bonds to be added to TALF (financial details sketchy) </li></ul></ul><ul><ul><li>Expect AAA spreads to tighten and cash synthetic basis to compress </li></ul></ul><ul><li>How bad it gets in CRE depends on how bad the economy gets </li></ul>Source: Deutsche Bank
    • 7. How Did We Get Here? – Shadow Banking System Failure The Traditional Banking System Loans are largely funded by deposits The Shadow Banking System Originated loans are pooled and their cash flows and risks are traced and distributed to a wide range of investors, many of whom use short –term funding to invest in them <ul><li>Securitization did not spread risk and the sub-prime housing debacle became a catalyst for the financial crisis as liquidity fled the market driving down asset values </li></ul>Sources: Zandi, Financial Shock 2008 Depositors Commercial Banks, Saving Institutions, Credit Unions Residential Mortgages Consumer Credit Commercial Mortgages C&I Loans Asset-Backed Conduits Finance Companies RMBS ABS CMBS CLO CDOs: High-Grade, Mezzanine, Synthetic Money Market Repo Market SIVs Broker-Dealers Hedge Funds Pension Funds, Insurance Cos
    • 8. How the Shadow Banking System Failure Lead to the Beginning of a Downturn in Commercial Real Estate <ul><li>CMBS market froze as investors hurt by sub-prime exposure fled to the sidelines </li></ul><ul><li>Banks hit hard by asset write-downs shut down conduit lending operations </li></ul><ul><li>As financing became increasingly difficult for Commercial Real Estate owners, the volume of acquisitions came to an almost virtual halt </li></ul><ul><li>When broader credit froze, and the economy declined, negotiating power shifted from the landlords to the tenants, and sellers to buyers </li></ul><ul><li>Previously loose underwriting standards got a sober awakening as rental growth needed to support amortizing loan payments (often after interest only periods) never materialized, causing loan delinquencies, reduced returns and weakened balance sheets </li></ul>
    • 9. Commercial Real Estate: It’s the RTC Days But Worse <ul><li>Value declines most likely will exceed those of the early 1990’s </li></ul><ul><ul><li>Analysts are currently predicting 35%-55% price/value declines </li></ul></ul><ul><ul><li>Substantial decreases in rents and occupancies projected as commercial real estate catches up to the rest of the economic downturn </li></ul></ul><ul><ul><li>Low demand with excess supply is likely to continue well into 2010 and possibly 2011 </li></ul></ul>Source: Deutsche Bank Commercial Real Estate Outlook March 2009
    • 10. Commercial Real Estate: It’s the RTC Days But Worse <ul><li>Value declines most likely will exceed those of the early 1990’s </li></ul><ul><ul><li>Analysts are currently predicting 35%-55% price/value declines </li></ul></ul><ul><ul><li>Substantial decreases in rents and occupancies projected as commercial real estate catches up to the rest of the economic downturn </li></ul></ul><ul><ul><li>Low demand with excess supply is likely to continue well into 2010 and possibly 2011 </li></ul></ul><ul><li>Delinquency rates on commercial real estate debt is rising rapidly </li></ul><ul><ul><li>Total delinquency rate likely to be 3.5% by the end of 2009 and possibly 6% by 2010 </li></ul></ul>Source: Deutsche Bank Commercial Real Estate Outlook March 2009
