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Real Estate Finance and Investment

FIN549

Alex is responsible for the leadership of Altus’ equity investments, acquisitions, capitalizations and joint- venture structuring. Additionally, Alex shares leadership responsibility of the firm's portfolio strategy and development endeavors. Prior to joining Altus, Alex was an executive team member of Koch Development Co., responsible for the leadership of asset management, portfolio strategy and development activities across its retail, office and industrial portfolio located throughout the Midwest. Alex is a graduate of Washington University in St. Louis, with degrees in Finance and Marketing. He serves as a member of Washington University's Alumni Board of Governors, the Board of Directors for the United Way of Greater Saint Louis, the Alumni Board of St. Louis Priory School, and as a past president and member of the Olin Business School Alumni Board.

Peter is responsible for firm strategy and capitalization. He oversees all aspects of Altus strategy, operations and cultural alignment – with an emphasis on the financial elements. Prior to joining Altus, Peter was at Pannatoni Development Company, Inc., a leading international development company that develops and owns industrial, office and retail properties in more than 175 cities throughout the United States, Canada and Europe. While at Panattoni, Peter managed approximately $1 billion of assets across multiple markets, intimately involved with every facet of an asset’s lifecycle from acquisition, development, stabilization, asset management, and disposition. Peter began his career in investment banking at Banc America Securities, LLC after graduating from the University of North Carolina at Chapel Hill with a Bachelor’s Degree with a double major in Economics and German. In addition, Peter holds an MBA from the Olin School of Business at Washington University in St. Louis.

Alexander D. Borchert Managing Partner

Peter Gray Managing Partner

Course Objective Introduction to CRE investment from the perspective of an equity investor

PRODUCT TYPES, INVESTMENT STRATEGIES, RISKS

REAL ESTATE CYCLES

FINANCIAL EVALUATION: Return on Cost, IRR, Multiple, Return Metrics

CASH FLOW ELEMENTS & BUILDING ASSUMPTIONS

LEASES

CRE LEVERAGE, INCLUDING LOAN PROVISIONS

RESEARCH

VALUATION

DEVELOPMENT

Real Estate Finance and Investment

FIN549

Course Objective Introduction to CRE investment from the perspective of an equity investor

PRODUCT TYPES, INVESTMENT STRATEGIES, RISKS

REAL ESTATE CYCLES

FINANCIAL EVALUATION: Return on Cost, IRR, Multiple, Return Metrics

CASH FLOW ELEMENTS & BUILDING ASSUMPTIONS

LEASES

CRE LEVERAGE, INCLUDING LOAN PROVISIONS

RESEARCH

VALUATION

DEVELOPMENT

Expectations

Material Changes (speakers, more text, less underwriting, etc.)

Format

Punctuality

Content Focus on the Meat of The Curve

C O U R S E O B J E C T I V E

Integrity, Code of Conduct, Behavior

Reading the textbook, including the prerequisite sections

Online Companion – Extremely useful in the virtual course delivery

Course subject to change

Interaction - Communication

Expectations C O U R S E O B J E C T I V E

Grading

Homework: The problems are meant to illustrate the fundamental concepts and their application to concrete real estate problems.

Take Home Exam

Expectations C O U R S E O B J E C T I V E

Real Estate Finance and Investments: Risks and Opportunities

Fifth Edition Dr. Peter Linneman and Bruce Kirsch

https://www.getrefm.com/textbook/index.php/toc/

Required Reading C O U R S E O B J E C T I V E

1. CRE Investment Overview

2. Why Real Estate?

3. Product Types

4. Cycles

5. Strategies

6. Risk

7. Investment Analysis

Agenda C O U R S E O B J E C T I V E

Class #1

Readings: Chapter 1, 2, 25 Prerequisite #1

Click to edit Master Click to edit Master subtitle style

CRE Investment Overview

CRE Investment Overview W H Y R E A L E S T A T E ?

1) Where are the markets right now?

2) What are real estate returns? What is anticipated?

3) How are capital flows? What is the denominator effect?

W H Y R E A L E S T A T E ?

Real Estate Finance and Investments: Risks and Opportunities; Peter Linneman, PhD; Bruce Kirsch, REFAI®

Real Estate Finance and Investments: Risks and Opportunities

Peter Linneman, PhD Bruce Kirsch, REFAI®

W H Y R E A L E S T A T E ?

Real Estate Finance and Investments: Risks and Opportunities; Peter Linneman, PhD; Bruce Kirsch, REFAI®

Real Estate Finance and Investments: Risks and Opportunities

Peter Linneman, PhD Bruce Kirsch, REFAI®

The Opportunities

Potential upside

Operating Costs

Terminal Value

Rental Growth

W H Y R E A L E S T A T E ?

Real Estate Finance and Investments: Risks and Opportunities; Peter Linneman, PhD; Bruce Kirsch, REFAI®

Real Estate Finance and Investments: Risks and Opportunities

Peter Linneman, PhD Bruce Kirsch, REFAI®

The Risks

Expect the unexpected:

• Operating Cost • Vacancy • Natural Disaster • Leasing • Liquidity • Pandemic

W H Y R E A L E S T A T E ?

Real Estate Finance and Investments: Risks and Opportunities; Peter Linneman, PhD; Bruce Kirsch, REFAI®

Real Estate Finance and Investments: Risks and Opportunities

Peter Linneman, PhD Bruce Kirsch, REFAI®

Market Research

• Product Type • Geography • Analyze supply and demand balance

Supply Existing New

Demand Tenants Site-Specific

W H Y R E A L E S T A T E ?

Real Estate Finance and Investments: Risks and Opportunities; Peter Linneman, PhD; Bruce Kirsch, REFAI®

Real Estate Finance and Investments: Risks and Opportunities

Peter Linneman, PhD Bruce Kirsch, REFAI®

W H Y R E A L E S T A T E ?

Real Estate Finance and Investments: Risks and Opportunities; Peter Linneman, PhD; Bruce Kirsch, REFAI®

Real Estate Finance and Investments: Risks and Opportunities

Peter Linneman, PhD Bruce Kirsch, REFAI®

W H Y R E A L E S T A T E ?

Real Estate Finance and Investments: Risks and Opportunities; Peter Linneman, PhD; Bruce Kirsch, REFAI®

Real Estate Finance and Investments: Risks and Opportunities

Peter Linneman, PhD Bruce Kirsch, REFAI®

Personal Decision

Investment Goals

Risk Aversion

Expertise

Synergies

Liquidity

Holding Period

Opportunity Cost

Resources W H Y R E A L E S T A T E ?

PwC: Emerging Trends in Real Estate Integra Realty Resources:

Annual Report Half-Year Report

CBRE: Cap Rate Survey (biannually) Quarterly Local, Regional and National Reports – All Property Types Periodic White Papers

Cushman & Wakefield: Quarterly Local, Regional and National Reports – All Property Types Periodic White Papers

Colliers International: Quarterly Local, Regional and National Reports – All Property Types Periodic White Papers

Jones Lang Lasalle: Quarterly Local, Regional and National Reports – All Property Types Periodic White Papers

Block Realty: Kansas City Multifamily

PNC: Periodic White Papers

MPF: Local Market Multifamily Research

Resources W H Y R E A L E S T A T E ?

CoStar: Quarterly St. Louis and National Reports – Office, Industrial and Retail. Periodic White Papers. Moody’s/CoStar Commercial Property Price Index CoStar Commercial Repeat-Sale Indices - http://www.costar.com/about/CCRSI.aspx

Rubin Brown: Multifamily Annual Report (rent and operating expense trends). National Real Estate Investor (NREI): Daily White Papers http://nreionline.com/ Urban Land Institute (ULI):

Annual / Biannual Real Estate Business Barometer - http://www.uli.org/research/economy-capital/ Periodic White Papers

Prudential: http://research.prudential.com/view/page/rp Periodic White Papers

CCIM: Periodic White Papers. CEL & Associates, Inc.: Strategic Advantage (http://celassociates.com/strategic-advantage-e-newsletter-recent-issues/) National Council of Real Estate Investment Fiduciaries (NCREIF):

NCREIF Fund Index Open-End Diversified Core (ODCE) Returns - https://www.ncreif.org/fund-index-odce-returns.aspx

http://www.costar.com/about/CCRSI.aspx

http://www.uli.org/research/economy-capital/

http://research.prudential.com/view/page/rp

http://celassociates.com/strategic-advantage-e-newsletter-recent-issues/

https://www.ncreif.org/fund-index-odce-returns.aspx

Roles in Real Estate W H Y R E A L E S T A T E ?

Do it All

Single Family Rental / Four Family Rentals

Capitalize with agency debt. Equity sourced friends and family.

Toilets, Tenants, Trash

Roles in Real Estate W H Y R E A L E S T A T E ?

Services

Leasing

Management

Finance

Construction

Accounting

Marketing

Investor relations

Roles in Real Estate W H Y R E A L E S T A T E ?

Brokerage

Leasing Tenant Rep / Landlord

Investment

Mortgage

Roles in Real Estate W H Y R E A L E S T A T E ?

