There is no consensus on the future of Fannie Mae and Freddie Mac. Policymakers face difficult choices in balancing support for the mortgage market with taxpayer risk.

1. Urban Land Institute Real Estate Capital
Markets: Real Estate 201 – “The Realities”
tenuous
ten∙u∙ous
[ten-yoo-uhs]
-adjective
Stephen Blank
Senior Fellow, Finance
ULI – the Urban Land Institute
October 26, 2011

2. Definition:
1. thin or slender in form, as a thread.
2. lacking in sound basis, as reasoning; unsubstantiated; weak: a
tenuous argument.
3. thin in consistency; rare or rarefied.
4. of slight importance or significance; unsubstantial: He holds a
rather tenuous position in history.
5. lacking in clarity; vague: He gave a rather tenuous account
of his past life.

3.  October 7, 2007: Financial institutions
were said to be ―too big to fail‖
 October 14, 2011: Dodd-Frank reform
legislation is said to be ―too big to read‖

5. Timeline of an Increasingly Cyclical, Uncertain,
and Tenuous Capital Markets and Real Estate
Industry
• 1997: Asian Financial Crises, aka ―Asian Contagion‖, or
―Asian Flu‖
• 1998: Russia defaults on Sovereign debt; Long-term Capital
Management ―rescued‖ by Federal Reserve/Wall Street
• 1999: Worldwide preparation for Y2K
• 2000: Bursting of the dot.com, aka ―dot.bomb‖, bubble
• 2001: September 11th
• 2002: Start of corporate governance/accounting scandals
• 2003: Euro-corporate governance scandals
• 2004: Fannie Mae accounting scandal

6. • 2005: GM/Ford debt downgraded by rating agencies
• 2006: Trading breakdown in Japan
• 2007: U.S. Sub-Prime Mortgage Crises gains momentum
• 2008: ―34-Days from Hell‖ (Lehman bankruptcy; AIG rescue;
Fannie Mae/Freddie Mac conservatorships; Goldman
Sachs/Morgan Stanley ―restructured‖ as commercial banks;
Merrill Lynch, Washington Mutual, and Wachovia acquired)
• 2009: Global capital markets faced period of ―Shock and Awe‖
• 2010: ―Sorting Through the Wreckage‖ began
• 2011: January 1st through August 4th
“I’ve got to admit it’s getting better, a little better all the time”
(Getting Better, The Beatles)

7. ―United States Long-Term Debt Rating Lowered
To 'AA+'; Outlook Negative‖
• On August 5th at 20:13:14 EST
– Global capital markets received a ―Shake-up Call‖, i.e., a
wake-up call to the 10th power
• Implications of downgrade were immediate and far reaching
– Volatility increased in the equity and debt capital markets
– Industry participants hit the ―pause‖ button
– CMBS spreads widened as capital withdrew from market
– Equity and debt underwriting standards tightened
– Transaction velocity slowed; ―MAC‖ clauses were invoked
– By mid-September, the European Flu was threatening both
the U.S.as well as Asia

8. Query: Will the U.S. Credit Downgrade a 3-
Month or 3-Year Problem?
• Will the capital markets, including real estate, repeat 1998?
– The flight to safety and liquidity caused by Russia’s default
on it Sovereign Debt, combined with the Federal Reserve’s
engineered rescue of Long-term Capital Management,
lasted thorough December
– Or, will the capital markets repeat mid-August 2007 and
remain closed for the next three years

9. 9

10.  December 2010: The Arab Spring began
in Tunisia
 September 2011: ―Occupy Wall Street‖
began a Financial Markets Spring in New
York; by October 9, similar demonstrations
had been held or were ongoing in over 70
cities

11. 11

12. 2012: Observations
• ―Smaller‖ industry with lower profits
• Lower, more rational, return expectations
• Less development
• Lower availability of credit
• Lenders can finally afford to recognize losses; borrowers have
no choice
• Markets begin to come off the bottom
• Some ―Generational‖ buying opportunities if you have cash
• Refinancing available for owner’s with stabilized properties
• Plenty of ―Rescue Capital‖ to assist in restructurings
• Buyers and lenders remain highly selective

13. • Banker’s focus on top tier properties in strongest markets
• CMBS continues its Lazarus-like rise
• Refinancing remains a problems for the rest of the decade
• ―Duration‖ is added to real estate borrower’s vocabulary
• Opportunity funds may have ―finally‖ learned that big
returns require high leverage and high risk
• Non-bank lenders and mezzanine investors re-emerge
• Institutional investors continue to increase allocations to
real estate; be mindful of the potential for the denominator
affect to surface
• Transaction volume continues to increase…slowly
• The economy…as always, it remains all about jobs

