Shorenstein Company LLC. Real Estate Case Study

Transcription

1 Shorenstein Company LLC Presentation to Yale School of Management February 1, 2005

2 Table of Contents 1 Questions for Discussion 8 Exhibit A: Investment Scorecard 9 Exhibit B: The Park Avenue Building 12 Exhibit C: The Lexington Avenue Buildings 18 Exhibit D: Debt Assumptions 24 Exhibit E: Glossary of Terms 26

3 Overview In the summer of 2004, two office properties near Grand Central Terminal in Midtown Manhattan were marketed for sale. Shorenstein Company, one of the country's largest and oldest real estate organizations, was interested in increasing its portfolio in New York City, and both properties represented attractive investment opportunities with value-added or redevelopment potential. The first property, located on Park Avenue (the Park Avenue Building ), is a Class B+ building that presented an opportunity to acquire a well-located asset with a stable, diversified, high-quality tenant base. The Park Avenue Building also offered significant potential for additional long-term value creation through the redevelopment of the lobby and retail spaces. The second property (the Lexington Avenue Buildings ) consisted of two, interconnected Class B+ buildings that occupy an entire city block between Lexington Avenue and Third Avenue. The owner of the buildings, a large pension fund, was also the lead occupier utilizing the property as part of its national headquarters. The pension fund was due to vacate over 50% of the net rentable area by December 2005, which presented an opportunity to re-lease and redevelop an entire city block in the Grand Central submarket in Manhattan. Company Overview Shorenstein Company From its beginnings in 1924 as a regional brokerage and property management company, Shorenstein Company has evolved into a fully integrated investment company, active on a national scale in all aspects of ownership, management, leasing, and development of high-quality office properties. Depending on investment activity, the company s portfolio usually consists of 20 to 25 million square feet of premier office projects around the country. It is privately owned and is headquartered in San Francisco, employing over 250 professionals engaged in all aspects of real estate ownership. Shorenstein seeks to generate appropriate risk-adjusted returns through investments in high-quality, welllocated office properties in major urban centers. In seeking to achieve this goal, it approaches real estate as a long-term operating business set against a backdrop of powerful market cycles driven primarily by capital flows. With this goal and orientation, Shorenstein has executed an investment strategy built on a number of core principles: Invest only in high-quality, well-located office buildings with demonstrated and sustainable leasing advantages over their competition that allow Shorenstein to keep a property well occupied during downturns in leasing cycles. Structure capital investments to mitigate downside risks. Add value during the holding period through Shorenstein s substantial in-house operating and leasing expertise. Utilize prudent debt levels to enhance returns while protecting invested equity through market cycles. Maintain durable cash flow through a high-credit, carefully managed rent roll, and maximize tenant retention through the delivery of excellent service to tenants. Closely monitor capital markets for advantageous dispositions or refinancings. 1

4 Case Study continued The Fund Structure Between 1992 and 2003, Shorenstein has sponsored six closed-end investment funds with a substantial investment by Shorenstein in each fund. The investors are primarily college endowments, foundations, and high net worth individuals. The funds had a total of $1.5 billion in equity capital; with leverage (averaging approximately 65% loan-to-value ratios), this amounts to approximately $4.3 billion of transactions. Shorenstein is currently completing the investment of its sixth fund ( Fund Six ). In 2004, Shorenstein closed its seventh fund with $775 million in equity. This fund will begin investing once Fund Six is fully invested. Fund Six was closed in August 2001 with $609.4 million in equity capital. At the time of this investment decision, approximately 60% of Fund Six had been invested; the purchase of either the Park Avenue Building or the Lexington Avenue Buildings would be its ninth investment and would result in Fund Six being approximately 85% invested. The first eight investments by Fund Six are: 500 West Monroe a 45-story, 920,000 square foot Class A tower located in the West Loop submarket of Chicago. Two Liberty Place a highly structured debt and equity investment in a 57-story, 1.26 million square foot Class A tower located in the Central Business District of Philadelphia. 450 Lexington Avenue a 40-story, 911,000 square foot Class A tower in the Grand Central submarket of New York City. US Bank Plaza a 25-story, 429,000 square foot Class A tower located in Downtown Sacramento. 123 Mission a partial interest in a 29-story, 330,000 square foot building located in the South Financial District submarket of San Francisco. Fund Six s partner in this investment is Shorenstein s fourth fund. Hamilton Square a 9-story, 237,000 square foot Class A building located in the East End submarket of Washington, D.C Broadway and 350 Madison Avenue a junior mezzanine loan collateralized by equity interests in a joint venture which owns 1440 Broadway and 350 Madison Avenue, located in New York City s Times Square and Grand Central submarkets, respectively Pennsylvania Avenue, N.W. a preferred equity investment in a 14-story, 331,000 square foot building, also known as the Presidential Building, located in the East End submarket in Washington, D.C. A summary of the Shorenstein funds and their performance is attached as Exhibit A. Additional information about Shorenstein can be found on 2