Asset Management Versus Property Management

Roles in Real Estate W H Y R E A L E S T A T E ?

Investment and Development

Development Manager

Capital Markets

Investments

Construction Manager

General Contractor / Sub Contractor

Roles in Real Estate W H Y R E A L E S T A T E ?

Decision Makers

Sponsorship

Capital Partners

Government / Zoning

Click to edit Master Click to edit Master subtitle style

Why Real Estate?

Commercial Real Estate Universe

Source: ACLI, AON, BIS, Bloomberg, CoreLogic, Federal Reserve Board, Guy Carpenter, NAIC, OECD, Oliver Wyman estimates, Preqin, Savill’s, SIGMA, SNL, TEFAF, Thomson, Reuters, UN, University of St. Gallens, World Federation of Exchanges

Domestic equities (S&P 500) and bonds are a fraction of the investable universe

W H Y R E A L E S T A T E ?

An absolute return takes into account appreciation, depreciation and cash flows to measure the amount of money an investment earns over time, and is expressed as a percentage gain or loss on the initial investment.

Benefit #1

Private Real Estate Generates High Absolute Returns

W H Y R E A L E S T A T E ?

Looking at data from Preqin, a research company that tracks the performance of alternative investments, a $100,000 investment in private real estate beginning on December 31, 2007, would have been worth about $410,000 on December 31, 2020. That same $100,000 investment in the S&P 500 would be worth $350,000 on December 31, 2020.

W H Y R E A L E S T A T E ?

“Up” and “Down” Years

Sources: NCREIF (National Council of Real Estate Investment Fiduciaries) and Bloomberg. Past performance is not a guarantee of future results. Real estate is represented by the NCREIF Property Index (NPI), an index of quarterly returns reported by institutional investors on investment grade commercial properties owned by those investors. The NPI is used as an industry benchmark to compare an investor’s own returns against the industry average. NCREIF data is based on institutional investments and is presented without leverage or fees. Institutional investors often invest on substantially different terms and conditions than individual investors, which may include lower fees, expenses or leverage. Stocks are represented by the S&P 500 Index, an unmanaged index of the 500 largest stocks (in terms of market value), weighted by market capitalization and considered representative of the broad stock market. Bonds are represented by the Barclay’s Capital Aggregate Bond Index, an index of securities that are SEC-registered, taxable and dollar-denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. The prices of securities represented by these indices may change in response to factors including: the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates and investor perceptions. All indices are unmanaged and do not include the impact of fees and expenses. An investment cannot be made directly in any index.

66 64

21 23

Real Estate Stocks Bonds

Up Years

Down Years

For Real Estate, Stocks and Bonds (1934 to 2022)

W H Y R E A L E S T A T E ?

NCREIF ODCE Index Returns

CoStar Commercial Repeat Sale Indices (CCRSI) – January 2019 (With Data Through December 2018).

W H Y R E A L E S T A T E ?

1978 2021

89.2% positive quarters

ODCS W H Y R E A L E S T A T E ?

Asset Pricing Trends: RCA CPPI W H Y R E A L E S T A T E ?

The RCA CPPI is based on repeat-sales (RS) transactions that occurred at any time up through the month of the current report and is used to measure commercial real estate price movements using repeat-sales regression methodology.

The 6 Major Metros (6MM) are Boston, Chicago, Los Angeles, New York, San Francisco and Washington DC. Non-Major Metros (NMM) refers to all secondary and tertiary markets.

All indexes are benchmarked to 100 at December 2006 and the time series extends to January 2001.

RCA CPPI

Asset Pricing Trends: RCA CPPI W H Y R E A L E S T A T E ?

RCA CPPI

Private real estate helps investors temper the volatility in their portfolios because it’s immune to the daily shocks of trading.

The value of a private real estate fund is based on the actual value of property held by the fund. Conversely, in a public REIT, the share price value is determined by daily market forces, which means the share price of a public REIT may not reflect the actual value of the underlying real estate.

Benefit #2

Correlation to Other Asset Classes

W H Y R E A L E S T A T E ?

Heavy Weight to Alternatives

Employ an investment philosophy focused around diversification, taking advantage of a long-term investment time horizon that allows them to invest a portion of capital in less-liquid assets whilst also being tolerant of market volatility.

This, in turn, ensures the pursuit of long-term investment objectives, as opposed to reacting to shorter-term market movements.

Endowment Leaders Allocation

With large exposure to alternative asset classes, leading US university endowments (Yale, Harvard) consistently achieved attractive annual returns with moderate risk The rationale for investing across multiple asset classes is supported by modern portfolio theory.

This theory, developed by Nobel Memorial Prize– winning economist Harry Markowitz, demonstrates the risk-adjusted returns of a portfolio can be improved by diversification across assets with varied correlations.

Harvard and Yale held 55 percent in traditional asset classes, with the remaining 45 percent allocated to alternatives.

W H Y R E A L E S T A T E ?

55% 45%

W H Y R E A L E S T A T E ?

By adding global real estate, a portfolio has the potential to achieve either a higher return or the same level of return at lower risk.

Real Estate and the Efficient Frontier GLOBAL INDICES EFFICIENT FRONTIER 2005-171

Risk (quarterly standard deviation, %)

Re tu

rn (q

ua rt

er ly,

% )

2.5

1.7

1.5

1.3

1.1 2.0 73.53.0 4.54.0 5.55.0 6.56.0

Portfolio comprised of global equities and bonds,

listed and private real estate

Portfolio comprised of global equities and bonds exclusively

1Bellman, Tim & Sabrina Unger. Invesco Real Estate “Considerations for Investing in Global Real Estate.” 2019/11, Accessed 2021/2, irei.com. Please see exhibit for additional analysis.

Income generated by properties is generally shielded through depreciation, providing investors with the long- term benefits of substantial cash flow and very little tax burden.

IRS rules allow owners to take annual losses in the form of depreciation to smooth out eventual capital expenditures as buildings age. However, only the physical elements of a property are subject to depreciation.

CoStar Commercial Repeat Sale Indices (CCRSI) – January 2019 (With Data Through December 2018).

Benefit #3

Private Real Estate is Tax Advantaged

W H Y R E A L E S T A T E ?

After Tax Comparison INVESTMENT DISTRIBUTION THE IRS AFTER TAX YIELD

SAMPLE OTHER INVESTMENT

DIRECT COMMERCIAL REAL ESTATE INVESTMENT

DEPRECIATION SHELTER

W H Y R E A L E S T A T E ?

Real estate depreciation affords tax-sheltering benefits for income generating properties.

Book value declines due to depreciation, a non-cash expense for income tax purposes, while investors enjoy distributions and net operating income grows or continues to stabilize. This is an advantage not shared by stocks or bonds.

Accelerated depreciation schedules enhance the real estate advantage.

Direct Real Estate is Uniquely Tax Advantaged

W H Y R E A L E S T A T E ?

Direct Real Estate Depreciation Results in Higher After-tax Distributions

The depreciation tax shelter can be used to:

Shield income generated from the direct real estate investment.

Offset gains elsewhere in an investor’s portfolio providing a rebalancing opportunity.

W H Y R E A L E S T A T E ?

The method that investors can use to determine their depreciation deductions depends on the life of the asset being depreciated and is set by the Internal Revenue Service’s Modified Accelerated Cost Recovery System (MACRS).

Under these regulations, buildings are generally depreciated on what is effectively straight-line depreciation over the course of 27.5 or 39 years, depending on whether the property is residential or commercial. Straight-line depreciation spreads the value of the property evenly over its useful life.

How is Depreciation Calculated?

The Tax Benefits of Depreciation for Private Real Estate Investors, Origin Investments, Priya Venkataraman, June 14, 2021

W H Y R E A L E S T A T E ?

Let’s say an investor buys a residential rental property for $1,000,000. If the land value is $175,000 and the cost of the building is $825,000, the annual depreciation would be $30,000 ($825,000/27.5).

In this example, let’s assume that the property yields a 5% cash return that amounts to $50,000. Unlike stock dividends, which are fully taxable in the year of receipt, the income from a rental property is substantially shielded from taxation by depreciation, providing real potential for investors to enjoy a highly tax-efficient stream of income for years, as Table 1 below shows.

Depreciation Expense

Cash From Rental Operations $50,000

Less: Deprecation ($30,000)

Taxable Income $20,000

Tax @ 37% $7,400

Post-Tax Cash Flow $42,600

Annual Tax Savings ($30,000 x 37%) $11,100

The Tax Benefits of Depreciation for Private Real Estate Investors, Origin Investments, Priya Venkataraman, June 14, 2021

The tax savings provided by depreciation can be substantial.

W H Y R E A L E S T A T E ?

That’s because taking depreciation deductions reduces the cost basis of the property, often resulting in higher gains when a property is sold.

Those gains are taxable and are subject to depreciation recapture, which allows the IRS to collect taxes on the deductions the property owner had used to previously offset taxable income.

How does depreciation impact the sale of a property?

While depreciation works for investors when they own a property, it works against them when they sell it.

