Shorenstein Company LLC

Real Estate Case Study

Return Expectations
Office Cap Rates versus Interest Rates
10%
9%
8%

7%
6%
5%
4%
3%

2%
1%
0%
1997 1998 1999 2000 2001 2002 2003 2004

CBD Cap Major Market CBD Cap Ten-Year Treasury 30-Day LIBOR
Park Avenue Building
Base Case ProForma (10 Years)
$ / SF
Purchase Price* $ 226,90 0 $ 394 Loan to Value Ratio 65.0 0 % Year 11 NOI $ 24,231
Loan Amount $ 147,48 5 Residual Cap Rate 7.5%
Equity $ 79,415 10 -Year Treasury Rate 4.50 % Resale Price $ 323,0 8 6
Debt 147,48 5 10 -Year Loan Spread 1.25% Less: Mortgage Balance (147,48 5)
Total Investment $ 226,90 0 All-in Interest Rate 5.75% Available Residual $ 175,60 1

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

NET OPERATING INCOME 13,358 14,0 12 15,566 16,295 17,20 1 18 ,347 19,160 18 ,10 0 22,70 4 23,8 74

TOTAL CAPITAL EXPENDITURES (1,486) (2,423) (1,228) (2,243) (2,388) (3,754) (1,194) (5,902) (755) (239)

NET CASH FLOW 11,8 72 11,58 8 14,338 14,0 52 14,8 13 14,593 17,966 12,198 21,949 23,635

Cap Rate (on NOI) 5.9% 6.2% 6.9% 7.2% 7.6% 8.1% 8.4% 8.0% 10.0% 10.5%
Cash Flow Yield 5.2% 5.1% 6.3% 6.2% 6.5% 6.4% 7.9% 5.4% 9.7% 10.4%

Interest Rate 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
TOTAL DEBT SERVICE (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480)

CASH FLOW AFTER DEBT SERVICE 3,392 3,10 8 5,8 57 5,572 6,333 6,113 9,48 5 3,718 13,469 15,155

Leveraged Yield 4.3% 3.9% 7.4% 7.0% 8.0% 7.7% 11.9% 4.7% 17.0% 19.1%
Debt Service Coverage Ratio Test 1.1x 1.1x 1.3x 1.3x 1.4x 1.5x 1.5x 1.5x 1.8x 1.9x

Unleveraged Cash Flow (226,900) 11,872 11,588 14,338 14,052 14,813 14,593 17,966 12,198 21,949 346,721
Unleveraged IRR 9.3%

Leveraged Cash Flow (79,415) 3,392 3,108 5,857 5,572 6,333 6,113 9,485 3,718 13,469 190,756
Leveraged IRR 14.0 %
*Includes Closing Costs
Park Avenue Building
Base Case ProForma Summary (10 Years)

Purchase Price $226,900,000

Unleveraged IRR 9.3%
Leveraged IRR 14.0%

Loan Terms
Loan-to-Value Ratio 65%
Term 10 Years
All-in Interest Rate 5.75%

10-Year Average Cap Rate 7.9%

10-Year Average Cash Flow Yield 6.9%
10-Year Leveraged Yield 9.1%

% of Value from Cash Flow / Residual Value 40% / 60%

Equity Multiple 3.1x
Park Avenue Building
ProForma 2: Value-Added Opportunity (10-Years)
$ / SF
Purchase Price* $ 226,90 0 $ 394 Loan to Value Ratio 65.0 0 % Year 11 NOI $ 26,719
Loan Amount $ 147,48 5 Residual Cap Rate 7.5%
Equity $ 79,415 10 -Year Treasury Rate 4.50 % Resale Price $ 356,256
Debt 147,48 5 10 -Year Loan Spread 1.25% Less: Mortgage Balance (147,48 5)
Total Investment $ 226,90 0 All-in Interest Rate 5.75% Available Residual $ 20 8 ,771