5 Case Study continued Market Summary Shorenstein believes that a majority of each fund should be invested in major urban office markets such as New York City, Washington, DC, Boston, San Francisco, Los Angeles, and Chicago. These markets tend to enjoy greater leasing velocity and capital markets liquidity than secondary ones (Charlotte, New Orleans, Phoenix, etc.) during most points in the economic cycle. While all markets experience the benefits of an economic expansion, increases in leasing activity and rental rate growth in major markets often outpace the secondary markets. In periods of economic recession, the major markets have repeatedly proven more resilient. They are often the last markets to decline and the first to recover, due to greater depth in the leasing market (by both size of tenants and diversity of industry). Investments in major markets have also proven to be more liquid and financible due to greater investor and lender interest. For this reason, Fund Six was eager to invest again in New York City. In addition, the Park Avenue Building and the Lexington Avenue Buildings were near Grand Central Terminal and the largest of Fund Six s investments, 450 Lexington Avenue. Shorenstein knew the Grand Central submarket very well, having over 15 years of experience in the area. Midtown Manhattan Overview Midtown Manhattan is the largest Central Business District ( CBD ) office submarket in the United States, comprising 207 million square feet among 434 buildings. Of these, 277 buildings and 168 million square feet are considered Class A. 1 Submarket Total Inventory (MM, SF) Total Vacancy (includes sublease space) Class A Inventory (MM, SF) Class A Vacancy (includes sublease space) Class A Gross Rental Rate (PSF) Columbus Circle % % $49.33 Penn Plaza/Garment District % % $36.47 Times Square % % $51.11 Grand Central % % $46.27 Plaza District % % $56.92 Total/Average % % $51.43 Source: Torto Wheaton Research, 2004 Q2 As of the second quarter of 2004, while 22% lower than the record-setting highs in 2000, rental rates in Midtown had increased by over 44% in the prior 10 years. After negative net leasing absorption of over 5.8 million square feet from 2001 to 2003, the market had begun to rebound in mid net leasing absorption was nearly 2.7 million square feet in the first two quarters of the year. While the rebound had thus far been seen in leasing volume and velocity, it had not yet been reflected by a significant increase in rental rates. However, rents had stabilized and concessions (free rent, tenant improvement allowances provided by the landlords) had decreased. Assuming continued job growth in the service sector, especially in financial and legal jobs that largely drive the Midtown economy, it was expected that rents would increase over the next several years. (1) Though Shorenstein classified both target properties as Class B+ buildings, they appear in many databases as Class A buildings. They are included in the Class A statistics shown. 3

6 Case Study continued Grand Central Submarket The Grand Central submarket consists of all properties south of East 47th Street, north of East 30th Street, east of Fifth Avenue, and west of the East River. Within Midtown, the Grand Central submarket is the second largest Class A submarket both in terms of area and the number of buildings, encompassing 83 buildings and over 41 million square feet. Grand Central has historically enjoyed strong leasing activity because of its convenient proximity to major mass transportation hubs. As of the second quarter of 2004, the Class A vacancy rate in the Grand Central submarket was 10.0% and the weighted average gross rent was $46.27 per square foot. This was 23% lower than 2000, but was over 50% higher than the rental rates recorded a decade before and 5% higher than in the prior year. While total net leasing absorption was a negative 1.9 million square feet over the prior three years, in the first two quarters of 2004, net leasing absorption had been a positive 637,000 square feet. Manhattan Investment Sales With such strong real estate fundamentals, especially relative to other markets around the country, most investors remained optimistic that an improving economy would only reinforce Midtown Manhattan s stability. Because of a confluence of historically low interest rates and an abundance of available capital, Manhattan investment sales activity in 2003 and 2004 was very brisk; in the first half of 2004, over $1.5 billion in Class A office building transactions had been completed with an average price of $400 per square foot. Recent Sales Comparables Property Building Size (SF) Sale Price (PSF) Sale Date 717 Fifth Avenue 450,000 $778 Jul Third Avenue 525,000 $404 Jul Fifth Avenue 497,000 $423 May Third Avenue 592,000 $397 Mar Fifth Avenue 426,500 $267 Feb Broadway 625,000 $400 Jan-04 Source: Real Capital Analytics, July 23, 2004 In tandem with gains in leasing activity and rental rate growth, the debt markets increasingly drove investment sales activity. Due to the low-interest rate environment, many investors took advantage of Positive Leverage in pricing assets. Whereas lenders had previously been comfortable with lending 65% to 75% of the acquisition cost, some transactions were financed with loan-to-value ratios of up to 85%, and sometimes even more. Buyers were able to either borrow at tight, competitive pricing on a short-term floating basis, or lock in fixed, low rates for a longer term. Commensurate with the low interest rates, capitalization rates had also fallen to historically low levels. 4