    • 11. Commercial Real Estate: It’s the RTC Days But Worse <ul><li>Value declines most likely will exceed those of the early 1990’s </li></ul><ul><ul><li>Analysts are currently predicting 35%-55% price/value declines </li></ul></ul><ul><ul><li>Substantial decreases in rents and occupancies projected as commercial real estate catches up to the rest of the economic downturn </li></ul></ul><ul><ul><li>Low demand with excess supply is likely to continue well into 2010 and possibly 2011 </li></ul></ul><ul><li>Delinquency rates on commercial real estate debt is rising rapidly </li></ul><ul><ul><li>Total delinquency rate likely to be 3.5% by the end of 2009 and possibly 6% by 2010 </li></ul></ul><ul><li>Greatest risk facing Borrowers is inability to satisfy loans at maturity </li></ul><ul><ul><li>Large % of loans made in 2005/2008 will not qualify for refinancing without substantial equity injections due to: </li></ul></ul><ul><ul><ul><li>Much tighter underwriting standards </li></ul></ul></ul><ul><ul><ul><li>Massive price declines </li></ul></ul></ul><ul><ul><ul><li>Declining cash flows/debt service coverage ratios </li></ul></ul></ul>Source: Deutsche Bank Commercial Real Estate Outlook March 2009
    • 12. Why it is Just Starting to Get Bad, and Going to Get Worse <ul><li>The lag from unemployment </li></ul><ul><ul><li>On a year over year basis, U.S. non-farm payrolls have fallen over 2% </li></ul></ul><ul><ul><li>Many expect continued retraction in US Economy until middle to late 2009 </li></ul></ul><ul><ul><li>Labor Market, which lags behind the broader economy, is expected to contract until late 2010 </li></ul></ul><ul><ul><li>The correlation of payroll growth to absorption in commercial real estate indicates that commercial real estate will continue to see a decline well into 2010, and possibly early 2011 </li></ul></ul>Year-over-Year % Change in Non-Farm Payrolls (NFP) Vs. % Net Absorption Source: Barclays Capital Dec. 08
    • 13. Occupancy & Rental Rates are on a Sharp Decline Vacancy Rate by Property Segment (%) Source: Property & Portfolio Research; BIG Year over Year Rental Growth by Property Segment (%)
    • 14. Estimated Commercial Real Estate Debt Maturities ($ Bln) Source: Barclays Capital <ul><li>As of Feb 2009 approximately 2.11% of commercial loans were delinquent, and data points to escalating delinquencies </li></ul>
    • 15. CMBS Delinquency Rates Rising Sharply <ul><li>30-day and 60-day delinquency rates up 300% to 400% in 6 months </li></ul><ul><li>Expected aggregate delinquency rate will be in excess of 3.5% by end of 2009 and 5-6% by late 2010 </li></ul><ul><li>Monthly delinquencies are at a historic high </li></ul><ul><li>Total dollar amount of delinquent loans has grown by an average of 22% per month since October 2008 </li></ul>Sources: Deutsche Bank March 2009; Intex; Trepp
    • 16. Past vs. Present: Diverging Perspectives REFINANCE ANYONE?     Past Underwriting   Present Underwriting Going In Cap Rate   5% to 6.5%   8% to 10% (or more) Loan to Value More Debt- Higher LTV ratios (75% to 85%) More Equity- Lower LTV ratios 50% to 60% Amortization 5 yrs Interest Only then 30 yr Amortization 30 yr Amortization Term 5 to 10 years 10 years Interest Rate 95 points over 10 year UST (5.65%) 525 points over the 10 year UST (8.10%) Occupancy Levels   95%+ Average Occupancy Levels   80%+ Average Occupancy Levels Rental Growth Assumptions 3% to 6% Annual Rental Growth -5% 0% Annual Rental Growth for 3 years then 3% Operating Expense Assumptions 2.5% Annual Expense Growth 3% Annual Expense Growth NOI Growth Average 8% Annual NOI Growth -5% to 0% NOI Growth for 3 years then 3% NOI Growth Tenant Retention Ratios 90% Retention of Tenants 60% Retention of Tenants Lease Downtime from Rollovers 4 to 6 months 6 to 12 months for first 3 years, 6 months thereafter Average Lease Term 5 years 2 to 3 years Refinancing Assumptions Refinancing under original loan terms Refinancing under new terms Exit Cap Rate   5% to 6.5%   8% to 10% (or more) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
    • 17. Required ROE for levered CRE investors suggests price declines of 45% or more Source: Deutsche Bank 13.0% 12.8% 13.8% ROE 8.6% 7.4% 4.8% Cap Rate (going in) 58 68 105 Purchase Price ($MM) 60% 66% 85% Loan to Value (LTV) 23 23 16 Equity ($MM) 35 45 89 Loan Amount ($MM) 30yr 30yr IO Amortization 2.86% 2.86% 4.69% 10-year UST 25 25 50 Swap Spread 500 500 45 Credit Spread 8.11% 8.11% 5.64% All-in Rate 2.82 3.61 5.05 Yr 1 Interest Cost ($MM) 5.5 6.5 6.5 Yr 10 NOI ($MM) 1.36X 1.25X 1.00X Yr 1 DSCR 45% 35% Implied Price Decline 64 89 137 Yr 10 value 8.6% 7.4% 4.28% Cap Rate (exit) New Underwriting 15% NOI Decline New Underwriting 2007 Underwriting