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

NET OPERATING INCOME 13,358 14,0 12 14,959 14,991 18 ,8 31 20 ,417 21,565 20 ,8 39 26,542 27,338

TOTAL CAPITAL EXPENDITURES (1,486) (2,423) (10,126) (2,288) (2,442) (3,902) (1,218) (6,162) (149) (239)

NET CASH FLOW 11,8 72 11,58 8 4,8 33 12,70 4 16,38 9 16,516 20 ,347 14,677 26,393 27,0 99

Cap Rate (on NOI) 5.9% 6.2% 6.6% 6.6% 8.3% 9.0% 9.5% 9.2% 11.7% 12.0%
Cash Flow Yield 5.2% 5.1% 2.1% 5.6% 7.2% 7.3% 9.0% 6.5% 11.6% 11.9%

Interest Rate 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
TOTAL DEBT SERVICE (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480) (8,480)

CASH FLOW AFTER DEBT SERVICE 3,392 3,10 8 (3,648 ) 4,223 7,90 9 8 ,0 35 11,8 66 6,196 17,913 18 ,619

Leveraged Yield 4.3% 3.9% -4.6% 5.3% 10.0% 10.1% 14.9% 7.8% 22.6% 23.4%
Debt Service Coverage Ratio Test 1.1x 1.1x 1.2x 1.2x 1.5x 1.6x 1.7x 1.7x 2.1x 2.2x

Unleveraged Cash Flow (226,900) 11,872 11,588 4,833 12,704 16,389 16,516 20,347 14,677 26,393 383,355
Unleveraged IRR 10 .1%

Leveraged Cash Flow (79,415) 3,392 3,108 (3,648) 4,223 7,909 8,035 11,866 6,196 17,913 227,390
Leveraged IRR 15.2%
*Includes Closing Costs
Park Avenue Building
ProForma 2: Value-Added Opportunity Summary (10-Years)

Purchase Price $226,900,000

Unleveraged IRR 10.1%
Leveraged IRR 15.2%

Loan Terms
Loan-to-Value Ratio 65%
Term 10 Years
All-in Interest Rate 5.75%

10-Year Average Cap Rate 8.5%

10-Year Average Cash Flow Yield 7.2%
10-Year Leveraged Yield 9.8%

% of Value from Cash Flow & Residual Value 36% / 64%

Equity Multiple 3.6x
 Lexington Avenue Buildings
Base Case ProForma (10-Years)
$ / SF
Purchase Price* $ 40 5,0 0 0 $ 244 Loan to Value Ratio 75.0 0 % Year 11 NOI $ 51,0 0 2
Capital Reserve 111,48 2 $ 67 Loan Amount $ 38 7,362 Residual Cap Rate 7.5%
Total Investment $ 516,48 2 $ 311 10 -Year Treasury Rate 4.50 % Resale Price $ 68 0 ,0 30
10 -Year Loan Spread 1.75% Less: Mortgage Balance (38 7,362)
Equity $ 129,121 All-in Interest Rate 6.25% Available Residual $ 292,668
Debt 38 7,362
Total Investment $ 516,48 2
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
NET OPERATING INCOME 33,243 6,662 34,0 0 3 42,8 0 3 43,38 8 44,0 19 46,938 50 ,315 49,699 50 ,70 8

TOTAL CAPITAL EXPENDITURES - (82,088) (21,638) (233) (193) (198) (204) (211) (3,419) (224)
CAPITAL RESERVE - 75,427 - - - - - - - -

NET CASH FLOW 33,243 0 12,365 42,570 43,195 43,8 20 46,733 50 ,10 5 46,28 0 50 ,48 4
Cap Rate (on NOI) 6.4% 1.3% 6.6% 8.3% 8.4% 8.5% 9.1% 9.7% 9.6% 9.8%
Cash Flow Yield 6.4% 0.0% 2.4% 8.2% 8.4% 8.5% 9.0% 9.7% 9.0% 9.8%
Interest Rate 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%
TOTAL DEBT SERVICE (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210) (24,210)
CASH FLOW AFTER DEBT SERVICE 9,0 33 (24,210 ) (11,8 45) 18 ,360 18 ,98 5 19,610 22,523 25,8 95 22,0 70 26,274