The Tax Benefits of Depreciation for Private Real Estate Investors, Origin Investments, Priya Venkataraman, June 14, 2021

W H Y R E A L E S T A T E ?

The tax characteristic of depreciation recapture can be either ordinary income or capital gains, and will depend on the type of property that was sold – was it a section 1245 property or a section 1250 property?

At a high-level, section 1245 property includes tangible personal property such as office equipment or furniture that is subject to depreciation, or intangible personal property such as patents that are subject amortization. Section 1250 property most commonly consists of depreciable real property, such as residential rental buildings.

How does depreciation impact the sale of a property?

Depreciation recapture is assessed when a property that has been depreciated is sold and the sale price exceeds its adjusted cost basis—in other words, when the sale of a property results in a taxable gain.

The Tax Benefits of Depreciation for Private Real Estate Investors, Origin Investments, Priya Venkataraman, June 14, 2021

W H Y R E A L E S T A T E ?

When a section 1250 property is sold for a gain, that gain to the extent of depreciation the owner deducted annually, is subject to taxes at a maximum rate of 25%.

This is commonly referred to in tax accounting as unrecaptured section 1250 gains. For investors in a high tax bracket, the 25% cap on the recapture rate is a silver lining as they are likely to have enjoyed depreciation deductions during the hold period at their ordinary income tax rates, which can be as high as 37%.

Note: Please consult with your tax advisor for the most up-to-date information regarding the various tax consequences when investing in real estate.

How does depreciation impact the sale of a property?

The Tax Benefits of Depreciation for Private Real Estate Investors, Origin Investments, Priya Venkataraman, June 14, 2021

W H Y R E A L E S T A T E ?

Commercial Real Estate

After Tax Income

(1) A depreciation recapture tax of 25% is paid upon asset disposition in the event the asset is sold for more than its depreciated value. As of February 2021, this tax rate is less than the ordinary income tax rate for individuals earning more than $163,301 per year. The depreciation tax shield not only defers taxes but results in less total taxes for those earning $163,301 or more. The tax shelter is higher in earlier years of the investment and lessens in subsequent years. In some instances, depreciation may be recaptured as ordinary income.

INCOME TAX PAID FROM OPERATIONS(1)

Comparing investments on an after-tax basis is key.

Depreciation is a Key Tool Available for Direct Real Estate to Shelter Income

40% 60%

Non Tax-Sheltered Asset

Taxes After Tax Income

W H Y R E A L E S T A T E ?

Direct Real Estate vs. Taxable Bond

A $1 million equity-only investment in direct commercial real estate that generates an annual return from operations of 5% over a 7-Year holding period and appreciates approximately 3.8% annually.

Please note that using a mix of debt and equity to invest in real estate could generate a higher return and provide an even larger tax shield than shown in this 100% equity investment example.

Investment: $1,000,000 Holding Period: 7 Years Coupon: 5% Sales Price: $1,300,000

A standard taxable bond that generates an annual coupon of 5% over a 7-year holding period and is redeemed at par.

Par Value: $1,000,000 Maturity: 7 Years Coupon: 5% Value at Maturity: $1,000,000

Real Estate Taxable Bond

W H Y R E A L E S T A T E ?

Direct Real Estate vs. Taxable Bond

Real Estate Taxable Bond A bond yield of 11.74% would be required in order to generate a breakeven after-tax IRR of 7.40%, the IRR of the direct commercial real estate asset in our example.

• The WSJ CCC Rated (Junk Bond) Index currently yields 14.62%. An Investor would need to invest in significantly lower quality junk bonds in order to achieve a comparable return.

Compared to a non-tax shielded asset, the direct commercial real estate asset generates:

• 2.3x higher IRR over the life of the investment

• 1.6x the operating (up-front) cash flows

As of 2/28/23, compared to 9.23% a year ago

https://ycharts.com/indicators/us_high_yield_ccc_effective_yield#:~:text=US%2 0High%20Yield%20CCC%20Effective%20Yield%20is%20at%2014.62%25%2C%20 compared,long%20term%20average%20of%2014.19%25.

https://ycharts.com/indicators/us_high_yield_ccc_effective_yield#:%7E:text=US%20High%20Yield%20CCC%20Effective%20Yield%20is%20at%2014.62%25%2C%20compared,long%20term%20average%20of%2014.19%25

1. Annual depreciation is used to offset pre-tax distributions taxed at ordinary income potentially as high as 37%.

2. Depreciation in excess of distributions can be used to offset similar income in the portfolio taxed at ordinary income potentially as high as 37%. Deprecation can create passive losses that are deferred until passive gains are recognized.

3. Operating distributions provide cash flow early in the investment period allowing these funds to be reinvested potentially earning additional returns for the life of the investment.

4. Increased rental rates result in increased property values.

5. Represents the difference between the sale price and the purchase price.

6. At sale, the depreciation which shielded current income over the life of the investment is taxed at a 25% rate vs. ordinary income potentially as high as 37%.

7. The $14,097 in annual depreciation in Excess of Distributions shields other income in the portfolio from being taxed at the ordinary income rate potentially as high as 37%. $14,097 x 7 x 37% = $36,511.

8. The internal rate of return measures the total return from the investment and incorporates the time value of money.

9. This analysis excludes the 3.8% net investment income tax, which would be applicable to the real estate gain and taxable bond.

Category Commercial Real Estate Asset Non-Tax Shielded Asset Initial Investment $1,000,000 $1,000,000 Hold Period 7-Years 7-Years Federal Tax Rate 37% 37%

Annual Distribution Rate 5.00% 5.00%

Annual Pretax Distributions $50,000 $50,000 Annual Depreciation(1) $64,097 $0 Annual Depreciation in Excess of Distributions(2) $14,097 $0

Annual Post Tax Operating Distribution(3) $50,000 $31,500 Annual Post Tax Operating Distribution Rate 5.00% 3.15% Total Post Tax Operating Distributions $350,000 $220,500

Yearly Appreciation(4) 3.82% 0.00% Sales Price $1,300,000 $1,000,000

Capital Gain(5) $300,000 $0 Depreciation Recapture(6) $448,680 $0 Taxable Gain $748,680 $0

Capital Gains Tax Rate 20% 20% Depreciation Recapture Tax Rate 25% 25%

Capital Gains Tax $60,000 0 Excess Depreciation Savings(7) -$36,511 0 Depreciation Recapture Tax $112,170 0 Tax on Operating Distributions $0 $129,500 Total Taxes $135,658 $129,500 % Variance 100.0% 95.5%

Internal Rate of Return(8) 7.40% 3.15%

W H Y R E A L E S T A T E ?

Direct Real Estate vs. Taxable Bond

1031 Exchanges: The ability to defer taxes into the future is one of the greatest attributes of owning real estate directly.

• The 1031 exchange tax provision allows real estate owners to sell a property and buy another property without incurring capital gains taxes.

• In theory, an investor could buy and sell properties without ever paying taxes on the gains.

Opportunity Zones

CoStar Commercial Repeat Sale Indices (CCRSI) – January 2019 (With Data Through December 2018).

Benefit #4 W H Y R E A L E S T A T E ?

Favorable Tax Rules

W H Y R E A L E S T A T E ?

Like-Kind Exchanges under Section 1031

Inflation Hedge Owners can benefit from increasing rents and values as inflation rises.

Preservation of Capital Well located real estate has traditionally maintained value.

CoStar Commercial Repeat Sale Indices (CCRSI) – January 2019 (With Data Through December 2018).

Other Benefits W H Y R E A L E S T A T E ?

W H Y R E A L E S T A T E ?

Inflation

Commercial real estate not only protects against higher inflation but provides outsize returns specifically in these environments.

If inflation follows the most probable script—higher inflation for a period but not damaging to the economy—then property stands to benefit. Our analysis shows that every 1% increase in inflation is associated with a 1.1% increase in total returns. This environment also results in lower cap rates across property sectors. Source: Cushman & Wakefield: What Rising Inflation Means for CRE Investing 2021

W H Y R E A L E S T A T E ?

Inflation

For the right assets, in the right markets, real estate historically has performed well in a rising-rate environment, particularly when economic growth is strong.

Within certain sectors, real estate can provide cash flow yield and growth, with the potential downside protection that hard assets provide. 1. Green Street Advisors, as of 3/1/21. Major sectors include apartments, industrial, mall, office, and strip centers. Past performance is not indicative of future results. There is no guarantee that any of these trends will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of, future events or results. There is no guarantee that any risk can be mitigated in whole or in part. Real Estate products are subject to the risk of capital loss and investors may not get back the amount originally invested. 2. Major sectors real estate cap rate was 5.4% as of March 31, 2021. 10-Yr UST was 1.7% as of March 31, 2021. The “long-term average” reflects the period between March 1986 to March 2021. “Major Sectors” is sourced from Green Street Advisors and reflects the equal weighted average of the asset weighted averages for the five major property sectors (apartments, industrial, mall, office, and strip center). 3. CBRE-EA, as of 3/31/21.

W H Y R E A L E S T A T E ?