14. Q&A
• What should I focus on? What should I invest in? ―Restructuring
Debris‖
• Are there really opportunities in the distressed space? Yes, but
the playing field is very competitive
• What’s your best strategy advice? Financing distressed owners
needing ―Rescue Capital‖ due to overleveraging
• What skills will I need? An ability, and the patience, to work
through complexity
• Are banks selling distressed assets? Yes Virginia, they finally are
• What about land? In general, still too expensive
• Is financing becoming more readily available? Yes, especially for
larger players (it figures)

15. • What about secondary and tertiary markets? ―Capital
chasing yield‖; not a good idea
• With the exception of the gateway markets, why are
investors reticent to commit? ―They are waiting for the
train to run them over so they can be sure it’s on the tracks‖
• What about retail property? ―We’re not over-retailed; we’re
under-demolished‖
• How would you approach the secondary markets? Buy the
―A‖ property and hope someone comes along to take you
out
• Will smaller REITs become merger and acquisition,
consolidation, targets? Yes they will
– Note: this is said at every conference; therefore it will
eventually happen and someone will be proved right

16. Best Ideas for 2012
• Development: multifamily apartments…that’s it!
• Investment:
– the gateway markets; the technology centers
– value-added; properties with opportunities for renovation,
rehabilitation, re-leasing, repositioning…
• Finance:
– Lock-in long-term, fixed rate debt…now!
• Rescue Capital
– Strategic investments in troubled borrowers, not troubled
properties

17. • Buy your own debt back from the lender at a discount; while
you at it, buy someone else’s debt back at a discount…if you
like the property
• Learn how to ―Green‖ your space; there’s a lot of low hanging
fruit to be picked
• Buy land...if you have the patience
• Property sectors
– Multifamily…obviously
– Fortress malls and in-fill shopping centers…obviously
– Industrial/distribution space in port cities
– Business center hotels, any trophy office building as yet un-
bought, and medical office properties

18. Welcome to the ―Naughts‖, America’s Lost
Decade (2000 – 2009)

19. Risk Premiums: Capitalization Rates to 10-Year
Treasury Yields
10 Year Treasury Yield Cap Rate
10%
9%
8%
7%
6%
5%
4%
3%
2%
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Source: Cornerstone Research, NCREIF, and the Federal Reserve Board.

20. Decline in Commercial Real Estate Property
Values
(44%)
Source: Moody’s/REAL.

21. Spreads for 10-Year ―Prime‖ Commercial
Mortgages to Treasury Yields

22. And Investors Convinced Themselves!
Collateralized Debt Obligations of Sub-Prime
Residential Mortgage-Backed Securities
Estimated 3-Year
Credit Rating Actual Default Rate
Default Rate
AAA 0.001% 0.10%
AA+ 0.010% 1.68%
AA 0.040% 8.16%
AA- 0.050% 12.03%
A+ 0.060% 20.96%
A 0.090% 29.21%
A- 0.120% 36.65%
BBB+ 0.340% 48.73%
BBB 0.490% 56.10%
BBB- 0.880% 66.67%
Source: Donald MacKenzie, University of Edinburgh.

23. Lesson Learned?
―The Bible, the Koran, early Christianity, the
Romans—everyone learned the perils of debt.
What happened to that wisdom?
Business schools!”
Nassim Nicholas Taleb
Author: ―The Black Swan – The Impact of the Highly
Improbable‖
Distinguished Professor of Risk Engineering at New
York University

24. Myths and Legends ―Exposed‖
• Diversification overcomes systemic risk
• High (credit) ratings equals high quality (see AIG)
• Global capital markets have become ―decoupled‖
• ―Tails‖ on bell-shaped curves do not require adjustments to
strategy
• ―Black Swan‖ events are totally accidental, random, and
unpredictable
• Risk of borrowing ―short‖ and investing in illiquid assets can
be hedged effectively
• Unfortunately…myths and legends are likely to return, but in a
different form

26. Real Estate Yields vis-à-vis Capital Markets
Returns as of 3Q 2011
One-Year Expectation: Real Estate V. Capital Markets Returns
3Q 2007 3Q 2008 3Q 2009 3Q 2010 3Q 2011
Real Estate Yield 8.2% 8.7% 10.0% 9.3% 8.9%
10-Year Treasury Bond 4.8% 3.8% 3.6% 2.9% 2.6%
Yield Spread in excess of:
10-Year Treasury Bond 3.4% 4.9% 6.4% 6.4% 6.3%
Source: RERC Investment Survey; Federal Reserve.