    • 18. As property prices continue to decline, more vintages will face refinancing issues <ul><li>Price declines that have already taken place may pose significant problems for 2006 and 2007 loans that mature during the 2011-2012 period </li></ul><ul><li>Further price declines would likely create significant problems for earlier vintages </li></ul>Price Decline from October 2007 Peak 12% 24% 37% 41% Takes Prices Back To: Early 2006 Early 2005 Early 2004 Early 2003 Source: Deutsche Bank
    • 19. Estimating the number of loans that will qualify for refinancing <ul><li>Project individual property cash flows using Portfolio and Property Research (PPR) rent growth and vacancy assumptions. </li></ul><ul><li>Specify average cap rates at each future date for each property type </li></ul><ul><li>Use the above to deduce LTV and DSCR at maturity for each loan under this scenario </li></ul><ul><li>Specify assumptions about maximum LTV and minimum DSCR for refinancing </li></ul><ul><li>Calculate aggregate value of loans that do not qualify for refinancing. </li></ul>
    • 20. Scenario assumptions <ul><li>PPR Recession Scenario – Aggregate 5-yr NOI growth by property type </li></ul><ul><li>Assumed current and future cap rates </li></ul>PPR Aggregate Current-to-Trough NOI Decline -8.5 Industrial % NOI Change Property Segment -20.0 Hotel -16.1 Retail -13.1 Office -4.4 Multifamily 8.0 8.0 10yrs Fwd 8.0 8.0 8.5 8.5 Non-Multifamily 8.0 9.0 9.5 9.5 Multifamily 18yrs Fwd 5yrs Fwd 2yrs Fwd Current Property Segment
    • 21. Loans maturing 2009-2012: Lenient Underwriting <ul><li>For loans maturing through 2012, even lenient underwriting requirements imply the majority (56.8%) of loans will not qualify </li></ul><ul><li>Out of $154.5 billion of maturing loans, $87.7 billion do no qualify </li></ul><ul><li>Office and multifamily are most severely impacted segments </li></ul>Source: Intex, Trepp Loans Maturing 2009 – 2012 Refinancing Requirement: LTV < 80% 66.3 45.5 27.1 1,196 40.9 2,629 Office 67.5 51.6 16.5 1,959 24.4 3,793 Multifamily 36.4 29.9 2.1 356 5.8 1,189 Industrial 52.8 38.5 3.9 183 7.4 475 Hotel 47.2 37.1 10.4 249 22.0 672 Multi Propetry 87.7 5.1 22.7 Defaulted Balance ($BB) 6,068 513 1,612 # Defaulted Loans 154.5 9.4 44.6 Balance ($BB) 14,459 1,545 4,156 # Loans Aggregate Other Retail Property Type 56.8 42.0 54.0 33.2 50.8 38.8 % Not Qualifying (Balance) % Not Qualifying (Count)
    • 22. Loans maturing 2009-2012: Conservative Underwriting <ul><li>For loans maturing through 2012, conservative refinancing assumptions imply approximately two-thirds of maturing loans will not qualify for refinancing </li></ul><ul><li>Fewer than 25% of multifamily loans and 25% of office loans qualify under this scenario </li></ul>Source: Intex, Trepp Loans Maturing 2009 – 2012 Refinancing Requirement: LTV < 70% 75.7 55.5 31.0 1,459 40.9 2,629 Office 75.2 57.2 18.4 2,170 24.4 3,793 Multifamily 45.8 36.8 2.7 438 5.8 1,189 Industrial 57.3 42.1 4.2 200 7.4 475 Hotel 54.1 44.6 11.9 300 22.0 672 Multi Propetry 87.7 5.9 28.5 Defaulted Balance ($BB) 7,415 667 2,181 # Defaulted Loans 154.5 9.4 44.6 Balance ($BB) 14,459 1,545 4,156 # Loans Aggregate Other Retail Property Type 66.4 51.3 62.5 43.2 64.0 52.5 % Not Qualifying (Balance) % Not Qualifying (Count)
    • 23. These estimates are regarded as lower bounds because of the following factors <ul><li>PPR NOI projections are optimistic </li></ul><ul><li>The minimum LTV is more likely to be in the 60%-65% range, NOT 70% </li></ul><ul><li>These estimates are imposing only value (LTV) constraints, not cash flow coverage constraints (DSCR) </li></ul><ul><ul><li>In imposing DSCR constraints, need to take account of much higher financing costs relative to financing costs of existing loans </li></ul></ul><ul><ul><li>DSCR constraints would likely result in vastly more loans failing to qualify for refinancing. </li></ul></ul>