7 Case Study continued Capitalization rates on First Year Net Operating Income ( Initial Cap Rates ) had fallen to levels that typically ranged from 5.0% to 6.5% depending on location, quality and leasing profile. Capitalization Rates on stabilized Net Operating Income ( Stabilized Cap Rate ) ranged from 6.0% to 8.0% over the holding period. (A property would be stabilized when below-market occupancy or in-place rental rates reflected normal market conditions.) These Cap Rates are 100 to 200 basis points below historic averages. Please see Exhibit E for a glossary of many of the real estate terms used above, as well as other commonly used terms. The Park Avenue Building The Park Avenue Building is a 25-story, 575,000 square foot building. The property presented Shorenstein with an opportunity to acquire a very well located, Class B+ office building with a high-quality tenant roster and stable revenue stream. These attributes alone made the property a desirable investment expected to deliver an attractive return throughout the holding period. In addition, several opportunities existed to create additional value through the redevelopment of public and retail spaces and to reposition the property in the market through an aggressive leasing campaign. This investment presented a challenge and an opportunity to reposition the building to Class A- status. Coupled with its Class A location, the repositioned property would be very attractive on exit to core investors (e.g. pension funds), a buyer pool which is very deep and willing to pay a premium in return for acquiring very high quality, stable real estate with reduced risk. Shorenstein liked the Park Avenue Building for the following reasons: Location: The property was located across the street from Grand Central Terminal. Direct subway access was also available through a station entrance on Park Avenue. Thus, the property s premier location offered tenants convenient and flexible commutes that would be a primary leasing advantage over other competitive properties. Asset Quality: The property was built in 1923; however, over $26 million was spent on renovations in the last 3 years. These renovations included the overhaul or replacement of several major mechanical systems and the improvement of the façade, building entrances, sidewalks and common areas. High Quality Tenant Roster: The property was home to 14 office and 6 retail tenants that represented diverse industries such as publishing, insurance, real estate, advertising and media. Eight of these tenants had investment-grade ratings and in total occupied 48% of the property s net rentable area. Stable Occupancy: Only 50% of the property s leases expired between 2004 and 2009, roughly halfway through the projected holding period. This expiration schedule produced a steady stream of secure income, but also presented the opportunity for solid income growth as in-place leases were marked to market. Below Market Rents: The average office rent was estimated to be 17% below market and the average retail rent was estimated to be 24% below market, providing an excellent opportunity to increase revenues over the holding period. 5

8 Case Study continued Identity Creation / Lobby Renovation: The Park Avenue Building lacked street presence--the primary entrance was a narrow, unimpressive vestibule that led to the main lobby and reception desk. The property also lacked a strong identity, as the seller was not aggressive in promoting the building in the Grand Central submarket. The potential existed to relocate the building s entrance and/or redevelop the lobby to provide more of a high-quality boutique look and feel. These improvements, in combination with a more aggressive marketing program, could solve these problems of perception and aesthetics. Retail Redevelopment: The main retail tenant was a service firm that enjoyed a double-height ceiling with large, arched windows that overlook Park Avenue and 42nd Street. The primary customer service provided by this retailer was in decline. Shorenstein believed that this space could be re-leased to a higher-quality retail tenant that would pay a premium for the visibility from Park Avenue and Grand Central Terminal. The addition of a higher-profile, destination tenant could significantly strengthen the property's presence in the market. With input from its Leasing, Property Management, and Capital Markets groups, Shorenstein developed a Base Case proforma. A second proforma was also developed to represent the value-added opportunity where money was spent to redevelop the lobby and retail space, resulting in an increase in office and retail rents. The proformas, and the assumptions used to construct them, are attached as Exhibit B. The Lexington Avenue Buildings The Lexington Avenue Buildings are a single office complex comprised of two office towers of 34 and 31 stories, totaling 1.66 million square feet. They are interconnected on the ground floor and share some mechanical systems. Like the Park Avenue Building, the Lexington Avenue Buildings offered Shorenstein the opportunity to acquire a well-located asset in the Grand Central submarket. It also offered a redevelopment opportunity, but on a much larger scale. The buildings were built in 1959 and were similar in quality to many other generic institutional properties built along Third Avenue in its era. However, after a full redevelopment and re-leasing effort, the property could be repositioned as a Class A/A- asset. While the challenge was large, the rewards could be larger. For the last 25 years, the owner of the buildings, a large pension fund, was also the lead tenant using the property as part of its national headquarters. Due to corporate restructuring, which included moving a significant number of employees to another state, the pension fund had vacated most of its space in one building ( Building One ) and had begun to lease space to other tenants (although it planned on keeping a few floors through 2009). It occupied all of the office space in the second building ( Building Two ), but was planning on moving out completely by the end of As part of the sale transaction, the seller offered to enter into a master lease for the entire project through December 2005 at a net rent of $20 per square foot ($40 per square foot gross, including expenses), totaling approximately $33.2 million annually. This guaranteed annual net operating income would give Shorenstein the ability to start a marketing program ahead of the known vacancy date and defer lease-up costs. The seller hoped that this strategy would result in higher pricing for the asset. 6