27. Senior Loan Officer Opinion Survey (3Q 2011)

28. But…Bank Commercial Real Estate Mortgage
Loan Portfolios Continued to Decline in 2011
• Footings of commercial real estate mortgage loans at 100
largest banks declined
– Decline due to a combination of loan write-offs,
foreclosures, run-off of maturing loans, and limited
originations
• Decrease stemmed entirely from decline in construction and
land loans
– Commercial real estate mortgages and multifamily
mortgages were virtually unchanged

29. Life Insurance Lending Circa 3Q2011
• Prepared to go head-to-head with anyone on Class A,
gateway/24 hour city located, top tier property
• Able to form clubs with other insurers to tackle ―super-sized‖
mortgages
• Starting to compete with Fannie Mae and Freddie Mac for
multifamily mortgage loans
• Highly selective with ―harsh‖ underwriting standards
– Did not get into trouble this time and mean to keep it that
way
• Interest rates: many insurers now have floor pricing:
– 5 year term: 3.50%; 10year term: 4:00%

30. Continuing ―Black Hole‖: Floating-and-Fixed
Rate CMBS Maturities (2011 – 2020)
CMBS (Fixed and Floating Rate) in $ Billions
$160
$140
$120
$100
$80
$60
$40
$20
$0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

31. Mirror, Mirror on the Wall, Who’s Commercial
Mortgages Held up Best of All? Insurance Companies

32. Bank Real Estate Loan Delinquency Rates

33. CMBS Loan Delinquency Rates

34. Preferred Strategies for ―Resolving‖ Maturing
Commercial Real Estate Loans
60%
54%
50%
40%
30% 25%
20% 15%
10% 6%
0%
Extend with Extend w/o Sell to 3rd Party Foreclose and
Mortgage Mortgage Dispose
Modification Modification

35. Additional Lender Workout Strategies Include…
Source: Real Capital Analytics.

36. Distressed Property Sales

37. “It has been said that the only purpose of
economic forecasts is to make astrology look
respectable”

38. All You Need to Know: Job Growth Drives the
Real Estate Economy
Monthly Job Job Growth Gain on a
Growth Benchmark Percentage Basis
-0- 0.00%
126,000 October 2003 1.15%
136,000 10-Year Average 1.26%
190,000 30-Year Average 1.75%
245,000 1990s Expansion 2.27%
Source: Torto Wheaton Research: “TWR About Real Estate”.

39. Two Measures of U.S. Unemployment/Labor
Utilization
Dec May June July March April May June July
2009 2010 2010 2010 2011 2011 2011 2011 2011
Normal
9.9% 9.7% 9.5% 9.5% 8.8% 9.0% 9.1% 9.2% 9.1%
(U-3)
Broad
Measure 17.2% 16.6% 16.5% 16.5% 15.7% 15.9% 15.8% 16.2% 16.1%
(U-6)

40. Forecast: Blue Skies Ahead, But Watch for Dark
Clouds and Unexpected Storms
• Resolutions to raise the debt ceiling and/or appropriate funds
could be held ―hostage‖ by one side or another or fail to be
enacted
• ―Fed‖ bashing continues as concerns about Fed’s continued
independence increase
• The recovery remains stubbornly ―Jobless‖
• Homes price decline continues and possibly accelerates
• Gasoline prices increase to as much as $5 a gallon
• And…sovereign defaults, municipal bond defaults, currency
―wars‖, government debt and deficits, prospects for fiscal
discipline, etc.

41. Regulatory “Corn Maze”
41

42. Potential Impact of Dodd-Frank on Commercial
Real Estate Lending
• Volker Rule: prohibits banks from proprietary
trading, investing in hedge funds, private equity
• Risk Retention: CMBS issuers retain at least 5% of
―something‖…maybe the offering
• Impact:
– Lower credit rated borrowers will find it more difficult to
obtain bank loans
– Risk retention requirements will negatively impact amounts
allocated to underwriting and warehouse lines
– Transaction cost increases will be passed on to borrowers
• Hey…someone has to pay them

43. What about Fannie and Freddie?
• Option 1: Minimum government role
+ Lowers risk throughout the system
+ Reduces taxpayer’s exposure to private mortgage losses
- Lower mortgage availability, higher mortgage cost
- Inability of government to support industry during a crises
- Option 2: Government plays a role during a housing crises
+ Government support stabilizes markets during crises periods
- Can government move quickly enough during a crises