    • 24. Why Invest in Real Estate Now <ul><li>This recession has created tremendous opportunities to invest in real estate. </li></ul><ul><ul><li>No competitive real estate market </li></ul></ul><ul><ul><li>Inability to refinance many properties </li></ul></ul><ul><ul><li>Quality off-market, distressed-owner properties </li></ul></ul><ul><ul><li>Real Estate has consistently been a top performer </li></ul></ul>
    • 25. FACTS! <ul><li>Most TICs, Funds and Non-traded REITs have performed well relative to other investments. </li></ul><ul><li>This recession is generating favorable acquisition opportunities. </li></ul><ul><li>Yields on acquisitions have improved. </li></ul><ul><li>Real estate is non-correlated to stocks and bonds. </li></ul><ul><li>More wealth has been created from real estate investments than any other asset. </li></ul><ul><li>Real estate is a tangible asset whose values tend to outpace inflation. </li></ul><ul><li>Emotional investing is bad investing. </li></ul><ul><li>Early cycle investors often reap the benefits of including under-valued investments in their portfolio. </li></ul><ul><li>The level of wealth creation and transfer of wealth from the current crisis is no doubt a once in a century opportunity. </li></ul>
    • 26. Who will benefit from the redistribution of wealth and foreclosures? <ul><li>Those who are prepared. </li></ul><ul><li>Those who have available cash or credit. </li></ul><ul><li>Those who are open to a next generation of real estate opportunities. </li></ul>
    • 27. So, Why Invest Now? Reason One Diversification Reduces Risk and Potentially Increases Total Return
    • 28.  
    • 29. <ul><li>Commercial property prices are now 26.9% lower than one year ago and 33.9% below the level seen two years ago, as measured by the CPPI. </li></ul><ul><li>Values on commercial property prices are now 35.5% below the peak seen in October 2007. </li></ul>
    • 30.  
    • 31. CMBS Delinquency Rates Rising Sharply <ul><li>30-day and 60-day delinquency rates up 300% to 400% in 6 months </li></ul><ul><li>Expected aggregate delinquency rate will be in excess of 3.5% by end of 2009 and 5-6% by late 2010 </li></ul>Sources: Deutsche Bank March 2009; Intex; Trepp
    • 32. CMBS Delinquency Rates Rising Sharply <ul><li>30-day and 60-day delinquency rates up 300% to 400% in 6 months </li></ul><ul><li>Expected aggregate delinquency rate will be in excess of 3.5% by end of 2009 and 5-6% by late 2010 </li></ul><ul><li>Monthly delinquencies are at a historic high </li></ul><ul><li>Total dollar amount of delinquent loans has grown by an average of 22% per month since October 2008 </li></ul>Sources: Deutsche Bank March 2009; Intex; Trepp
    • 33.  
    • 34.  
    • 35.  
    • 36. Real Estate Overview <ul><li>Is the glass half full or half empty? </li></ul>
    • 37. Private Real Estate Has Performed Private Real Estate - compared to Public Real Estate, Stocks and Bonds – has provided the highest average returns over the past 3, 5 and 10 year periods. Source: National Council of Real Estate Investment Fiduciaries. The chart above shows the average returns of different investments.  Each of the respective investments possess different features, including investors’ expectations, investment objectives, risks, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal, returns (if any), and tax features, which must be considered when evaluating the performance of such investments.  The index returns are shown for illustrative purposes only, you cannot invest in directly in an index.  Past performance is no guarantee of future results.