Inflation

Real estate can offer dynamic cash flows

https://pws.blackstone.com/wp-content/uploads/sites/5/2021/04/Real-Estate-Investing-at-an-Inflation-Inflection-Point.pdf?v=1629478159

• Unlike traditional bonds that generate fixed cash flows, the income streams from real estate can rise over time.

• Prioritizing assets with shorter lease durations in sectors with strong underlying growth fundamentals can result in faster translation of higher market rents into underlying operating cash flows. Hotels effectively have one-night leases. Other sectors, including apartments and warehouses, also tend to have shorter-duration leases.

• Certain assets with longer duration leases, such as net lease properties, often include contractual rent escalators to mitigate inflationary risks.

W H Y R E A L E S T A T E ?

Inflation

• Bond-like assets that have long-term leases with limited rent resets are more susceptible as rates rise.

• Sectors facing tenant demand headwinds, such as U.S. regional malls and urban office buildings, may not be able to command near-term rent increases that can keep up with inflation.

Sector selection matters

https://pws.blackstone.com/wp-content/uploads/sites/5/2021/04/Real-Estate-Investing-at-an-Inflation-Inflection-Point.pdf?v=1629478159

W H Y R E A L E S T A T E ?

Inflation

• Supply, even within in-demand sectors like industrial,3 remains in check.

• In an inflationary environment, increases in the cost of land, construction, and labor are likely to make new supply less financially feasible.

Limited supply generally supports valuations

https://pws.blackstone.com/wp-content/uploads/sites/5/2021/04/Real-Estate-Investing-at-an-Inflation-Inflection-Point.pdf?v=1629478159

W H Y R E A L E S T A T E ?

Environmental, Social and Governance

ENVIRONMENTAL IREM CSP certifications

ENERGY STAR certifications

Sustainable purchasing program

Waste management and recycling options

Increase landfill diversion rate

Conservation of water usage and control waste generation

SOCIAL COVID response, vaccination time off and mileage reimbursement

Chaplain program

Employee interest free loan program

Employee directed charitable donations

Fitness centers

Healthy food options

Green cleaning programs

Healthy indoor air quality verification

Work from home flexibility

GOVERNANCE Mission statement drives our business

Employee evaluations align with core values

Daily data backups

Frequent, transparent reporting to investors

Robust cybersecurity enhancements

Clear decision-making structure through committees

WiredScore Certified

Environmental, Social and Governance (ESG) is the framework for assessing the overall impact of sustainability and ethical business practices on a company’s operations and financial performance

Care for stakeholders.

Compensations, incentives, shareholder returns, diversity

of the board

W H Y R E A L E S T A T E ?

ESG in Real Estate

E S G Physical and environmental

risks that threaten the income and value of the asset.

Floods, climate change, water conservation, waste disposal,

renewal energy usage

Human issues and company culture.

How employees are treated, right wages for all workers, benefits employees receive, personal

development

W H Y R E A L E S T A T E ?

ESG in Real Estate

The CRE sector has an important role to play in mitigating climate change. But with climate risks growing, the real estate industry must proactively address the impacts of climate change on assets.

Climate change may alter the dynamics of where people want to live and invest. In addition to the discomfort and health risks of living in ever-hotter climates, energy costs rise with temperatures, as do the risks of power outages as more strain is placed on power grids. Extended drought conditions may limit new development because authorities may limit new hookups.

Many investors rely on insurance rather than capital improvements to protect their investments, but changing investor sentiment toward climate risks may force more affirmative changes.

Pressures for greater ESG disclosure by real estate owners and investors are intensifying due to efforts both from industry groups like NCREIF and PREA and from government regulation by the SEC.

FRAMEWORK FOR TENANT LIFECYCLE

• Climate change risk profile • Renewable-energy strategy • Green commute options • Sustainable business improvement districts • Traditional lease vs Flexible space agreement • “Green leasing” • Landlord engagement • Sustainable building certification • Energy-efficient opportunities

• Material Selection • Role and impact of partners and suppliers • Improve operational management and enhance

asset performance • Promote & support sustainable travel patterns • Inform & influence organizational behaviors • Business strategy & resources • Metrics & specific/measurable goals • Materiality, consistency, and transparency

W H Y R E A L E S T A T E ?

ESG in Real Estate

INCORPORATE COMMUNITY

Diversity, Equity, & Inclusion

• Sourcing talent from DE&I-focused organizations

• Develop site selection criteria to ensure consideration of markets that provide a more diverse base of talent

• Consider needs of the talent base including accessibility, commute time, public transportation, and childcare

Community Impact

• Strengthen the local economy by partnering with local businesses

• Sponsoring public events

• Advocate/build neighborhood amenities to serve the community (grocery, health, & green space)

• Support employment of disadvantaged populations of talent

Health & Well-Being

• Assess & optimize building health and how this impacts well-being in the workplace

• Establish wellness programs

• Set zero-accident goals for employee health & safety

W H Y R E A L E S T A T E ?

ESG in Real Estate

Product Types

Single Family Detached Cluster developments Zero lot line developments

Multifamily High rise Low rise Garden apartments

Residential P R O D U C T T Y P E S

Non-Residential

Retail Regional shopping centers/malls Neighborhood centers Community centers Strip centers Specialty /lifestyle centers Discount/outlet centers

Warehouse/ Industrial Heavy industrial Light industrial warehouse

Office/warehouse Warehouse:

Distribution Research & development (R&D) Flex space

Office Major multitenant (central business district) Single or multitenant- suburban Single tenant - build to suit Combination office/showroom Professional-

Medical specialized use

Hotel/Motel Business/convention Full service Tourist/resort:

Limited service Extended stay All suites

Recreational Country clubs Marinas/resorts Sports complexes

Institutional (special purpose) Hospital/convalescent Universities Other

Mixed Use Developments Combinations of the above uses

P R O D U C T T Y P E S

Strip Center: Ranges from 10,000 to 200,000 square feet and may be dependent on a single anchor tenant. Strip centers often have out parcels detached from the main building.

Community Retail Centers: Generally 150,000- 350,000sqft and have more than one anchor tenant.

Power Center: Several big-box retailers, such as Walmart or Staples, and is most commonly located outside a city or in the outskirts of a major urban area, where land is cheap.

Retail Properties P R O D U C T T Y P E S

Regional Malls: largest type of retail property, ranging from 400,000 to 2,000,000 square feet. Regional malls do well when they successfully maximize a customer’s shopping experience by offering a complementary tenant mix (with both anchor tenants and inline stores), good design, shared amenities, and well maintained common areas.

Retail Properties P R O D U C T T Y P E S

Deemed non-essential—apparel retailers, salons, gyms, and movie theaters, for example—were temporarily shut down across much of the U.S. due to COVID-19.

On the other hand, businesses believed to be essential to daily life, including grocers, home improvement stores, pharmacies, banks and gas stations, were allowed to remain open.

Savvy retailers are also accelerating their innovations in store locations, formats, layouts, branding and marketing, supporting the idea that brick-and mortar shopping is not going away — it’s just evolving.

Bifurcation: Essential and Non-Essential Retail P R O D U C T T Y P E S | R E T A I L P R O P E R T I E S

2020: omnichannel

2021 U.S. Real Estate Market Outlook. CBRE. 2020. Accessed 5 January 2021.

Brick-and-mortar retail sales are expected to grow in 2021 as e-commerce sales decline after the 2020 COVID-fueled surge.

New opportunistic and emerging retailers will capitalize on market conditions to absorb some of the vacancies from bankrupt retailers and store closures.

Adaptive reuse and conversion will drive the repositioning of Class B and C malls, which have been hardest hit by COVID restrictions.

Bifurcation: Essential and Non-Essential Retail P R O D U C T T Y P E S | R E T A I L P R O P E R T I E S

2021: repositioning

Retail Trends P R O D U C T T Y P E S | R E T A I L P R O P E R T I E S

After plunging briefly during the lockdown at the beginning of the pandemic last spring, retail sales quickly rebounded, with overall sales (including e- commerce) recovering to pre-COVID levels by the fall and physical retailers matching pre-COVID levels by year-end. Retail spending has only continued to grow from there.

2021 PWC Emerging Trends in Real Estate

Every major category registered sales

exceeding pre-COVID levels by mid-2021.

Reimagination of Retail

2021 U.S. Real Estate Market Outlook. CBRE. 2020. Accessed 5 January 2021.

Malls will require a strategic evaluation of the highest and best use of the underlying land and demand drivers for adaptive reuse and conversion.

Off-mall big-box retailers will increasingly consider acquisition of mall sites for redevelopment given favorable pricing for prime locations.

While the fastest-growing conversion category is retail to industrial, adaptive reuse with multifamily, office and hotel components will still be viable on a market and asset-specific basis.

Alternative uses also include medical, education, cultural centers and open space.

P R O D U C T T Y P E S | R E T A I L P R O P E R T I E S

Malls

Adaptive Reuse

Alternatives

Adaptative Reuse

2021 U.S. Real Estate Market Outlook. CBRE. 2020. Accessed 5 January 2021.

Successful adaptive reuse and conversion require overcoming complex regulatory issues, as well as greater flexibility in municipal zoning and department store cooperation granting consent and modifications to reciprocal easement agreements permitting redevelopment.