44. What about Fannie and Freddie?
• Option 3: Government the re-insurer
+ Probable lowest increase in mortgage costs
+ Highest liquidity
+ Levels the playing field for smaller banks
- Increases taxpayer risk exposure to private mortgage losses
- Option 4: ―Kick the can down the road‖ until after the 2012
Presidential election

45. Financing and Investing in Real Estate
• The Sudoku approach to structuring real estate investments
8 2 9 4 6
3 5
9 3 5
3 8 1 6 9
2 9 8
4 8 2 7 1
4 7 5
3 7
9 7 2 1 4
45

46. Financing and Investing in Real Estate
• The Sudoku approach to structuring real estate investments
A-1 A-2 A-3 A-1 A-2 A-3
Lender’s Lender’s Lender’s Loan-to-Value Mortgage Lender’s
Investment Required Rate Weighted Cost Ratio Constant Weighted
of Return of Capital Return on
Capital
B-1 B-2 B-3 B-1 B-2 B-3
Equity Investor’s Investor’s Equity Investor’s Investor’s
Investors Required Rate Weighted Cost Investors % Required Weighted
Investment of Return of Capital Investment Return on Return on
Equity Equity
C-1 C-2 C-3 C-1 C-2 C-3
Total Equity Total Cost of Total Equity Total Return on
and Debt Capital and Debt Invested Capital
Investment (Capitalization Investment (Capitalization
Rate) Rate)
46

47. Financing and Investing in Real Estate
• The Sudoku approach to structuring real estate investments
A-1 A-2 A-3
A-1 x A-2 = A-3
B-1 x B-2 = B-3
B-1 B-2 B-3
A-1 + B-1 = C-1
A-3 + B-3 = C-3
C-1 C-2 C-3
47

48. Assume a property is offered for sale. Net operating income is projected to
be $92,700 in year 1. A lender has indicated that it would make a loan
equal to 65% LTV at a 8.87% constant. The equity investor requires a
10% return on investment. What capitalization rate should you use to
value the property?
65% LTV x 8.87% = 5.77% $650,000 x 8.87% = $57,655
35% Equity x 10.00% = 3.50% $350,000 x 10.00% = 35,000
9.27% $92,655
48

49. A broker calls you about a property. Net operating income is projected to
be $92,700 in year 1. A lender has indicated that it would make a loan
equal to 65% LTV, interest-only at 8.00%. The equity investor requires a
10% return on investment. How much could he bid for the property and
still earn a 10% return on investment?
65% x 8.00% = 5.20% $692,586 x 8.00% = $55,407
35% x 10.00% = 3.50% $372,931 x 10.00% = 37,293
8.70% $92,700
$92,700 / 8.70% = $1,065,517
49

50. A broker calls you about a property. Net operating income is projected to
be $92,700 in year 1. A lender has indicated that it would make a loan
equal to 75% LTV, interest-only at 8.00%. The equity investor requires a
10% return on investment. How much could he bid for the property and
still earn a 10% return on investment
75% x 8.00% = 6.00% $817,941 x 8.00% = $65,435
25% x 10.00% = 2.50% $272,647 x 10.00% = 27,265
8.50% $92,700
$92,700 / 8.50% = $1,090,588
50

51. A broker calls you about a property which is offered for sale for
$1,200,000. Net operating income is projected to be $95,000 in year 1. A
lender has indicated that it would make a loan equal to 65% LTV at 8.65%
constant. What return on investment will the equity investor receive?
65% x 8.65% = 5.62% $780,000 x 8.65% = $67,470
35% x ____ = ____% 420,000 x ____ = $______
$95,000 / $1,200,000 = 7.92% $1,200,000 x 7.92% = $95,000
Step 1: 7.92% - 5.62% = 2.30% $95,000 – 67,470 = $27,530
Step 2: 2.30% / 35% = 6.57% $27,530 / $420,000 = 6.55%
51

52. A broker calls you about a property. Net operating income is projected to
be $92,700 in year 1. The equity investor requires a 12% return on
investment. Assuming the property is offered for sale for $950,000, what
loan constant can the investor pay a lender who is willing to make a 70%
LTV, 25-year amortizing, loan?
30% x 12.00% = 3.60% $285,000 x 12.00% = $34,200
70% x ______ = _____ $665,000 x _____ = ______
$92,700 / 950,000 = 9.76% $950,000 x 9.76% = $92,720
Step 1: 9.76% - 3.60% = 6.16% $92,700 – 34,200 = $58,500
Step 2: 6.16% / 70% = 8.80% $58,500 / 665,000 = 8.80%
52