    • 38. Lower Risk Levels for Privately Held Real Estate Standard Deviation 1985-2008* Source: Morningstar, Inc. * Chart Benchmarks: Direct real estate is represented by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. REITs are represented by the FTSE NAREIT Equity REIT Index, large cap stocks are represented by the S&P 500, small cap stocks are represented by the performance of the Dimensional fund Advisors, Inc. (DFA) United States Micro Cap Portfolio, and international stocks are represented by the Morgan Stanley Capital International Europe, Australasia, and Far East.(EAFE) index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
    • 39. Non-Correlation to Other Asset Classes Real Estate Vs. Equities 1985-2008 * Chart Benchmarks: Direct real estate is represented by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. REITs are represented by the FTSE NAREIT Equity REIT Index, large cap stocks are represented by the S&P 500, small cap stocks are represented by the performance of the Dimensional fund Advisors, Inc. (DFA) United States Micro Cap Portfolio, and international stocks are represented by the Morgan Stanley Capital International Europe, Australasia, and Far East.(EAFE) index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. 1.00 0.59 0.74 0.44 0.21 Int’L Stocks (MSCI) 1.00 0.80 0.64 0.26 Small CAP Stocks (Russell 2000) 1.00 0.53 0.29 Large CAP Stocks (S&P 500) 1.00 0.33 Publicly Traded REITS 1.00 Direct Real Estate Int’l Stocks (MSCI) Small CAP Stocks (Russell 2000) Large CAP Stocks (S&P 500) Publicly Traded REITS Direct Real Estate
    • 40. Real Estate may be able to Lower Risk and Increase Returns Hypothetical Portfolio Allocation 1989-2008 Source: Morningstar (Data as of 12/31/08 – This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Stocks are represented by the S&P 500, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the 5-yr US Govt. Bond, Treasury bills by the 30-day US Treasury bill, and direct real estate by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. The average return and risk are represented by the arithmetic average return and standard deviation respectively. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability and thus risk of the investment returns. WITH NO REAL ESTATE HOLDINGS WITH 10% REAL ESTATE HOLDINGS WITH 20% REAL ESTATE HOLDINGS Return 8.3% Risk 8.2% Return 8.4% Risk 7.6% Return 8.5% Risk 7.1% Stocks Bonds T-Bills Real Estate
    • 41. Why Invest Now Reason Two Recovery is Poised to Create Greater Demand
    • 42. Space Demand Will Outpace Supply Source: Property & Portfolio Research Apartment Forecast Office Forecast
    • 43. Space Demand Will Outpace Supply Source: Property & Portfolio Research Retail Forecast Industrial/Warehouse Forecast
    • 44.  
    • 45. Why Invest Now Reason Three There is Blood in the Streets
    • 46. Investors Cycle of Market Emotions We Are Here Optimistic “ Time to buy” Greatest Potential Risk Greatest Potential Opportunity “ Time to sell” “ Time to evaluate” Excited Elated Concerned Nervous Frightened Relieved Optimistic “ This is only temporary”
    • 47. Source: Real Capital Analytics
    • 48. Savvy Investors Cycle of Market Timing We Are Here “ This is only Temporary” Optimistic “ Time to evaluate” Greatest Potential Risk Greatest Potential Opportunity “ Time to Buy” “ Time to Buy” Concerned Nervous Relieved Optimistic Excited Elated Optimistic “ Time to Sell”
    • 49. Real Estate’s Future <ul><li>We do not know what the future holds. </li></ul><ul><li>We learn from the past and apply key learning to future investing. </li></ul><ul><li>Real estate is predicated on population growth and demographic trends </li></ul><ul><li>Each sector benefits variously to: </li></ul><ul><ul><li>overall population growth </li></ul></ul><ul><ul><li>employment growth </li></ul></ul><ul><ul><li>demographic changes </li></ul></ul><ul><ul><li>infrastructure developments. </li></ul></ul>
    • 50. <ul><li>Consider, that current valuations may not provide for an accurate reflection of overall asset values and where we are in the cycle. </li></ul><ul><ul><li>This is similar to the cycle during the 1990's, when there were huge price drops at the bottom of the market, but on very low volume. At the very “bottom” of the market, transactional velocity was at a standstill and it was nearly impossible to find “market bottom” assets to buy. </li></ul></ul><ul><ul><li>It was also the same in the stock market in March 2009, when the Dow hit of low of 6,443. At that moment, everyone had lost a ton of money on paper, but it quickly rebounded, as buyers re-entered the market. Just three weeks later the market was at 7,924 (up 23% from its low) and by June it was above 9,000 (up 40%). </li></ul></ul><ul><ul><li>In both cases, those investors who waited for the “bottom” of the market may have missed it. And, since market data often has a significant lag, investors not only missed the bottom, but much of the trough of the cycle. </li></ul></ul>