To avoid the further loss of retail uses and sales tax revenue, some local and state jurisdictions may provide more public financing and subsidies for these redevelopments.

P R O D U C T T Y P E S | R E T A I L P R O P E R T I E S

Regulatory Zoning

Easements

Financing Subsidies

Warehouse & Industrial Properties

Manufacturing Facilities: Categorized as ‘heavy’ or ‘light’. Heavy manufacturing facilities carry long-term leases because they are not easily transferable to new tenants.

Warehouses: Used for storage and distribution and are usually located near major transportation hubs. Warehouses are notated on a cubic square footage basis since height is important for stacking goods.

Light Assembly

Flex Buildings

P R O D U C T T Y P E S

Industrial Demand P R O D U C T T Y P E S | W A R E H O U S E & I N D U S T R I A L

E-commerce sales expected to increase by up to 26% by 2025, further increasing the demand to build and acquire industrial real estate.

Retail Dive, “US needs 330M square feet of warehouse space to keep up with e-commerce: CBRE”, https://www.retaildive.com/news/warehouse-ecommerce-construction-fulfillment-center/602308/, June 2022 7CNBC, “Commercial Real Estate: Warehouse Demand Offsets Vacant Office Space”, https://www.cnbc.com/2021/07/10/commercial-real-estate-warehouse-demand-offsets-vacant-office-space.html, July 2022

+26%

https://www.retaildive.com/news/warehouse-ecommerce-construction-fulfillment-center/602308/

https://www.cnbc.com/2021/07/10/commercial-real-estate-warehouse-demand-offsets-vacant-office-space.html

Construction Inflation P R O D U C T T Y P E S | W A R E H O U S E & I N D U S T R I A L

Construction cost inflation has continued to cool off from the peaks seen in Q1 and Q2 of 2022.

Engineering News Record’s (ENR) Building cost index measuring year of year inflation peaked at just above a 16% YOY inflation rate in April of 2022.

ENR’s most recent reporting in January of 2023 has this YOY inflation rate at 9.4%.

It would be typical to see this rate fluctuating between 2-4%. Consistent with the macroeconomic environment , construction cost inflation remains at elevated levels but has pulled back significantly from its recent peaks.

Slowdown? P R O D U C T T Y P E S | W A R E H O U S E & I N D U S T R I A L

The ABI is seen as a leading indicator of the health of the construction industry, as demand for architectural services is typically a precursor to construction activity.

On a forward looking note, the Architectural Billing Index (ABI), reporting by the American Institute of Architects, remained below 50 for the 4th straight month indicating architecture firms are seeing a reduction in billings/demand for services over the past 4 months, possibly signally continued softening in demand for construction services.

Generally the market for design and construction services appears to be reflective of many developers and owners “wait and see” position as many variables, including the ongoing impact of the pandemic, global economic conditions, and government policies related to, inflation, trade and infrastructure spending begin to take shape

E-Commerce, an Outsized Driver P R O D U C T T Y P E S | W A R E H O U S E & I N D U S T R I A L

Alicia Phaneuf, Insider Intelligence, “Ecommerce Statistics: Industry Benchmarks & Growth,” https://www.insiderintelligence.com/insights/ecommerce-industry- statistics/ , July 29, 2021

It is predicted for every $1 billion in e-commerce sales made, businesses will require 1.25 million square feet of industrial space.

It is predicted for every $1 billion in e- commerce sales made, businesses will

require

1.25 million square feet

of industrial space.

https://www.insiderintelligence.com/insights/ecommerce-industry-statistics/

Central Business District (Cbd)

Class A

Class B

Class C

Highrise

Suburban / Garden

Office Properties P R O D U C T T Y P E S

Cushman Wakefield

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

The United States has 5.56 billion sf (bsf) of office space and inventory will likely reach over 5.68 bsf by theend of the decade.

Office Market Size

Current size of US office market

5.56 billion square feet

https://www.bisnow.com/national/news/office/return-to-work-levels-post-pandemic-high-110514

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

A survey conducted by international architecture and design firm Gensler found that the time workers spent collaborating with colleagues fell to 27 percent during the pandemic from 43 percent before, while individual focus time more than doubled to 62 percent of time spent working.

The Physical Office and Remote Work

Collaboration fell from 43% to

27%

1The Office Hub and Spoke Model is Coming, Globest.com, June 2020. Accessed 9/18/2020.

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

CEOs are feeling the impact of COVID among their workforce.

In all candor, it’s not like being together physically. And so I can’t wait for everybody to be able to come back into the office.

I don’t believe that we’ll return to the way we were because we’ve found that there are some things that actually work really well virtually.

TIM COOK, CEO, APPLE INC.

1What CEOs Really Thing About Remote Work. The Wall Street Journal. September 23, 2020. Accessed 11/11/2020.

“That unplanned kind of interaction that contributes so much to how we build relationships with people and

how we build culture, those things are what are missing.

ANDI OWEN, CHIEF EXECUTIVE, HERMAN MILLER INC.

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

More than three-quarters of those surveyed said it is of “considerable” or “great” importance to go to an office to enable effective collaboration and company culture, with more than 60 percent saying it is important to “deliver inperson coaching or training.”

EMERGING TRENDS IN REAL ESTATE® 2022, PWC, ULI

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

The Work from Home (WFH) environment and need for additional space per employee offset each other. Ultimately, we believe that the revenue benefits from in person collaboration more than offset the savings from WFH. Further, we believe well-located suburban infill office properties are uniquely positioned to benefit coming out of this crisis.

1What CEOs Really Thing About Remote Work. The Wall Street Journal. September 23, 2020. Accessed 11/11/2020.

“What I worry about the most is innovation. Innovation is hard to

schedule — it’s impossible to schedule.

ELLEN KULLMAN, CEO OF 3-D PRINTING STARTUP CARBON INC., ON HER CONCERNS ABOUT

REMOTE WORK1

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Companies also recognized the growing trend of “work from anywhere” knowledge workers who use technology to boost their mobile productivity and lessen their dependence on physical offices.

1What CEOs Really Thing About Remote Work. The Wall Street Journal. September 23, 2020. Accessed 11/11/2020.

“There’s sort of an emerging sense behind the scenes of executives saying,

‘This is not going to be sustainable.’

LASZLO BOCK, CHIEF EXECUTIVE OF HUMAN-RESOURCES STARTUP HUMU AND

FORMER HR CHIEF AT GOOGLE, ON THE STATE OF REMOTE WORK1

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Well-located, thoughtfully designed and tech-enabled physical spaces – combined with the power of choice over when and how to use them – will deliver good productivity and engagement outcomes for employees and employers alike.

1What CEOs Really Thing About Remote Work. The Wall Street Journal. September 23, 2020. Accessed 11/11/2020.

“It’s a much harder way to work for anything that requires a personal relationship. And as a consequence, I think we’re going to find that we maybe not go back to 100% in the office all the time. Because remote work clearly works for

many things, but I think we’re going to find that being together delivers value in productivity and creativity and relationships that is irreplaceable

ARNE SORENSON, CEO OF MARRIOTT INTERNATIONAL INC., AT WSJ’S 2020 FUTURE OF

EVERYTHING1

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Great offices of the future will do what great offices of today already do: serve as important hubs for the human elements and experiences that technology can’t provide – relationships, teamwork, chemistry and culture.

1What CEOs Really Thing About Remote Work. The Wall Street Journal. September 23, 2020. Accessed 11/11/2020.

“I am concerned that we would somehow believe that we can basically take kids from college, put them in front of Zoom, and think that three years

from now, they’ll be every bit as productive as they would have had they had the personal

interaction [of work in offices].

RONALD J. KRUSZEWSKI, CHIEF EXECUTIVE OF STIFEL FINANCIAL CORP., ON PROFESSIONAL DEVELOPMENT WHILE

WORKING REMOTELY 1

Flight to Quality P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

We expect Class A properties to experience much faster improvement in demand, vacancy and rents, as they have done in past recovery periods.

Well-located and well-amenitized properties could thrive while lesser-quality and poorly located properties struggle with obsolescence.

EMERGING TRENDS IN REAL ESTATE® 2022, PWC, ULI

Less overall demand and occupiers’ need for technology and amenities create a doubtful future for older, class B/C buildings that require increased capital expenditures.

Usage was already in long-term decline, as firms maximize the efficiency of their office space. Class B and C markets have really borne the brunt of this trend. Recruit and retain top talent by offering a luxurious work environment. Employers cut costs by reducing excess space, pushing employees closer together in back office areas. Obvious trends: Telecommute, flex time, unassigned desks, framed photos replaced by digital pics on their phones, instead of needing tall cubicle walls to help them focus, workers listen to music on earbuds.