53. A property is offered for sale for $1,500,000. First year NOI is projected
at $127,500. A lender has expressed interest in a 70% LTV loan with a
8.45% constant. The buyer is willing to invest $300,000. Assuming the
investor requires an 9.0% return on investment, what current rate of
return can he offer a mezzanine investor?
$127,500 / $1,500,000 = 8.50% $1,500,000 x 8.50% = $127,500
70% x 8.45% = 5.92% $1,050,000 x 8.45% = $88,725
20% x 9.00% = 1.80% $300,000 x 9.00% = $27,000
10% x ____% = ___%
Step 1:8.50% - (5.92% + 1.80%) = $127,500 – (88,725 – 27,000) =
0.78% $11,775
Step 2: 0.78% / 10% = 7.80% $11,775 / $150,000 = 7.85%
53

54. Real Estate Investment and Capital Markets
Strategies
Real Estate Commercial
Mortgage-Backed
Investment Trusts
Securities
Core, Value-Added, Whole Loans,
and Opportunistic Bridge Loans, and
Property Investments Mezzanine Debt

56. 56

57. Real Estate Investment Trusts: 3Q2011
• REITs posted declines, underperforming the broader market (S
& P Index) during the 3Q2011
• Key performance drivers included:
– Macro concerns such as the U.S. credit
downgrade, concerns about the U.S. as well as global
economy, real estate fundamentals, and European sovereign
debt issues
• Outflows from REIT-centric mutual funds
• Flattening yield curve has historically correlated with lower
REIT returns
– On the other hand, REITs provide high dividend returns as
compared to other investment alternatives

60. CMBS Issuance: 1995 – 2011 (Projected)
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
U.S. ($Mil.) Non-U.S. ($Mil.) Global ($Mil.)

61. CMBS 2.0: Situation Analysis
• Conduits are starting to step up originations after this
summer’s pullback
• While spread volatility is ―easing‖ for super-senior bonds, it
remains wide for all other classes
• Since the ―Summer Swoon‖
– Conduits have increased rates in response to wider spreads
overall; think ―6.0%‖
– Many originators are limiting originations to a maximum of
$75 million due to aggregation risk
– Conduits are telling borrowers that rates quoted are subject
to ―upward adjustment‖ if bond spreads widen further

62. CMBS 1.0 Delinquencies

63. CMBS 2.0: Finished and Unfinished Business
1. Refinancing will continue to affect the industry well into the
coming decade
2. Cleaning up the system and eliminating legacy assets from
balance sheets to allow lending to re-start
3. Restore credibility of rating agencies
4. Improve product structure
5. Improve transparency
6. Resolve regulatory and accounting uncertainties
7. Restore investor demand

64. CMBS’ Pipeline ―Shallow‖
• Only three transactions totaling $2.6 billion are in the pipeline
for the fourth quarter :
– October: 1 transaction for $1 billion
– December: 2 transactions for $1.6 billion
• Issuance slowdown reflects pullback in lending by conduits
due to increased volatility in the credit markets
– Conduits have widened lending spreads significantly in
response to widening trading spreads which in turn makes
them less competitive with traditional lenders

65. Changes in CMBS Transaction Structures
Legacy CMBS New Issue CMBS
LTV-based sizing at risk to changing valuations Debt yield/cash flow-based sizing
• Pro-forma underwriting • In-place income
• Above market rent credit • Market vacancy
B-piece investors B-piece investors
• B-piece investor and special servicer may be • B-piece investor and special servicer are
same entity separate entities
• Actual losses • Appraisal controlled out
• Accrued interest • Interest accrual stopped
• Senior bondholders had limited options to • Senior bondholders can replace the special
replace the special servicer servicer through a vote
Public transactions mean more available information 144A means more information available to those that
sign confidentiality agreements
No audit procedure of special servicer Trist advocate/adviser to audit
Anonymous bondholders in trustee hands Bondholders registry and voting
Source: J.P. Morgan.

67. Private Real Estate Equity Capital Markets
• Fundraising, in general, was slow in 2009 and 2010, primarily
due to investor caution, little sense of urgency to commit, and
legacy performance
– Two-thirds of 2006 vintage funds and 79% of 2007 vintage
funds are currently producing negative IRRs
• Many fund managers (correctly) are focused on asset
management and debt restructuring
• Consolidation and contraction of private equity real estate
platforms is expected to continue in 2012
• Institutional investors evidencing interest in co-investment and
―club‖ structures as a means of exerting control

68. Regions Viewed as Providing the ―Best‖
Opportunities for Private Real Estate Investment
80%
70%
60%
50%
40%
30%
20%
10%
0%
North America Asia Europe South America Middle East

69. Key Issues in the Private Real Estate Market
25%
20%
15%
10%
5%
0%

70. Investment Strategy Preferences of Private Real
Estate Funds
100%
90%
80%
70%
60%
50%
40%
30% Sept. 2010
20% Sept. 2011
10%
0%
Source: Preqin.