CAPITAL RESERVE - 24,210 11,846 - - - - - - -

CASH FLOW AFTER DEBT SERVICE 9,0 33 0 0 18 ,360 18 ,98 5 19,610 22,523 25,8 95 22,0 70 26,274
Leveraged Yield 7.0% 0.0% 0.0% 14.2% 14.7% 15.2% 17.4% 20.1% 17.1% 20.3%
Debt Service Coverage Ratio Test 1.0x 0.2x 1.0x 1.3x 1.3x 1.4x 1.4x 1.5x 1.5x 1.6x

Unleveraged Cash Flow (516,482) 33,243 0 12,365 42,570 43,195 43,820 46,733 50,105 46,280 730,514
Unleveraged IRR 8 .7%
Leveraged Cash Flow (129,121) 9,033 0 0 18,360 18,985 19,610 22,523 25,895 22,070 318,942
Leveraged IRR 16.0 %
*Includes Closing Costs
Lexington Avenue Buildings
Base Case ProForma Summary (10Years)

Purchase Price $405,000,000

Unleveraged IRR 8.7%
Leveraged IRR 16.0%

Loan Terms
Loan-to-Value Ratio 75%
Term 10 Years
All-in Interest Rate 6.25%

10-Year Average Cap Rate 7.8%

10-Year Average Cash Flow Yield 7.1%
10-Year Leveraged Yield 12.6%

% of Value from Cash Flow & Residual Value 49% / 51%

Equity Multiple 3.5x
 Lexington Avenue Buildings
ProForma 2: Aggressive Case (10 Years)
$ / SF
Purchase Price* $ 40 5,0 0 0 $ 244 Loan to Value Ratio 75.0 0 % Year 11 NOI $ 55,18 4
Capital Reserve 10 2,68 5 $ 62 Loan Amount $ 38 0 ,763 Residual Cap Rate 7.5%
Total Investment $ 50 7,68 5 $ 30 5 10 -Year Treasury Rate 4.50 % Resale Price $ 735,78 7
10 -Year Loan Spread 1.75% Less: Mortgage Balance (38 0 ,763)
Equity $ 126,921 All-in Interest Rate 6.25% Available Residual $ 355,0 23
Debt 38 0 ,763
Total Investment $ 50 7,68 5
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
NET OPERATING INCOME 33,243 10 ,340 45,8 58 46,398 46,970 47,640 52,70 5 54,0 55 53,613 54,8 53

TOTAL CAPITAL EXPENDITURES - (89,226) (182) (218) (193) (198) (204) (211) (3,042) (224)
CAPITAL RESERVE - 78,887 - - - - - - - -

NET CASH FLOW 33,243 0 45,676 46,18 0 46,777 47,442 52,50 0 53,8 44 50 ,571 54,629
Cap Rate (on NOI) 6.5% 2.0% 9.0% 9.1% 9.3% 9.4% 10.4% 10.6% 10.6% 10.8%
Cash Flow Yield 6.5% 0.0% 9.0% 9.1% 9.2% 9.3% 10.3% 10.6% 10.0% 10.8%
Interest Rate 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%
TOTAL DEBT SERVICE (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798) (23,798)
CASH FLOW AFTER DEBT SERVICE 9,445 (23,798 ) 21,8 79 22,38 3 22,98 0 23,644 28 ,70 2 30 ,0 47 26,774 30 ,8 32

CAPITAL RESERVE - 23,798 - - - - - - - -

CASH FLOW AFTER DEBT SERVICE 9,445 0 21,8 79 22,38 3 22,98 0 23,644 28 ,70 2 30 ,0 47 26,774 30 ,8 32
Leveraged Yield 7.4% 0.0% 17.2% 17.6% 18.1% 18.6% 22.6% 23.7% 21.1% 24.3%
Debt Service Coverage Ratio Test 1.0x 0.3x 1.4x 1.5x 1.5x 1.5x 1.6x 1.7x 1.7x 1.7x