9 Case Study continued Shorenstein liked the Lexington Avenue Buildings for the following reasons: Redevelopment Opportunities: Despite a lobby renovation in 1988, the buildings still looked dated. The opportunity existed to redevelop the property into a premier single- or multi-tenant asset located blocks away from Grand Central Terminal. Few opportunities existed in Manhattan, much less in Midtown, on such a large scale. Strategies included façade renovations, new streetscape designs, or even the creation of a mixed-use complex with multiple components -- the zoning of the parcel allowed additional uses aside from office use, including hotel, residential, and retail. In its Base Case proforma, Shorenstein underwrote $78 million in new capital for re-tenanting and allocated $25 million for the renovation of the lobby and the entrances (a full renovation, including façade work and system upgrades could cost much more). Market Fundamentals: Market statistics showed that large blocks of space were diminishing in Manhattan, especially in the Midtown office market. At the time of the sale, only 9 blocks of space over 250,000 square feet were available for lease, totaling 3.4 million square feet. At the same time, demand for space was increasing net absorption in Midtown Manhattan showed healthy gains after 3 years of losses. It was estimated that over 20 large companies were in the market looking at their options for space in excess of 150,000 square feet, potentially totaling over 8.0 million square feet. The large amount of available space at the property was expected to be attractive to many potential tenants, and would be one of a few locations that could accommodate a large corporate user, offering such user the ability to name and establish a large headquarters presence in Midtown. Just a few months earlier, a major publishing firm had signed a 15-year, 260,000 square foot lease for six floors of Building #1, space that was formerly occupied by the pension fund. The rent was $34.50 per square foot, with $4 per square foot increases every 5 years. Below Replacement Cost: The replacement cost of a Class A building in Midtown was estimated at $550 per square foot. Due to the age and vacancy of the buildings, Shorenstein estimated that the value of the asset in its present condition was far below that level, even when adding in the cost of the anticipated re-leasing and redevelopment costs. Based on preliminary valuations, the discount to replacement cost was estimated to be as much as 30% to 40%. Location: While not across the street from Grand Central Terminal like the Park Avenue Building, the property was only a couple of blocks away, still a distinct leasing advantage over many competitive properties in the market. Like the Park Avenue Building, a Base Case proforma was developed for the Lexington Avenue Buildings with input from the various Shorenstein business groups. A second proforma was also developed to represent a more aggressive view of the redevelopment opportunity, with higher market rents and an accelerated lease-up schedule. The proformas, and the assumptions used to construct them, are attached as Exhibit C. 7

10 Questions for Discussion 1. We have given you the reasons why Shorenstein considered buying each property. What reasons are there for Shorenstein not to buy each property? 2. What are the risks involved for each building? What do you think an appropriate rate of return should be for each investment opportunity? 3. What would be your financing strategy for each investment? What is an appropriate Loan-to-Value ratio? What loan terms would you underwrite? Can you explain the effect of Positive Leverage? Please refer to Exhibit D for loan pricing guidance. 4. What would you pay for each property? Which one would you rather buy? 5. How long would you plan to own the property? What would be your exit strategy? 6. Given the information provided on Shorenstein Company s history, strategy, and investment performance, which property do you think is a better fit for Fund Six? A glossary of common real estate terms is attached as Exhibit E. 8

11 Exhibit A Investment Fund Scorecard

12 Exhibit A Investment Fund Scorecard Summary of all Fund Activity as of December 31, 2004 Internal Rate of Return Committed Fund Capital Date Formed Gross Realized on Properties Sold Gross Projected on Properties Held Net Realized/ Projected Fund Total One Two Three Four Five Six Seven(a) $160.0 $200.0 $151.2 $100.0 $281.5 $609.4 $775.0 Million Million Million Million Million Million Million % 13.2% 22.4% 52.5% 14.7% N/M N/M N/A 12.2% 19.7% 19.4% 12.8% 15.2% N/M 16.3% 13.1% 18.4% 20.1% 10.3% 11.2% N/M Annualized Operating Cash Flow Distribution Yield Fund Inception to Date One Two Three Four Five Six 6.7% 6.5% 9.0% 7.2% 4.9% 8.4% Equity Multiples Operating Cash Fund Flow Distributions Realized Appreciation Realized Return of Capital Total Realized Equity Multiple Projected Equity Multiple One Two Three Four Five Six 0.45x 0.39x 0.36x 0.40x 0.20x 0.05x 0.64x 0.20x 0.27x 0.26x 0.02x 0.00x 1.00x 0.99x 0.65x 0.14x 0.38x 0.14x 2.09x 1.58x 1.28x 0.80x 0.60x 0.19x N/A 1.85x 2.70x 3.37x 1.58x 1.60x Loan-to-Value Average On Acquisition 63.7% Current 56.0% Methodology IRRs and Operating Cash Flow Distribution Yields are compounded monthly over the holding period. Results for assets that have not been sold are based on the operating cash flow distributions anticipated to be realized over the projected holding period and the disposition proceeds anticipated to be realized upon sale at the end of the projected holding period. Total fund results are net of all Sponsor fees and Sponsor distributions Held and Sold Property IRRs are gross of all Sponsor fees and Sponsor distributions. N/A = not applicable N/M = not meaningful (a) Fund Seven investment period commenced in July