71. Quarterly Transaction Volume

72. U.S. Average Capitalization Rates

73. 2012: Improving Prospects
• NCREIF National Property Index +16.7% on trailing 12-
month basis
• Capitalization rates continued to ―firm‖ with the Real Estate
Research Corporation quarterly survey showing seven
consecutive quarters of declines, from 8.40% to 7.24%
• Transaction volume, while ―light‖ by historical
standards, continued to increase sequentially; according to
Real Capital Analytics, volume should exceed $150 billion for
2011
• Not out of the woods yet…

74. Insurance Companies
• Average allocation to real
15% estate:
– 6.8% of total assets
23% • Average target allocation
62% to real estate:
– 10.4% of total assets
North America
Europe
Asia and Rest of World

75. Investment Strategy Preferences of Insurance
Companies
70%
60%
50%
40%
30%
20%
10%
0%

76. 76

77. Lending Environment
• Lenders are becoming more active versus a year ago due to
stronger balance sheets and income statements
– Underwriting standards stringent and precise; focus on
―quality, quantity, and durability‖ of income
– Loan-to-value and debt service coverage ratios, and debt
yield requirements are ―reverting to the mean‖, i.e., the
long-term historical average
– Focus is on ―bankable borrowers‖ with stabilized properties
• Foreign banks, like the Bank of China, are focused solely on
institutional quality properties located in 24-hour gateway
markets owned and managed by best-in-breed sponsors

78. Total Delinquency and Non-Accrual Rates for
U.S. Banks and Thrifts
Q2 Q2 Q2 Q1 Q2 2011
2008 2009 2010 2011 (Est.)
Construction Loans
-Total Delinquency* 8.1% 16.3% 19.2% 18.2% 17.1%
-Non-accrual 5.7% 12.1% 14.8% 13.8% 12.7%
Commercial Mortgages
-Total Delinquency* 1.9% 4.1% 5.4% 5.4% 5.0%
-Non-accrual 1.1% 2.6% 3.7% 3.9% 3.6%
* Includes 30+ days past due and non-accruals
Source: FDIC; Trepp, LLC

79. Maturing Commercial Mortgages: Real Estate’s
Current and Future ―Black‖ Hole
$350
$300
$250
$200
251 240 155 96
241 115
224 199
$150
$100
139 76
$50 103 114
56 55 64 67 51 33
46 41
$0 11 12
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CMBS Banks
Source: Trepp; Foresight Analytics; Mortgage Bankers Association; UBS; Deutsche Bank.

80. Current Lending Environment
Mid-Point of Fixed Rate Commercial Mortgage
Property Type Spreads For 10 Year Commercial Real Estate Mortgages
12/31/10 3/31/11 8/11/11 8/24/11 9/30/11
Multifamily - Non-Agency +190 +180 +240 +240 +240
Multifamily – Agency +200 +185 +245 +230 +235
Regional Mall +175 +180 +240 +255 +250
Grocery Anchor +190 +185 +230 +250 +240
Strip and Power Centers +250 +260 +255
Multi-Tenant Industrial +190 +190 +240 +250 +250
CBD Office +180 +180 +240 +255 +250
Suburban Office +190 +190 +260 +260 +255
Full-Service Hotel +290 +230 +275 +275 +300
Limited-Service Hotel +330 +260 +295 +280 +325
10-Year Treasury 3.47% 3.45% 2.23% 2.16% 2.01%
Source: Cushman & Wakefield Sonnenblick Goldman.