190 SF PRE-PANDEMIC 2020

165 SF 2028

Cushman Wakefield

A Reduction in Square Footage P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

SHRINKING SQ FEET PER WORKER

A Reduction in Square Footage P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Sanitation stations

Increased space and barriers between workers

Offices continue to be reconfigured to suit a post-COVID world, featuring:

Updated floor plans adding larger interior pathways

Reimagined common areas

The Pandemic and the Physical Office P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

The Pandemic and the Physical Office

Companies are reconsidering total space needs as well as design and health and safety concerns. “Employers need to take seriously that people are looking for a good place to do work,” said one senior executive at an architecture firm. The industry “took design for granted,” but that is no longer an option, she said.

Another analyst noted that working remotely has shed light on issues such as loneliness and burnout. “We’re starting to see a growing recognition [of how design impacts] mental health issues,” he said.

EMERGING TRENDS IN REAL ESTATE® 2022, PWC, ULI

What's Next for Offices, Cushman & Wakefield, Live Webcast, November 05, 2021

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Offices must now show added value.

Tenants and owners must significantly raise the bar for what it takes to be an office.

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Physical Workplace Transformed

Placemaking by owners can deliver what might be missing by not be in the central business districts

Office property owners may increasingly find that providing an experience for tenant users is key to maintaining sustainable demand.

“The competition for talent will make it hard to force people to come back five days a week,” said a partner at an office industry consulting firm. “You have to give employees a reason to come to the office; otherwise, they won’t come in.”

P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Placemaking and Community Building

We need to talk more about the experiences people want to have in the office. The office has to be a place for community socialization, even with people who are not in your immediate work group. Sociologists talk about people having strong and weak ties.

“Some companies asked me that. I said to them, you’ve been cooking from home over past year, right? So have you ever asked if we need restaurants anymore? Of course we do. We cherish the experience of the restaurant. We connect there. So why are you not feeling that way about your office?”

https://www.bloomberg.com/news/articles/2021-10-13/how-to-design-an-office-for-a-hybrid-work-future

RYAN ANDERSON, VICE PRESIDENT OF RESEARCH AND GLOBAL INSIGHTS FOR OFFICE FURNITURE MAKER HERMAN MILLER

Bringing more enhanced amenities and services to aiming for higher usage and tenant retention.

Placemaking and Community Building P R O D U C T T Y P E S | O F F I C E P R O P E R T I E S

Multifamily Properties

Highrise: Yardi Matrix, an apartment market data provider and our sister company, defines high-rises as apartment communities of 10+ stories in height.

Better views More privacy More natural light Less noise Fewer insects Better ventilation

Low Rise/Garden: A garden apartment complex is characterized by a cluster of low-rise buildings, usually no more than two or three stories high

Easier street access Less walking/waiting Lower energy costs More green spaces in sight

P R O D U C T T Y P E S

76% Built before 1990

P R O D U C T T Y P E S | M U L T I F A M I L Y

Multifamily Demand P R O D U C T T Y P E S | M U L T I F A M I L Y

Only the leading edge of the millennial cohort—ages 35 to 40—have pivoted toward homeownership, meaning most of the rest of the 75 million millennial generation wants to rent.

Further, with an enormous generation Z filtering into real-world adulthood, the demand side of the apartment sector shows no sign of ebbing through at least another decade.

Multifamily rents have outperformed those of the other major property sectors during and after the 2008-2009 recession in three ways:

1) Lowest level of rent decline 2) Fastest recovery to pre-recession

peaks 3) Longest post-recession period of rent

growth.

Historically Resilient P R O D U C T T Y P E S | M U L T I F A M I L Y

Cumulative Effects on Rent During and After 2008-09 Recession

However, let’s unpack the 2008-2009 recession… The recession's single-family housing collapse helped multifamily demand by moving households from homeownership to rentals (via foreclosures) and by diminishing the appeal of homeownership given falling home values.

Based on CBRE Research’s analysis of effective rent change during and after the past two recessions, multifamily outperformed office and industrial in the 2001 recession and all major property sectors (office, industrial, retail) during the 2008-2009 recession.

Recessions P R O D U C T T Y P E S | M U L T I F A M I L Y

St. Louis Absorption to Construction Ratio

St. Louis supply has not kept up with demand for the past five years.

Even with new supply, vacancy has declined and rental rates continue to increase.

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Austin

Charlotte

Cincinnati

Cleveland

Columbus

Denver

Kansas City

Minneapolis-St. Paul

Nashville

Omaha

Salt Lake City

St. Louis

Absorption to Construction Ratio 2021 – Selected Secondary Markets

Absorption to Construction Ratio P R O D U C T T Y P E S | M U L T I F A M I L Y

1.6

Consumer-Driven Amenities P R O D U C T T Y P E S | M U L T I F A M I L Y

Increase in renter households earning $100,000 a year or more from 2012 through 2021 36% Increase in Baby Boomers moving into the rental market from 2007 through 2021

43%

Renters by Choice P R O D U C T T Y P E S | M U L T I F A M I L Y

Full Service

Limited Service

Extended Stay

Owner Operated vs. Management Company

Hotel Properties P R O D U C T T Y P E S

Commodity product by design

Climate-controlled

Non-climate controlled

Self Storage P R O D U C T T Y P E S

Investment Cycles

What Are Cycles?

Real estate markets are rarely near equilibrium

Prolonged periods of property supply and demand imbalance

I N V E S T M E N T C Y C L E S

Four Phases of the Real Estate Cycle

I N V E S T M E N T C Y C L E S

Contractual Agreements and Market Frictions

Real estate takes years to plan, build, and lease

Long-term nature of real estate leases

Landlord perspective vs. tenant perspective

Certainty vs. flexibility and upside potential

Construction to completion lag

Timing is everything

I N V E S T M E N T C Y C L E S

Demand Dynamics

Population growth and job growth often do not match in any given year

Excess supply results in large vacancy  downward pressure on rents and new supply creation ceases

Excess supply is slowly absorbed, destroyed, or re-used

I N V E S T M E N T C Y C L E S

Capital Cycle

If a developer can source funds, they will build

If debt is cheap, owners will overpay and over-leverage

Short-term illiquidity often results in an opportunity to purchase at bargain prices

Having substantial equity is a tremendous advantage

I N V E S T M E N T C Y C L E S

Market Cycle Quadrants – Rent Growth Rates

I N V E S T M E N T C Y C L E S

Office Cycle Overview

Office employment growth was constrained by full employment, as firms found it difficult to hire from a smaller hiring pool.

New supply is moderate, as higher construction and financing costs are creating better rationalization.

Short term rentals like WeWorks is leading new demand for space as small startups need the growth flexibility and larger firms realize that the tax code now favors short terms rentals that do not have to be accounted for as debt on their balance sheets like long term leases.

I N V E S T M E N T C Y C L E S

Office Market Cycle Analysis

I N V E S T M E N T C Y C L E S

Glenn R. Mueller – Professor - University of Denver - Burns School of Real Estate & Construction Management [email protected]

Industrial Market Cycle Analysis

Glenn R. Mueller – Professor - University of Denver - Burns School of Real Estate & Construction Management [email protected]

I N V E S T M E N T C Y C L E S

Apartment Market Cycle Analysis

I N V E S T M E N T C Y C L E S

Glenn R. Mueller – Professor - University of Denver - Burns School of Real Estate & Construction Management [email protected]

Real Estate Cycle

Phases do not necessarily occur in equal periods.

Cycles have different durations.

Cycles vary on geography and asset class.

Application of investment strategies

I N V E S T M E N T C Y C L E S

Investment Strategies

Core

RISK

RE TU

Core Plus

Value Add

Opportunistic

Returns derived primarily from Positive Cash Flow

Returns derived primarily from Reversion

I N V E S T M E N T S T R A T E G I E S

Stabilized, Class A, assets in major core markets

Often featuring long-term leases and tenants with strong credit profiles

Core

Synonymous with ‘income’ in the stock market.

Property investors are conservative investors looking to generate stable income with very low risk.

Properties require very little hand-holding by their owners and are typically acquired and held as an alternative to bonds.

This type of investing is as close as one can get to passive investing when buying properties directly.

A core property requires very little asset management and is typically occupied with credit tenants on long-term leases.

Core

I N V E S T M E N T S T R A T E G I E S

Stabilized assets with diversified multi-tenant income streams

Institutional quality attributes in infill locations

Core Plus

‘Core Plus’ is synonymous with ‘growth and income’ in the stock market and is associated with a low to moderate risk profile.

Core plus property owners typically have the ability to increase cash flows through light property improvements, management efficiencies or by increasing the quality of the tenants.

Similar to core properties, these properties tend to be of high-quality and well-occupied.

Core Plus

Strategy hinges on being able to buy low and sell at an opportune time

Value Add

Value-add real estate investments may require additional leasing or capital improvements with the goal of better positioning the assets to achieve greater total returns.

Properties require physical improvement and/or suffer from captial contraints; little in-place cash flow

Value Add

I N V E S T M E N T S T R A T E G I E S

Properties require a high degree of enhancement

Development, raw land and niche property sectors

Opportunistic

Opportunistic is the riskiest of all real estate investment strategies. It is also synonymous with ‘growth’ in the stock market, like ‘value add,’ but it is even riskier.