13 Exhibit B The Park Avenue Building

14 Exhibit B The Park Avenue Building Size & Vacancy Square Feet Vacancy Vacancy as % of Total SF Office 523,458 17, % Retail 38, % Lower Level Retail and Storage 13,342 10, % Total 575,213 27, % Lease Expiration Schedule Year Square Feet % of Total SF Cumulative % of Total SF Vacant 27,195 5% 5% Month-to-Month 5,609 1% 6% ,506 3% 9% ,416 1% 10% ,542 8% 18% ,553 12% 30% ,595 12% 42% ,878 12% 54% ,129 30% 84% ,028 2% 85% ,562 14% 99% ,500 1% 100% Messenger Center 1,700 0% 100% Total 575, % Major Tenants Tenant Square Feet % of Total SF Lease Expiration Date Publishing Company 143,075 25% 12/2011 Publishing Company 68,878 12% 6/2009 Financial Company 58,615 10% 7/2008 Business Services Company 56,752 10% 8/2014 Real Estate Company 50,571 9% 5/2006 Financial Services Company 44,363 8% 12/2007 Advertising Company 29,054 5% 2/2011 Service Company (Retail) 24,057 4% 4/

15 Park Avenue Building Base Case ProForma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 INCOME Rental Income 20,700,090 21,704,038 23,544,659 24,646,917 26,252,371 27,925,708 28,878,031 28,701,544 33,811,745 35,171,639 36,343,478 Escalation Income 4,349,232 4,494,711 4,562,264 4,568,147 4,199,378 4,008,915 4,235,398 3,674,676 3,606,352 3,793,003 3,341,829 Miscellaneous Income 332, , , , , , , , , , ,082 Collection Loss - (198,938) (230,252) (296,078) (302,973) (303,251) (332,224) (347,730) (354,759) (361,867) (363,934) TOTAL INCOME 25,381,993 26,342,462 28,229,601 29,282,505 30,523,200 32,017,029 33,178,432 32,437,634 37,484,755 39,036,836 39,768,455 EXPENSES Operating Expenses 7,890,191 8,093,964 8,320,885 8,535,850 8,759,421 8,993,022 9,225,065 9,424,287 9,744,618 10,000,530 10,245,658 Real Estate Taxes 4,133,584 4,236,923 4,342,846 4,451,417 4,562,703 4,676,771 4,793,690 4,913,532 5,036,370 5,162,280 5,291,337 TOTAL EXPENSES 12,023,775 12,330,887 12,663,731 12,987,267 13,322,124 13,669,793 14,018,755 14,337,819 14,780,988 15,162,810 15,536,995 NET OPERATING INCOME 13,358,218 14,011,575 15,565,870 16,295,238 17,201,076 18,347,236 19,159,677 18,099,815 22,703,767 23,874,026 24,231,460 CAPITAL EXPENDITURES Tenant Improvements 874,524 1,453,075-1,214,904 1,187,139 2,028, ,540 2,993, ,985,634 Leasing Commissions 493, ,207 1,102, ,853 1,067,895 1,588, ,483 2,762, ,761 86,045 1,798,335 Capital Reserves 117, , , , , , , , , , ,064 TOTAL CAPITAL EXPENDITURES 1,485,837 2,423,192 1,228,340 2,243,244 2,388,031 3,753,737 1,194,169 5,901, , ,096 3,941,033 NET CASH FLOW 11,872,381 11,588,383 14,337,530 14,051,994 14,813,045 14,593,499 17,965,508 12,198,091 21,949,053 23,634,930 20,290,427 13

16 Park Avenue Building Base Case ProForma Assumptions Market Rent 2004 Growth Rates , Office Low-Rise (Floors 3-12) $ %, 7%, 5%, 5%, 3%+ High-Rise (Floors 13-25) $ %, 7%, 5%, 5%, 3%+ Retail Ground Floor $ %, 7%, 5%, 5%, 3%+ Concourse $ %, 7%, 5%, 5%, 3%+ Lower Level $ %, 7%, 5%, 5%, 3%+ Free Rent New Leases Renewals 8 months 3 months 6 months 2 months Tenant Improvements Growth Rates Office New Leases $45.00 $ %+ Renewals $15.00 $ %+ 14

17 Park Avenue Building ProForma 2: Value-Added Opportunity Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 INCOME Rental Income 20,700,090 21,704,038 22,966,285 23,405,630 28,066,482 30,184,971 31,475,571 31,652,840 37,844,823 38,642,643 38,933,567 Escalation Income 4,349,232 4,494,736 4,513,768 4,471,451 4,126,418 3,943,778 4,180,458 3,609,067 3,583,970 3,954,020 3,390,296 Miscellaneous Income 332, , , , , , , , , , ,082 Collection Loss (198,938) (222,817) (288,524) (380,949) (384,936) (420,195) (438,731) (448,700) (458,804) (463,994) TOTAL INCOME 25,381,993 26,342,487 27,610,166 27,952,076 32,186,375 34,129,470 35,633,061 35,232,320 41,401,510 42,571,920 42,306,951 EXPENSES Operating Expenses 7,890,191 8,093,965 8,308,496 8,509,242 8,792,685 9,035,270 9,274,157 9,480,180 9,822,953 10,071,231 10,296,428 Real Estate Taxes 4,133,584 4,236,923 4,342,846 4,451,417 4,562,703 4,676,771 4,793,690 4,913,532 5,036,370 5,162,280 5,291,337 TOTAL EXPENSES 12,023,775 12,330,888 12,651,342 12,960,659 13,355,388 13,712,041 14,067,847 14,393,712 14,859,323 15,233,511 15,587,765 NET OPERATING INCOME 13,358,218 14,011,599 14,958,824 14,991,417 18,830,987 20,417,429 21,565,214 20,838,608 26,542,187 27,338,409 26,719,186 CAPITAL EXPENDITURES Tenant Improvements 874,524 1,453,075-1,214,904 1,187,139 2,028, ,540 2,993, ,998,219 Leasing Commissions 493, , ,241 1,121,654 1,736, ,754 3,022,902-86,045 1,934,597 Redevelopment Costs ,000, Capital Reserves 117, , , , , , , , , , ,064 TOTAL CAPITAL EXPENDITURES 1,485,837 2,423,192 10,126,015 2,287,632 2,441,790 3,901,888 1,218,440 6,161, , ,096 4,089,880 NET CASH FLOW 11,872,381 11,588,407 4,832,809 12,703,785 16,389,197 16,515,541 20,346,774 14,676,849 26,393,234 27,099,313 22,629,306 15