    • 51. <ul><li>Prices are down, but they aren't inherently what they appear and the perception of opportunity may be skewed. </li></ul><ul><li>When are we in the &quot;bottom&quot; of the market? Who is to say that we aren't in it now? </li></ul><ul><ul><li>Some data suggests increased volume and a slowing of price declines. </li></ul></ul><ul><ul><li>With huge money on the sidelines starting to come into the market, massive funds and REITs having to invest, TARP and other government assistance, a recovering economy, potential inflation, supply constraints, etc, combined with banks who are doing everything not to take assets back, it is possible that the meltdown in commercial real estate make not be as pronounced as the media suggests, and that the very low prices will be short lived and on small volume. </li></ul></ul><ul><ul><li>What will hundreds of billions of dollars slated for &quot;opportunistic&quot; investment do to prices, when there is a relatively limited supply? </li></ul></ul><ul><ul><li>Negative factors include lack of accessible credit, delinquencies and defaults, the disconnect between buyers and sellers, economic pressures, and investor sentiment. </li></ul></ul>
    • 52. <ul><li>Many indicators suggest that we are near the “bottom” of the cycle and that prices will stabilize and slightly rebound in early 2010. </li></ul><ul><li>Prices may stay down for a while, but as credit loosen up, the economy improves, and the large cache of funds is released on the market, values will rise. This will be positively impacted by inflation and the lack of new supply on the horizon. </li></ul><ul><li>Those who wait for news that he market has bottomed will have missed much of the opportunity. </li></ul>
    • 53. How To Take Aim to Maximize Returns Build a base using bottom up analysis <ul><ul><li>Property Segment </li></ul></ul><ul><ul><li>Property Segment Submarket </li></ul></ul><ul><ul><li>Rent Roll/Tenant Base </li></ul></ul><ul><ul><li>Economy- Local/National </li></ul></ul><ul><ul><li>Property Segment Market </li></ul></ul><ul><ul><li>Property Segment Micro-Market </li></ul></ul>Perform rigorous due diligence and underwriting <ul><ul><li>Property Condition/Environmental </li></ul></ul><ul><ul><li>Stress Test Scenarios/Assumptions </li></ul></ul><ul><ul><li>Tenant, Capital Costs & Liquidity </li></ul></ul><ul><ul><li>Site Visits/Local Presence </li></ul></ul><ul><ul><li>Property Segment Submarket </li></ul></ul><ul><ul><li>Leverage & Financing </li></ul></ul>Implement portfolio constraints to maximize cash flow <ul><ul><li>Allocate by property types and asset classes (Loans & Property) </li></ul></ul><ul><ul><li>Allocation of Equity </li></ul></ul><ul><ul><li>Investment Timeline & Holding Period </li></ul></ul>Hold to Stabilize & Reposition/Exploit Market Conditions <ul><ul><li>Sell into up cycles </li></ul></ul><ul><ul><li>Repositioning / Renovations </li></ul></ul><ul><ul><li>Bail out Distressed Owners/Lenders </li></ul></ul><ul><ul><li>Supply “gap” equity to venture partners </li></ul></ul><ul><ul><li>Hold through down cycles </li></ul></ul><ul><ul><li>Strong Asset Management </li></ul></ul><ul><ul><li>Aggressive Management </li></ul></ul>Assess Unique Market Characteristics <ul><ul><li>Transitional Markets </li></ul></ul><ul><ul><li>Utilize Market Presence/Network </li></ul></ul><ul><ul><li>Transitional Property Segments </li></ul></ul><ul><ul><li>Transitional Sub Markets </li></ul></ul><ul><ul><li>Catalyst Events </li></ul></ul>
    • 54. Holding Power & Cash Flow <ul><li>We take a 360 degree view of real estate, and then narrow in on two of our primary targets, preservation of investor capital and cash flow . Our tools are due diligence, risk management and portfolio allocation. Important to this investment approach are: </li></ul><ul><ul><li>Property Segment Analysis </li></ul></ul><ul><ul><li>Rent Roll/Tenant Analysis </li></ul></ul><ul><ul><ul><li>Rollover timeline and tenant base </li></ul></ul></ul><ul><ul><ul><li>Tenant interviews and market presence are key to assessing income stability </li></ul></ul></ul><ul><ul><li>Economic, Market and Submarket Analysis </li></ul></ul><ul><ul><ul><li>Broader economy sings the chorus while local economy sings the lead </li></ul></ul></ul><ul><ul><ul><li>Focus on data; bottom up, quantitative approach </li></ul></ul></ul><ul><ul><li>Rigorous Due Diligence and Underwriting </li></ul></ul><ul><ul><ul><li>Site visits, tenant interviews, local market presence, experienced due diligence team </li></ul></ul></ul><ul><ul><ul><li>Property condition, environmental, and energy efficiency </li></ul></ul></ul><ul><ul><ul><li>Stress testing multiple scenarios </li></ul></ul></ul><ul><ul><ul><li>Leverage, financing terms, capital costs, tenanting costs </li></ul></ul></ul>