81. Insurance Companies
• Life insurance companies
continue their laser-like
focus on high quality
property located in primary
markets
• Traditionally the most
conservative players, life
companies have seized the
initiative, financing only the
―Best and the Brightest‖

83. The ―Kitchen Sink‖ of Ideas
• Repaying maturing debt at a discount in exchange for a
preferred position
• Paying down maturing debt to secure an extension (in
exchange for an interest in the property)
• Providing rescue capital to pay debt services and/or property
level expenses (in exchange for an interest in the property)
• Buying out defaulting partners/paying capital calls for
defaulting partners
• ―Control your enthusiasm‖; buy cash flowing assets with
prospects for appreciation as markets improve
• Lock-in leverage; rates can’t get any lower and cyclical
bottoms are the optimal time to add leverage

84. • Focus initially on global gateways and 24-hour markets; watch
for signs that pricing is ―getting out of control‖, then switch to
secondary markets
• Focus on in-fill over fringe
• Patience…value-added and opportunistic will appear but don’t
expect RTC-like pricing or returns
• Buy or hold REITs; a 3-peat is possible
• Buy land…if you’re prepared to wait
• Distressed loans (direct from lenders or via auction)
• Patience…value-added and opportunistic will appear but don’t
expect RTC-like pricing or returns
• Development opportunities will be few and far between; use
your skills to workout problem deals or in markets outside the
U.S.

85. • Buy or hold multifamily; sector benefits from positive
demographic trends, and if it has a roof, Fannie or Freddie will
finance it
• In-fill grocery anchored shopping centers and fortress malls
hold value even when consumers are careful with each buck
• Buy and hold CBD office buildings in gateway, 24-hour
markets; suburban commodity office buildings will remain
hard to rent until the economy really recovers
• Buy full service hotels in CBDs; watch out for high capital
expenditure resorts and commodity limited service
• Well leased industrial maintains its place as a cash flow
generator

86. Investment Opportunities?
• Today:
– Acquire properties in ―next tier‖ markets perceived by
investors and lenders as ―must have‖ markets
– Originate debt in secondary and tertiary markets at
premium interest rates and conservative LTVs and DSCRs
• Tomorrow
– Acquire properties and /or loans from distressed
owners/lenders at bargain prices
• Never:
– Avoid ―priced-to-perfection‖ trophy property in gateway
markets; think of them as ―priced-to-disappoint‖
– Avoid current offerings in secondary/tertiary markets; they
will be cheaper in the future

88. Urban Land Institute Real Estate Capital
Markets: Real Estate 201 – “The Realities”
tenuous
ten∙u∙ous
[ten-yoo-uhs]
-adjective
Stephen Blank
Senior Fellow, Finance
ULI – the Urban Land Institute
October 26, 2011

89. Weighted Cost of Capital
―Homework‖ Problems
89

90. Assume a property is offered for sale. Net operating income is projected to
be $105,000 in year 1. A lender has indicated that it would make a loan
equal to 75% LTV at a 7.76% constant. The equity investor requires a
10% return on investment. What capitalization rate should you use to
value the property? What would you pay for the property?
Percentage Proof: Dollar Proof
90

91. A broker calls you about a property. Net operating income is projected to
be $99,500 in year 1. A lender has indicated that it would make a loan
equal to 60% LTV, interest-only at 7.50%. The equity investor requires a
8.0% return on investment. How much could he bid for the property and
still earn a 8.0% return on investment?
Percentage Proof Dollar Proof
91

92. A broker calls you about a property. Net operating income is projected to
be $125,000 in year 1. A lender has indicated that it would make a loan
equal to 70% LTV, interest-only at 7.75%. The equity investor requires a
6.5% return on investment. How much could he bid for the property and
still earn a 6.5% return on investment
Percentage Proof: Dollar Proof:
92

93. A broker calls you about a property which is offered for sale for
$1,500,000. Net operating income is projected to be $145,000 in year 1. A
lender has indicated that it would make a loan equal to 70% LTV at 8.25%
constant. What return on investment will the equity investor receive?
Percentage Proof: Dollar Proof:
93

94. A broker calls you about a property. Net operating income is projected to
be $112,500 in year 1. The equity investor requires a 10% return on
investment. Assuming the property is offered for sale for $1,050,000, what
loan constant can the investor pay a lender who is willing to make a 75%
LTV, 25-year amortizing, loan?
Percentage Proof: Dollar Proof:
94

95. A property is offered for sale for $1,350,000. First year NOI is projected at
$118,000. A lender has expressed interest in a 75% LTV loan with a 7.95%
constant. The buyer is willing to invest $250,000. Assuming the investor
requires an 7.5% return on investment, what current rate of return can he offer a
mezzanine investor?
Percentage Proof: Dollar Proof:
95

96. Answers to Weighted
Cost of Capital Problems
96

97. Assume a property is offered for sale. Net operating income is projected to be
$105,000 in year 1. A lender has indicated that it would make a loan equal to
75% LTV at a 7.76% constant. The equity investor requires a 10% return on
investment. What capitalization rate should you use to value the property? What
would you pay for the property?
Percentage Proof: Dollar Proof
75% x 7.76% = 5.82% $1,262,000 x 75% = $946,500
25% x 10.0% = 2.50% $1,262,000 x 25% = $315,500
$946,000 x 7.76% = $73,448
8.32%
$315,500 x 10.0% = $31,500
$104,948
97