Opportunistic investors take on the most complicated projects and may not see a return on their investment for three or more years.

These investment strategies require years of experience and a team of people to be successful.

Ground up developments, acquiring an empty building, land development and repositioning a building from one use to another are examples of opportunistic investments.

Opportunistic

I N V E S T M E N T S T R A T E G I E S

Property Sector Investing

Contrarian Investing

Market Timing

Investing for Future Growth

Value Investing

Investing in “Trophy” or “Blue Chip” Properties

Strategy as to Size of Property

Strategy as to Tenants

Turnaround/Special Situations/Liquidation/Spin Offs

Geography Investing

Specialized Strategies I N V E S T M E N T S T R A T E G I E S

Click to edit Master Click to edit Master subtitle style

Risk

Possible Investor Risks

Operating Cost Vacancy / Demand Natural Disaster

Leasing Liquidity Capital Markets

R I S K

Market Risk

Investors can’t eliminate market shocks, but they can hedge their bets against booms and busts with a diversified portfolio and strategy based on general market conditions.

All markets have ups and downs tied to the economy, interest rates, inflation or other market trends.

R I S K

Business Plan Risk

Is the investment a ground-up development that requires substantial planning, effort and cost to achieve the end result or is it more of a passive investment in a project with a credit tenant who has a decade or more left on their lease?

The less business and asset level risk, the lower the DCF discount rate, or required return, will be.

Business plan risk refers to the investment strategy behind the project.

R I S K

Asset Class

In real estate investing, there’s always demand for apartments in good and bad economies, so multifamily real estate is considered low-risk and therefore often yields lower returns.

Office buildings are less sensitive to consumer demand than shopping malls, while hotels, with their short, seasonal stays and reliance on business and tourism travel, pose far more risk than either apartments or office.

Hotels tend to have more asset-level risk than apartments due to higher operating leverage and shorter duration of leases (nightly versus annual leases for apartments).

Some risks are shared by every investment in an asset class.

R I S K

Property Risk

Construction, for example, will add risk to a project because it limits the capacity for collecting rents during this time.

And when developing a parcel from the ground up, investors take on more types of risk than just the construction risk.

There’s also entitlement risk – the chance that government agencies with jurisdiction over a project won’t issue the required approvals to allow the project to proceed; environmental risks that range from soil contamination to pollution; budget overruns and more, such as political and workforce risks.

Idiosyncratic risk is specific to a particular property. The more risk, the more return.

R I S K

Lease and Obsolescent Risk

As demand for space in the market drives lease rates higher in older properties, it’s only a matter of time before those lease rates justify new construction and increase supply risk. What if a new building makes your investment property obsolete because there’s a better facility with comparable rents? It may not be possible for an investor to raise rents, or even attain decent occupancy rates.

A property leased to Apple for 30 years will command a much higher price than a multi-tenant office building with similar rents.

The length and stability of the property’s income stream is what drives value.

R I S K

Capital Risk

The more debt on an investment, the more risky it is and the more investors should demand in return. Leverage is a force multiplier: It can move a project along quickly and increase returns if things are going well, but if a project’s loans are under stress – typically when its return on assets isn’t enough to cover interest payments – investors tend to lose quickly and a lot.

A lack of alignment can create a divergence of incentives between the manager and the investor.

R I S K

Operating cost synergies by combining services to reduce expenses associated with managing the asset.

Scale Expertise

Commercial real estate is local business.

R I S K

Investment Analysis

CRE Cash Flows Rental income, expenses, offsets, capital

expenditures, fees, debt service, distributions

Sources and Uses Understanding the stakeholders,

types of debt and financing constraints

Valuation Valuation techniques: DCF,

capitalization rates, appraisal techniques

Underwriting Comparables, market research, assumption

building

Development Return on cost, entitlement

process

Investment Analysis I N V E S T M E N T A N A L Y S I S

Acquisition Underwriting Model

$47.5 MM 270,000 SF OFFICE

I N V E S T M E N T A N A L Y S I S

Acquisition Process

DEAL SOURCING UNDERWRITING DUE DILIGENCE / CONTRACT ACQUISITION ASSET

MANAGEMENT DISPOSITION

UNDERWRITING Granular, data-driven approach

Investment analysis includes tenant-by-tenant cash flow forecasts

Rooted in quantification, disciplined underwriting

DECISION

Comprehensive risk assessment of underwriting process Investment Committee grants/ rejects approval

ACQUISITION Transaction and legal documents structured

Physical due dilligence

Letter of intent / Purchase Contract

ASSET MGMT

Best position the asset in fluid economic environment

Identifies optimal exit strategies for value maximization

Ensure asset positioning is aligned with investment objectives

I N V E S T M E N T A N A L Y S I S

One Page

Cash Flows

Components

Granular Assumptions

Underwriting Pyramid Presentation

I N V E S T M E N T A N A L Y S I S

Mpls Suburban Office Property Executive Summary

Project Detail Summary Uses Mpls Suburban Office Property 277,044 sf Acq NOI (12M From Analysis Start Date) $3,895,105 Reporting Start Date / Analysis Start Date Jan-19 Jan-19 Purchase Price 8.20% $171.45 $47,500,000 Analysis Presentation 2/19/19 Altus Acquisition Fee 1.00% % of purchase price $475,000

Bank Fee (A & B) 0.55% % of loan $170,418 Building Name Occupied Total SF InPlace NOI InPlace Cap Purchase Price PSF Broker Fee $0 Mpls Suburban Office Property 97% 277,044 sf $3,806,844 8.01% $47,500,000 $171.45 Due Diligence 0.05% % of purchase price $22,329

Legal (Buyer & Lender) 0.22% % of purchase price $105,300 Title & Mortgage Registration 0.18% % of purchase price $85,038 Entrance Basis 8.05% $174.55 $48,358,084 Initial Project Cash Reserve $0.36 $100,000 Total Initial Capitalization $174.91 $48,458,084

Sources Initial Equity Funding 46% 22,333,084$ Initial Debt Funding 54% 26,125,000$ Total Initial Capitalization 100% $48,458,084.28

Totals 97% 277,044 sf $3,806,844 8.01% $47,500,000 $171.45 Follow on Equity Funding Mar-18 $0

Financing & Underwriting General Underwriting

General Inflation 2.50% Portfolio Permanent Vacancy Impact Over Invest Period 0.31% Expenses (Year 1) $13.01 PSF Portfolio General Vacancy $1,421,977 5.00% Market Rent Growth $0.50 PSF Structural Offset $173,153 $0.10 PSF Specific Identified Capital Improvements $2,639,985 Economic Offset $2,952,994 10.23%

Initial Debt Financing Initial Loan to Purchase Actually Gets Drawn 54.02% LTC 55.00% LTP $94.30 26,125,000$ DSCR (Intial / Full Balance, InPlace NOI) 2.31 x 1.95 x Additional Draw Proceeds $4,860,000 84m Max Draw Period $17.54 4,860,000$ Debt Yield (Initial / Full Balance, InPlace NOI) 14.57% 12.29% Total Loan Amount 54.71% LTC 65.23% LTP $111.84 30,985,000$ Prepayment Penalty 0.00% -$ Loan Term 7.0 years Dec-25 84 months Balance at Refinance $0.00 -$ Interest Only Period 3.0 years 36 months Balance at Sale $106.35 29,464,000$ Amortization Acq Fixed Draw Float Index Spread Buffer $39,000/month 30 years Interest Rate 4.77% 2.51% 2.20% 0.25% 4.80%

Disposition Summary Project AVG RENT

(Day 1) AVG NOI

(Inv Period) Occupancy at

Sale 12M NOI

(Sale Date) AVG RENT

(At Sale) Accelerated

Debt Sale

Month Exit Date

Cap Rate

Sales Price

PSF Sales Price Allocation

Mpls Suburban Office Property $15.34 PSF $4,230,094 100% $4,946,515 $18.01 PSF 100.00% 75 Mar-25 8.01% $61,780,812 $223.00 PSF 100.0%

Total Capital Offset @ Sale $140,000 $4,230,094 $4,946,515 75 6.3 yr hold 8.01% $61,780,812 $223.00 PSF 0.75% Offset

Project Structure Partnership Structure General Partner Fees and Promote

Structure: ARIF II Acquisition Fee 1.00% $475,000 Step 1: Simple Interest Preferred Return to Member 6.00% Asset Mgmt - Annual 1.25% $279,164 Step 2: Return of Capital to Member 100.00% Disposition Fee 0.50% $308,904 Step 3: Manager Catchup 0.00% Step 4: Manager Cash Flow Split After Catchup 20.00%

Project Performance Limited Partner Level Project Level Return on Equity (Cash on Cash )

Investors Altus Promote Levered Unlevered On Equity Outstanding On Capital Invested