    • 55. Exploit Changing Market Conditions & Achieve Capital Gains <ul><li>Without straying from our focus on capital preservation and cash flow, we are well aware that some of the most intriguing returns in real estate are provided by focusing on capital gains through value appreciation . To take advantage of this opportunity we overlay additional investment approaches: </li></ul><ul><ul><li>Assessment of unique market characteristics </li></ul></ul><ul><ul><ul><li>Neighborhoods in transition </li></ul></ul></ul><ul><ul><ul><li>Catalyst events that trigger an upside situation in a submarket or micro-market </li></ul></ul></ul><ul><ul><ul><li>Market presence, expertise and experienced partners are key to finding opportunities </li></ul></ul></ul>
    • 56. Exploit Changing Market Conditions & Achieve Capital Gains <ul><li>Without straying from our focus on capital preservation and cash flow, we are well aware that some of the most intriguing returns in real estate are provided by focusing on capital gains through value appreciation . To take advantage of this opportunity we overlay additional investment approaches: </li></ul><ul><ul><li>Assessment of unique market characteristics </li></ul></ul><ul><ul><ul><li>Neighborhoods in transition </li></ul></ul></ul><ul><ul><ul><li>Catalyst events that trigger an upside situation in a submarket or micro-market </li></ul></ul></ul><ul><ul><ul><li>Market presence, expertise and experienced partners are key to finding opportunities </li></ul></ul></ul><ul><ul><li>Implementation of portfolio constraints aimed at maintaining portfolio cash flow </li></ul></ul><ul><ul><ul><li>Allocation of Equity (analyzing investment dollars and aggregation of cash flows) </li></ul></ul></ul><ul><ul><ul><li>Investment timeline and holding period </li></ul></ul></ul>
    • 57. Exploit Changing Market Conditions & Achieve Capital Gains <ul><li>Without straying from our focus on capital preservation and cash flow, we are well aware that some of the most intriguing returns in real estate are provided by focusing on capital gains through value appreciation . To take advantage of this opportunity we overlay additional investment approaches: </li></ul><ul><ul><li>Assessment of unique market characteristics </li></ul></ul><ul><ul><ul><li>Neighborhoods in transition </li></ul></ul></ul><ul><ul><ul><li>Catalyst events that trigger an upside situation in a submarket or micro-market </li></ul></ul></ul><ul><ul><ul><li>Market presence, expertise and experienced partners are key to finding opportunities </li></ul></ul></ul><ul><ul><li>Implementation of portfolio constraints aimed at maintaining portfolio cash flow </li></ul></ul><ul><ul><ul><li>Allocation of Equity (analyzing investment dollars and aggregation of cash flows) </li></ul></ul></ul><ul><ul><ul><li>Investment timeline and holding period </li></ul></ul></ul><ul><ul><li>Strategies aimed at adapting to various market conditions that drive opportunities </li></ul></ul><ul><ul><ul><li>Renovations, repositioning, aggressive management and other value added strategies </li></ul></ul></ul><ul><ul><ul><li>Greening retrofits and renovations aimed at reducing exposure to rising energy costs and retaining tenants who want, or are required to be in, green buildings </li></ul></ul></ul><ul><ul><ul><li>Bailing out distressed owners/managers/lenders </li></ul></ul></ul><ul><ul><ul><li>Providing gap (later stage) equity to venture partners to enable completion of acquisitions and projects </li></ul></ul></ul>
    • 58. <ul><ul><li>Preserve, protect and return investor capital </li></ul></ul><ul><ul><li>Maximize cash flow </li></ul></ul><ul><ul><li>Capture potential capital gains over time </li></ul></ul>Investment Objectives RISK RETURN 3.) Capital Gains 2.) Maximize Cash Flow 1.) Capital Preservation
    • 59. Thank you Richard Zimmerman, Founder 1031 Exchange Provider (866) 590-9858

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