This document summarizes the current state of the commercial real estate lending market and provides tips for assembling a successful loan package. Key points include: - Lenders are taking a more conservative and disciplined approach to underwriting with tighter standards for borrower experience, cash reserves, and property financials. - It is important to provide accurate and up-to-date property operating data and financial projections, and be prepared to justify assumptions to skeptical lenders. - Additional tools like debt coverage ratios and market studies are now often required to supplement traditional metrics like capitalization rates.

1. Assembling a Loan Package That Attracts Dollars and Approvals Presented by: Georgia Ragsdale, Watermark Financial January 26-29, 2009 The Venetian Resort Hotel Casino/ Sands Expo & Convention Center Las Vegas

2. Agenda Assessment of Market Conditions New Realities in Underwriting Basic Assumptions: APOD (Annual Property Operating Data) Modeling Investment Analysis Tools What is Coming Navigating Change

3. National Debt Since WWII

4. Soaring National Debt

5. Equity Real Estate Prospects: 2008 vs Early 1990s Source: NCREIF; Moody’s Economy.com; Heitman Research 1990 2008 Investor Expectations Double-digit returns, inflation hedge, low volatility Single-digit core returns, inflation hedge if markets in balance, moderate volatility Liquidity Deteriorating and no capital Deteriorating but capital available for some strategies Institutional Underwriting Undisciplined Debt side undisciplined Equity side disciplined Pricing Spread between NCREIF current value cap rate of 6.97% and 10-Year Treasury Yield of 8.68% = -171 Spread between NCREIF current value cap rate of 5.61% and 10-Year Treasury Yield of 4.26% = +135 Property Market Conditions No link between supply and demand Office vacancy downtown: 14.0% Office vacancy suburban: 21.2% Demand and supply linked Office vacancy downtown: 9.6% Office vacancy suburban: 14.2% Outcome Value decline: 32% Value Decline: 15%-20%

6. Showing Up in Huge Pull Back in Transactions Source: Real Capital Analytics; HeitmanResearch

7. Changes in Financing

8. What This Means To Your Loan Package Good credit , banks don’t lend to borrowers who are late on their mortgages or defaulted on their homes Good cash , banks don’t lend to borrowers who are trying to take cash out of their commercial real estate because they have financial difficulties elsewhere. **Some banks are now look at borrowers and do a “global cash flow analysis, limiting the borrower to 50% debt to income –keep consumer debt down. Good experience , banks are not lending to new, inexperienced self storage operators in this market. Lenders are seeking additional deposits in exchange for lending to you, i.e. Accounts Lenders are asking for additional Due Diligence on Properties, Marketing Study

9. What This Means To Your Loan Package Borrower Needs: Personal Financial Statement 3 years tax returns- federal only, all schedules Bank / Brokerage Statements – to show your liquidity List of prior projects Property Needs: Property – if in operation Management Report Rent Roll Profit and Loss on the property – up to 3 years and year to date 3 years tax returns -federal only, all schedules

10. Your Relationship to the Underwriter:

12. Use Accurate and To Date Information 1. Know the Current Value of Your Property 2. Refute Assumptions of Bank

13. Cost of Funds Varies by Region When Underwriting Your Loan Package For Fixed Rates: Use 7% For Variable Rates: Use 8%

14. Leverage of Funds Varies by Region Leverage Ranges from High: 80% LTV to Low: 50% LTV Capped by DCR

15. Tools to Analyze Property Ammunition You Need To Have: Cap Rate Debt Coverage Ratio STATIC VS DYNAMIC

16. Cap Rate-A STATIC Snapshot Cap Rate= NOI/Value Going In Cap Rate Exit Cap Rate Buyers Cap Rate Sellers Cap Rate Brokers Cap Rate Lender's Cap Rate

17. Where to Get Cap Rate ASK: Appraiser, Self Storage in your area ASK: Self Storage Broker in your area From Comparables, average of last 5 sales in your area-averaged Comps 6 months ago are worthless Property Values are Dropping, Cap rates are rising Ideas of values are often not accurate

18. Cons of Cap Rate Only considers a snapshot in time 1. Disregards the property's expected performance over the entire holding period 2. Works with a number today 3. Only looks at one year 4. Doesn't tell you what the cap rate will be in the following years 5. Cap rates change over time-not a constant 6. Assumes data was reported accurately

19. Putting Pressure on Cap Rates Source: Real Capital Analytics; Heitman Research

20. Cap Rates: What Goes Up... 2003 through the end of 2007: a historic period marked by an abundance of capital at extremely low interest rates, cap rates for self-storage properties dropped from an average of 9.5% to 7.2%

21. Cap Rate Effect on Value and Loan Amount

22. DCR

23. DYNAMIC Evaluation Indicators Income Expenses NOI

24. Accurate Property Operating Data Lenders are Scrutinizing and Questioning Every Detail, Often Opting for Most Conservative Numbers

25. Annual Property Operating Data (APOD)

26. APOD (part 2)

27. Average Occupancy Per Region

28. Occupancy Trends

29. Income Raise Rents Maximize revenue streams Operational systems in place, automated Management Expertise, training Add new revenue generators

30. Expenses as Related to Income 2008 National Operating Expense Averages Expense/Income Ratio: 38.5% $/SF Change from 2007: +7.2% Total Expenses: $/SF Low: $0.13 $/SF High: $17.20 $/SF Average: $4.09

31. Current Trends Summation Industry Consolidation, larger portfolio transactions, fewer single asset transactions More Disciplined Investing: Discounted Cash Flow, Target IRR 10.5% (unlevered) Use of Market Study Required by Lenders Lender Demand for Banking Relationship (Deposits) and Multiple Sources of Repayment (cash flow from other existing businesses) Values based on Existing Cash Flow, Trailing Income NOT Pro-forma Continuing pressures: Over-supply and lack of credit Housing crisis will help or hurt SS? Data is inconclusive

32. Positive Summation Fundamentals Remain Strong 15% Vacancy Rate Both in Bull and Bear Cycles Trade Area Remains Constant: 3.25 radial miles from location, Average 6.52 feet per person, Change from 2007 (+6.45%) Asset class remains lowest in bank defaults of all commercial property types Growing Sophistication and Due Diligence by Borrowers

33. How It Has Been in Self Storage: Pooch

34. How It Is Now: Coyote

35. Watermark Financial Georgia Ragsdale, CEO 11150 W. Olympic Blvd. #150 Los Angeles, CA 90046 [email_address] www.watermarkfinancialgroup.com Office: 310-479-1260