18 Park Avenue Building ProForma 2: Value-Added Opportunity Assumptions All assumptions remained the same as in the Base Case Proforma with the following exceptions: Lobby and Retail Redevelopment It was assumed that the Lobby and Retail Redevelopment commenced and was completed in 2007, at a total cost of $10 million. Market Rent Office Market Rent assumptions were the same as in the Base Case Proforma until 2008, at which time they were increased, reflecting its upgrade in status to a Class A- building: 2008 Rent Increase Office Retail Low-Rise (Floors 3-12) High-Rise (Floors 14-26) Ground Floor Concourse Lower Level + $ $ $ $ $

19 Exhibit C The Lexington Avenue Buildings

20 Exhibit C The Lexington Avenue Buildings Size & Vacancy Building One Building Two Total Property Office Square Feet 712,468 Vacant SF 184,072 Vacant (% of SF) 26% Square Feet 834,230 Vacant SF 0 Vacant (% of SF) 0% Square Feet 1,546,698 Vacant SF 184,072 Vacant (% of SF) 12% Retail 33,077 8,972 27% 43,955 8,028 18% 77,032 17,000 22% Other 21,361 11,592 54% 17,055 2,552 15% 38,416 14,144 37% Total 766, ,636 27% 895,240 10,580 1% 1,662, ,216 13% Lease Expiration Schedule Year Square Feet % of Total SF Cumulative % of Total SF Vacant 215,216 13% 13% ,304 51% 64% ,380 0% 64% ,310 6% 70% ,968 2% 72% ,653 4% 76% ,220 1% 75% ,867 8% 83% ,736 1% 84% ,495 16% 100% Total 1,662, % Major Tenants Tenant Square Feet % of Total SF Lease Expiration Date Building One Publishing Company 261,495 34% 2/2021 Pension Fund (Seller) 93,310 12% 6/2009 Accounting Company 85,682 11% 7/2017 Financial Company 49,989 7% 4/2013 Building Two Pension Fund (Seller) 834,230 93% 12/2005 Parking Company 22,425 3% 11/2012 Retail 2 17,220 2% 11/

21 Lexington Avenue Buildings Base Case ProForma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 INCOME Rental Income 33,242,920 28,305,666 69,320,638 78,688,491 79,535,660 80,440,667 83,656,437 87,337,928 86,637,633 88,636,114 89,216,919 Escalation Income - 3,058,031 8,563,356 9,640,769 10,596,861 11,689,768 12,920,488 14,179,179 14,994,726 16,285,910 17,561,286 Vacancy / Credit Loss - (3,894,200) (4,416,463) (4,506,626) (4,606,522) (4,828,846) (5,049,794) (4,460,422) (5,246,101) (5,338,910) TOTAL INCOME 33,242,920 31,363,697 73,989,794 83,912,797 85,625,895 87,523,913 91,748,079 96,467,313 97,171,937 99,675, ,439,295 EXPENSES Operating Expenses - 9,256,885 24,014,822 24,764,671 25,484,040 26,332,333 27,208,167 28,110,049 28,979,866 30,012,535 31,007,688 Real Estate Taxes - 15,444,687 15,972,018 16,345,265 16,753,897 17,172,744 17,602,063 18,042,114 18,493,167 18,955,496 19,429,384 TOTAL OPERATING EXPENSES - 24,701,572 39,986,840 41,109,936 42,237,937 43,505,077 44,810,230 46,152,163 47,473,033 48,968,031 50,437,072 NET OPERATING INCOME 33,242,920 6,662,125 34,002,954 42,802,861 43,387,958 44,018,836 46,937,849 50,315,150 49,698,904 50,707,892 51,002,223 CAPITAL EXPENDITURES Tenant Improvements - 36,135,698 10,266, ,795, Leasing Commissions - 24,804,215 6,722,514 45, ,406, ,989 Renovation Costs - 20,972,011 4,466, Capital Reserves - 176, , , , , , , , , ,425 TOTAL CAPITAL EXPENDITURES - 82,088,261 21,637, , , , , ,555 3,419, , ,414 NET CASH FLOW 33,242,920 (75,426,136) 12,365,059 42,570,148 43,195,270 43,820,367 46,733,426 50,104,595 46,279,770 50,484,178 50,595,809 19