98. A broker calls you about a property. Net operating income is projected to be
$99,500 in year 1. A lender has indicated that it would make a loan equal to
60% LTV, interest-only at 7.50%. The equity investor requires a 8.0% return on
investment. How much could he bid for the property and still earn a 8.0%
return on investment?
Percentage Proof Dollar Proof
60% x 7.50% = 4.50% $1,292,300 x 60% = $775,380
40% x 8.0% = 3.20% $1,292,300 x 40% = $516,920
775,380 x 7.5% = $58,154
7.70%
$516,920 x 8.0% = $41,354
$99,508
98

99. A broker calls you about a property. Net operating income is projected to be
$125,000 in year 1. A lender has indicated that it would make a loan equal to
70% LTV, interest-only at 7.75%. The equity investor requires a 6.5% return on
investment. How much could he bid for the property and still earn a 6.5% return
on investment
Percentage Proof: Dollar Proof:
70% x 7.75% = 5.43% $1,693,767 x 70% = $1,185,637
30% x 6.50% = 1.95% $1,693,767 x 30% = $ 508,130
$1,185,637 x 7.75% = $91,887
7.38% $ 508,130 x 6.50% = $33,028
$125,000 / 7.38% = $1,693,767 $124,915
99

100. A broker calls you about a property which is offered for sale for $1,500,000. Net
operating income is projected to be $145,000 in year 1. A lender has indicated
that it would make a loan equal to 70% LTV at 8.25% constant. What return on
investment will the equity investor receive?
Percentage Proof: Dollar Proof:
$145,000 / $1,500,000 = 9.67% $1,500,000 x 70% = $1,050,000
$1,500,000 x 30% = $ 450,000
70% x 8.25% = 5.78% $1,050,000 x 8.25% = $86,625
30% x ___% = 3.89% $ 450,000 x 12.97% = $58,365
3.89% / 30% = 12.97% $144,990
100

101. A broker calls you about a property. Net operating income is projected to be
$112,500 in year 1. The equity investor requires a 10% return on investment.
Assuming the property is offered for sale for $1,050,000, what loan constant
can the investor pay a lender who is willing to make a 75% LTV, 25-year
amortizing, loan?
Percentage Proof: Dollar Proof:
$1,050,000 x 75% = $787,500
$112,500 / 1,050,000 = 10.71%
$1,050,000 x 25% = $262,500
$787,500 x 10.95% = $86,231
25% x 10% = 2.50%
$262,500 x 10.00% = $26,250
10.71% - 2.50% = 8.21% $112,481
8.21%/75% = 10.95%
101

102. A broker calls you about a property. Net operating income is projected to be
$112,500 in year 1. The equity investor requires a 10% return on investment.
Assuming the property is offered for sale for $1,050,000, what loan constant
can the investor pay a lender who is willing to make a 75% LTV, 25-year
amortizing, loan?
Percentage Proof: Dollar Proof:
$1,050,000 x 75% = $787,500
$112,500 / 1,050,000 = 10.71%
$1,050,000 x 25% = $262,500
$787,500 x 10.95% = $86,231
25% x 10% = 2.50%
$262,500 x 10.00% = $26,250
10.71% - 2.50% = 8.21% $112,481
8.21%/75% = 10.95%
102

103. A property is offered for sale for $1,350,000. First year NOI is projected at
$118,000. A lender has expressed interest in a 75% LTV loan with a 7.95%
constant. The buyer is willing to invest $250,000. Assuming the investor requires
an 7.5% return on investment, what current rate of return can he offer a
mezzanine investor?
Percentage Proof: Dollar Proof:
$118,000 / $1,350,000 = 8.74% 75.00% x $1,350000 = $1,012,500
$250,000 / $1,350,000 = 18.52% 18.52% x $1,350,000 = $ 250,020
75.00% x 7.95% = 5.96% 6.48% x $1,350000 = $87,480
18.52% x 7.50% = 1.39% $1,350,000
$1,012,500 x 7.95% = $ 80,494
5.96% + 1.39% = 7.35%
$ 250,020 x 7.50% = $ 18,752
8.74% - 7.35% = 1.39% $87,480 x 21.45% = $ 18,764
1.39% / 6.48% = 21.45% $118,010
103