Investment $22,333,084 $22,333,084 $48,358,084 Y1 22,333,084 6.0% 22,333,084 6.0% Total Return $16,403,287 $2,062,558 $18,465,844 $27,401,900 Y2 22,333,084 6.0% 22,333,084 6.0% Cash Multiple 1.7 11.17% 1.8 1.6 Y3 22,333,084 6.0% 22,333,084 6.0% IRR 10.6% 11.58% 8.3% Y4 22,333,084 6.0% 22,333,084 6.0% IRR % From Operating / Reversion Cash Flows 26.1% 73.9% Average Over Investment Period 6.0% 6.0%

Mpls Suburban Office Property Executive Summary

Sources Initial Equity Funding 46% 22,333,084$ Initial Debt Funding 54% 26,125,000$ Total Initial Capitalization 100% $48,458,084.28

Totals 97% 277,044 sf $3,806,844 8.01% $47,500,000 $171.45 Follow on Equity Funding Mar-18 $0

Financing & Underwriting General Underwriting

Disposition Summary Project AVG RENT

(Day 1) AVG NOI

(Inv Period) Occupancy at

Sale 12M NOI

(Sale Date) AVG RENT

(At Sale) Accelerated

Debt Sale

Month Exit Date

Cap Rate

Sales Price

PSF Sales Price Allocation

Mpls Suburban Office Property $15.34 PSF $4,230,094 100% $4,946,515 $18.01 PSF 100.00% 75 Mar-25 8.01% $61,780,812 $223.00 PSF 100.0%

Total Capital Offset @ Sale $140,000 $4,230,094 $4,946,515 75 6.3 yr hold 8.01% $61,780,812 $223.00 PSF 0.75% Offset

One Page

Cash Flows

Components

Granular Assumptions

Underwriting Pyramid Presentation

I N V E S T M E N T A N A L Y S I S

Mpls Suburban Office Property Cash Flow Summary

Bank DSC (Based On: Outstandingl Loan Proceeds, 6% Rate, 30 Yr Amort) 1.98 x 1.86 x 1.73 x 1.66 x 1.95 x 2.06 x 1.87 x Bank DSC (Based On: Full Loan Proceeds, 6% Rate, 30 Yr Amort) 1.73 x 1.71 x 1.70 x 1.65 x 1.91 x 1.98 x 1.79 x

Bank DY (Based On: Outstanding Loan Proceeds) 14.22% 13.36% 12.48% 11.98% 14.06% 14.80% 13.49% Bank DY (Based On: Full Loan Proceeds) 12.48% 12.31% 12.22% 11.87% 13.73% 14.23% 12.84%

Average SF Owned For Period 277,044 sf 277,044 sf 277,044 sf 277,044 sf 277,044 sf 277,044 sf 69,261 sf Average Occupied SF For Period (Excluding General Vacancy) 264,638 sf 259,538 sf 265,726 sf 253,687 sf 273,363 sf 269,293 sf 272,414 sf Occupancy Year over Year Change 0 sf (5,100 sf) 6,189 sf (12,040 sf) 19,677 sf (4,071 sf) 3,122 sf

Portfolio Vacancy (Excluding General Vacancy) 4.28% Avg 4.5% 6.3% 4.1% 8.4% 1.3% 2.8% 2.5% Portfolio Vacancy Including 5% Gen Vacancy 7.05% Avg 6.8% 8.1% 7.0% 9.5% 5.6% 6.3% 6.1%

Initial 1 2 3 4 5 6 7 For the Year Ending Investment Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 Dec-25

Rental Revenue 4,309,743 4,418,969 4,549,048 4,675,568 4,766,943 4,893,611 1,247,355 Absorption, Turnover Vacancy, Base Rent Abatements (220,323) (323,972) (354,396) (568,914) (145,111) (156,858) (90,592) Reimbursement & Other Revenue 3,588,949 3,707,785 3,777,936 3,689,958 4,156,715 4,245,514 1,040,699

Potential Gross Income 7,678,369 7,802,782 7,972,588 7,796,612 8,778,547 8,982,267 2,197,462

General Vacancy Factor 5.0% (179,216) (141,405) (243,318) (88,376) (372,672) (318,396) (78,592) Effective Gross Income 7,499,153 7,661,377 7,729,270 7,708,236 8,405,875 8,663,871 2,118,870

Total Expenses (3,604,048) (3,819,835) (3,914,700) (4,003,185) (4,122,940) (4,225,620) (1,080,209) $13.01 $13.79 $14.13 $14.45 $14.88 $15.25 $15.60

Net Operating Income 3,895,105 3,841,542 3,814,570 3,705,051 4,282,935 4,438,251 1,038,661

Debt Service (1,297,205) (1,367,811) (1,446,666) (1,942,474) (1,922,252) (1,899,792) (471,439) Tenant Improvements (132,545) (231,462) (1,292,217) (1,209,777) (544,409) (129,851) (441,201) Commissions (166,324) (74,372) (427,134) (518,477) (233,319) (57,766) (179,385) Asset Management Fee (279,164) (279,164) (279,164) (279,164) (279,164) (279,164) (69,791) Refinance Costs 0 0 0 0 0 0 0 Structural Reserve (27,704) (27,704) (27,704) (27,704) (27,704) (27,704) (6,926) Spec. Identified Cap Improvements (1,812,260) (275,309) (236,375) (150,255) (165,785) 0 0 Cash Flow after Debt Service and Capital Items 179,903 1,585,719 105,310 (422,800) 1,110,302 2,043,974 (130,081)

781.4% (93.4%) (501.5%) (362.6%) 84.1% (106.4%) Pruchase Price (47,500,000) Closing Costs ($858,084) Follow-On Equity Funding - - - - - - - Initial Debt Funding 26,125,000 Loan Draw Proceeds - 2,111,129 581,143 1,955,726 212,001 - - - Refinance Proceeds (Remargin) - - - - - - - - Cash Account Outflow (Reserve) ($100,000) (986,543) (862,374) (756,548) 1,515,288 194,187 (739,485) 1,735,474 Sale Net Proceeds - - - - - - 60,869,602 Debt Repay Assoc. W/ Sale (Including Offsets & Prepayment Penalty) - - - - - - (29,503,000)

Levered Cash Flow 18,465,844 (22,333,084)$ 1,304,489$ 1,304,489$ 1,304,489$ 1,304,489$ 1,304,489$ 1,304,489$ 32,971,995$

Project Levered IRR / Multiple 11.58% 1.83 x IR Distributions 1,304,489 1,304,489 1,304,489 1,304,489 1,304,489

Capital Invested End of the Period 22,333,084 22,333,084 22,333,084 22,333,084 22,333,084 22,333,084 22,333,084 - CoC - Equity Invested (e) 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 1.0% CoC - Equity Invested (Net of Reserves) 2.9% 0.8% 7.1% 0.5% (1.9%) 5.0% 9.2% (0.6%) CoC - Equity Invested (Net of Reserves & Capitals) 8.2% 10.3% 9.7% 9.2% 6.5% 9.2% 10.0% 2.2%

Projected Equity Balance End of the Period 22,333,084 22,333,084 22,333,084 22,333,084 22,333,084 22,333,084 22,333,084 - CoC - Equity Outstanding (c) (e) 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 1.0%

Projected Debt Balance End of the Period 26,125,000 28,236,129 28,817,272 30,772,999 30,517,000 30,049,000 29,581,000 - Debt Balance by SF $106.70 $111.03 $115.81 $120.29 $109.92 $109.85 $0.00 Year over Year Change 2,111,129 581,143 1,955,726 (255,999) (468,000) (468,000) (29,581,000) Debt Balance by SF * $101.92 PSF $104.02 PSF $111.08 PSF $110.15 PSF $108.46 PSF $106.77 PSF $0.00 PSF

Projected Cash Balance End of the Period $100,000 1,086,543 1,948,916 2,705,464 1,190,176 995,989 1,735,474 - Year over Year Change 986,543 862,374 756,548 (1,515,288) (194,187) 739,485 (1,735,474)

Total Basis* 48,358,084 49,482,671 49,201,440 50,400,619 51,659,908 51,386,095 50,178,611 - Basis by SF * $174.55 PSF $178.61 PSF $177.59 PSF $181.92 PSF $186.47 PSF $185.48 PSF $181.12 PSF $0.00 PSF

* Average SF owned for the period.

Unlevered Returns Total Unlevered Cash Flow 27,401,900 (48,287,667) 1,477,108 2,953,531 1,551,976 1,519,673 3,032,554 3,943,766 61,210,960 Project Unlevered IRR / Multiple 8.28% 1.57 x

Project Structure Partnership Structure General Partner Fees and Promote

Project Performance Limited Partner Level Project Level Return on Equity (Cash on Cash )

Investors Altus Promote Levered Unlevered On Equity Outstanding On Capital Invested

Cash Flow Summary Bank DSC (Based On: Outstandingl Loan Proceeds, 6% Rate, 30 Yr Amort) 1.98 x 1.86 x 1.73 x 1.66 x 1.95 x 2.06 x 1.87 x Bank DSC (Based On: Full Loan Proceeds, 6% Rate, 30 Yr Amort) 1.73 x 1.71 x 1.70 x 1.65 x 1.91 x 1.98 x 1.79 x