22 Lexington Avenue Buildings Base Case ProForma Assumptions Market Rent 2004 Growth Rates , Office Low-Rise (Floors 2-16) $ %, 7%, 5%, 5%, 3%+ High-Rise (Floors 17-34) $ %, 7%, 5%, 5%, 3%+ Retail Side Street Retail $ %, 7%, 5%, 5%, 3%+ Avenue Retail $ %, 7%, 5%, 5%, 3%+ Other Storage $ %, 7%, 5%, 5%, 3%+ Lease-Up Assumptions The existing vacant space and the space to be vacated by the Pension Fund/Seller was leased up as follows: Building Space Square Feet Lease-Up % of Total Vacancy Building 1 94,198 4/2006 Building 2 171,211 4/ ,409 25% Building 1 41,291 7/2006 Building 2 204,241 7/ ,532 24% Building 2 293,139 10/ ,139 28% Building 1 69,147 1/2007 Building 2 176,219 1/ ,366 23% Free Rent Tenant Improvements Growth Rates New Leases 8 months 6 months Office Renewals 3 months 2 months New Leases $ %+ Renewals $ %+ 20

23 Lexington Avenue Buildings ProForma 2: Aggressive Case Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 INCOME Rental Income 33,242,920 41,951,324 81,165,132 81,828,759 82,622,241 83,527,248 88,966,986 90,477,626 89,880,710 92,127,924 92,708,729 Escalation Income - 5,068,099 8,203,033 9,229,030 10,193,626 11,295,131 12,526,516 13,785,878 14,602,037 15,893,941 17,170,059 Vacancy / Credit Loss - (4,468,409) (4,552,889) (4,640,793) (4,741,119) (5,074,675) (5,185,146) (4,561,633) (5,401,093) (5,493,939) TOTAL INCOME 33,242,920 47,019,423 84,899,756 86,504,900 88,175,074 90,081,260 96,418,827 99,078,358 99,921, ,620, ,384,849 EXPENSES Operating Expenses - 21,234,875 23,069,654 23,761,744 24,451,024 25,268,327 26,112,241 26,981,245 27,814,592 28,812,303 29,771,450 Real Estate Taxes - 15,444,687 15,972,018 16,345,265 16,753,897 17,172,744 17,602,063 18,042,114 18,493,167 18,955,496 19,429,384 TOTAL OPERATING EXPENSES - 36,679,562 39,041,672 40,107,009 41,204,921 42,441,071 43,714,304 45,023,359 46,307,759 47,767,799 49,200,834 NET OPERATING INCOME 33,242,920 10,339,861 45,858,084 46,397,891 46,970,153 47,640,189 52,704,523 54,054,999 53,613,355 54,852,973 55,184,015 CAPITAL EXPENDITURES Tenant Improvements - 35,866, ,595, Leasing Commissions - 27,720,840-30, ,228, ,326 Capital Reserves - 25,638, , , , , , , , , ,425 TOTAL CAPITAL EXPENDITURES - 89,226, , , , , , ,555 3,042, , ,751 NET CASH FLOW 33,242,920 (78,886,401) 45,676,457 46,180,390 46,777,465 47,441,720 52,500,100 53,844,444 50,571,248 54,629,259 54,836,264 21

24 Lexington Avenue Buildings ProForma 2: Aggressive Case Assumptions All assumptions remained the same as in the Base Case ProForma with the following exceptions: 2004 Growth Rates , Office Low-Rise (Floors 2-16) $ %, 7%, 5%, 5%, 3%+ High-Rise (Floors 17-34) $ %, 7%, 5%, 5%, 3%+ Lease-Up Assumptions Building Space Square Feet Lease-Up % of Total Vacancy Building 1 128,844 1/2006 Building 2 469,358 1/ ,409 57% Building 1 23,342 4/2006 Building 2 204,241 4/ ,532 22% Building 2 37,187 7/ ,211 7/ ,398 20% Building 1 Building 2 12,298 10/ ,366 1% Tenant Improvements 2004 Growth Rates Office New Leases Renewals $35.00 $ %+ 2.5%+ 22