Unleveraged Cash Flow (507,685) 33,243 0 45,676 46,180 46,777 47,442 52,500 53,844 50,571 790,416
Unleveraged IRR 10 .6%

Leveraged Cash Flow (126,921) 9,445 0 21,879 22,383 22,980 23,644 28,702 30,047 26,774 385,855
Leveraged IRR 20 .5%
*Includes Closing Costs
Lexington Avenue Buildings
ProForma 2: Aggressive Case Summary (10 Years)

Purchase Price $405,000,000

Unleveraged IRR 10.6%
Leveraged IRR 20.5%

Loan Terms
Loan-to-Value Ratio 75%
Term 10 Years
All-in Interest Rate 6.25%

10-Year Average Cap Rate 8.8%

10-Year Average Cash Flow Yield 8.5%
10-Year Leveraged Yield 17.1%

% of Value from Cash Flow & Residual Value 57% / 43%

Equity Multiple 4.5x
Park Avenue Building
IRR Sensitivity (Base Case)
Leveraged IRR Purchase Price Increase in Price
10% $260,200,000 14.7%
12% $243,200,000 7.2%
14% $226,900,000 ---
16% $211,300,000 (6.9%)
18% $196,700,000 (13.3%)
20% $183,000,000 (19.4%)
Lexington Avenue Buildings
IRR Sensitivity (Base Case)
Leveraged IRR Purchase Price Increase in Price
10% $490,200,000 21.0%
12% $461,100,000 13.9%
14% $432,800,000 6.9%
16% $405,000,000 ---
18% $377,800,000 (6.7%)
20% $351,000,000 (13.3%)
Positive Leverage
Loan-to-Value Ratio and Debt Service Coverage Sensitivity

10-Year
Interest Avg. CF 10-Year
Property Price LTV Rate Yield IRR Avg. DSCR

65% 5.75% 6.9% 14.0% 1.2x

Park Avenue $226,900,000 75% 6.25% 6.9% 15.2% 1.1x
85% 7.50% 6.9% 14.6% 0.9x

65% 5.75% 7.1% 14.6% 1.1x

Lexington Avenue $405,000,000 75% 6.25% 7.1% 16.0% 1.0x
85% 7.50% 7.1% 15.6% 0.9x
125 Park Avenue
Closing Date August 18, 2004

Price $225,000,000 ($391/sf)

Location Southeast corner of Park Avenue and 42nd Street

Debt Terms • Loan amount: $146,250,000

• Loan term: 10 years
• Loan-to-Value: 65%
• Loan-to-cost (includes closing costs): 63%
• Interest rate: 5.75% fixed
• Amortization: None. Interest only

Asset Profile • 95% leased with high-quality tenant roster

• Majority of current leases below market
• Potential retail redevelopment
• Close proximity to Grand Central Terminal

Process • Significant investor demand

• Pre-empted sales process with accelerated due
diligence period and assured closing
• Acquired property at a price below highest offer
125 Park Avenue
Purchase
Price 10-Year Average Unleverage Leveraged Equity
Proforma ($PSF) Leveraged Yield d IRR IRR Multiple
$225,000,000
Base Case 8.6% 9.6% 13.4% 3.2x
($391)
$225,000,000
Value-Add 9.3% 10.6% 14.9% 3.6x
($391)
Lexington Avenue Buildings

Purchase Total Leverage

Price Investment Unleverage d Equity
Proforma ($PSF) ($PSF) d IRR IRR Multiple
$405,000,000 $516,500,000
Base Case 8.7% 16.0% 3.5x
($244) ($311)

Buyer of Property $480,000,000 $599,200,000

6.8% 10.7% 2.4x
Using Base Case ($289) ($361)
Buyer of Property $480,000,000 $586,400,000
Using Aggressive 8.6% 15.4% 3.3x
Case ($289) ($353)