25 Exhibit D Debt Assumptions

26 Exhibit D Debt Assumptions The cost of debt is often predicated on the amount of debt relative to the total asset value ("Loan-to-Value ratio" or "LTV"). In addition, other property specific factors, such as Debt Service Coverage ratios (a property's Net Operating Income relative to debt service - see below) will affect risk and loan pricing and terms. Generally, the higher the Loan-to-Value ratio, the more expensive the debt, since the risk profile (the possibility of default) increases. However, with Positive Leverage (see Exhibit E for a definition), the total return (IRR) increases on the levered amount of equity. Lenders will often quote prices with fixed rates, based on Treasury rates, or floating rates, based on LIBOR (London InterBank Offered Rates). Borrowers will usually decide on the term and the type of loan based on their holding strategy and appetite for risk. The chart below outlines estimated pricing for fixed 5- and 10-year loans on a Class A/B+ building in Manhattan. The "Spread" is the risk premium that lenders will charge over the 5- or 10-year Treasury rate, and is added to the Treasury rate for the overall interest rate. Loan-to-Value Ratio 60% 65% 70% 75% 80% 85% 5-Year Loan Spread 1.65% 1.75% 2.00% 2.25% 2.75% 3.25% 10-Year Loan Spread 1.15% 1.25% 1.50% 1.75% 2.50% 3.00% For this exercise, assume that the 5-year Treasury rate is 3.75% and the 10-year Treasury rate is 4.50%. Also assume that the loan is interest-only (there are no amortization payments.) What loan-to-value ratio would you apply? What loan term? Things to Consider: If you choose to hold the property longer than your loan term, you must refinance the property. In that case, assume that Treasury rates have been increasing 0.35% per year, starting in Year 2. In evaluating the appropriate level of leverage for a property, lenders will calculate a property's Debt Service Coverage Ratio ("DSCR"). The DSCR is most often calculated as the ratio of a Property's Net Operating Income ("NOI") to Debt Service Payments. While the DSCR calculated on actual Debt Service Payments are important, lenders will usually impose a DSCR "test", which uses a hypothetical Debt Service payment using a historically stabilized interest rate (currently 7.50% - 8.0%), which in today's low interest rate environment, can be significant. Lenders typically require that the DSCR test result in a DSCR of 1.10x to 1.25x. For instance, assuming a 75% LTV, $100,000,000, interest-only 10-year loan, annual debt service is $6.25 million [= $100,000,000 x (4.50% %)]. An NOI of $10 million would result in an actual DSCR of 1.60x [= $10,000,000 / $6,250,000]. However, a lender may require that a borrower apply a test, using hypothetical debt service, based on a loan with a 7.5% interest rate and a 25-year amortization schedule. For such a loan, annual debt service would be $8.87 million, and the test DSCR would only be 1.13x. For this exercise, assume that the lender will require a DSCR test using an 7.5% interest rate and a 30-year amortization schedule. The DSCR test cannot result in a ratio lower than 1.10x. How would you fund large cash deficits? Would you borrow more money or would you put in additional equity? 24

27 Exhibit E Glossary of Terms

28 Exhibit E Glossary of Terms 1. Capitalization Rate ("Cap Rate"): The rate of return generated by income as it relates to property value. It often refers to the ratio of the first year's Net Operating Income divided by the Purchase Price: Capitalization Rate = Net Operating Income Purchase Price "Cap Rate" is sometimes used to refer to the "Initial Cap Rate", which is calculated using the Net Operating Income in the first year. It can also refer to the "Stabilized Cap Rate", which uses the Net Operating Income in a year that is considered "stabilized" (e.g. after a building leases an abnormally large block of space, or a below-market lease is renewed at market levels). 2. Cash-on-Cash Return: The rate of return generated by cash flow (before debt service) as it relates to property value. The ratio used here is: Cash-on-Cash Return = Cash Flow (before Debt Service) Property Value 3. Internal Rate of Return ("IRR"): A discount rate where future Net Cash Flows equal the initial investment. In other words, a discount rate where the net present value (NPV) is equal to zero. NPV = Initial investment + CF1 + CF2 + CFY (1 + IRR) 1 (1+IRR) 2 (1+IRR) Y 4. Leveraged Return: The rate of return generated by net cash flow (after debt service) as it relates to invested equity. The ratio used here is: Leveraged Return = Net Cash Flow (after Debt Service) Invested Equity 5. Loan-to-Value Ratio ("LTV"): The ratio of a mortgage loan principal (value of loan) to the property's value/sale price. For example: If a property is purchased for $300m and our target LTV is 65%, our loan would be $300,000,000 x 65% = $195,000,000. Accordingly, our equity contribution would be 35% or $105,000, Net Cash Flow ("NCF"): Net Operating Income less Capital Expenditures and Debt Service. NOI - Capital Expenditures - Debt Service = Net Cash Flow 7. Net Operating Income ("NOI"): The balance remaining after deducting Total Expenses (fixed property expenses and operating expenses) from Total Revenues (Gross Receipts less a vacancy and/or credit loss allowance), but before Capital Expenditures and Debt Service. Total Revenues - Total Expenses = Net Operating Income 26

29 Glossary of terms continued 8. Positive Leverage: Positive Leverage occurs when leverage increases the return on the invested equity. When cash-on-cash return is greater with financing than without, positive leverage exists. That is, the rate of return on the investor's equity is greater if the investor borrows part of the property cost than if the investor pays all cash for it. This usually occurs when the property is earning a return at a greater rate than the cost of borrowing money. (Conversely, Negative Leverage occurs when cash-on-cash return is less with financing than without. Such a situation occurs when the cost of borrowing money is greater than the rate at which the property is earning a return.) 9. Replacement Cost: The cost of constructing a building with current materials and techniques that is identical in functional utility to the structure being evaluated. The costs include Hard Costs (e.g. building materials, furniture, fixtures, and equipment), Soft Costs (e.g. architectural, legal and other professional fees, permits and licenses, and insurance), Leasing Costs, Financing Costs, and Land Costs. 10. Tenant Improvement ("TI's"): Tenant Improvements are any physical improvements made to a tenant's space. Tenant Improvements are typically offered by the Landlord as a means of attracting new tenants and are modeled for new and renewing leases. 27