Diversifying Your Business

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Diversifying Your Business Using Funds Presented
by Aaron G. Cook Executive Vice-President and
National Sales Manager CORE Realty Holdings,
LLC. Richard Previdi Chief Executive Officer NPV
/ Direct Invest
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Structuring a Fund From the Ground Up

• Developing a fund concept
• Legal Structure
• Penetrating the Market

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Developing a Concept

• Fund or Program Design
• Review of the Competition
• Competitive Advantage
• Differentiation
• Fund Goals Objectives

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Legal Structure

• Choosing Counsel
• Program Structure
• Debt/ Equity
• Type and Manner of Offering
• Aligning Investor Goals
• Sponsor Fees and Promote
• Sponsor Equity

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Penetrating the Market

• Developing a Cohesive Fund/ Program Story
• Develop a Selling Group
• Sponsor Level Due Diligence
• Program Level Due Diligence
• Organized Approach
• Broker Dealer Approval
• Wholesaling
• Sold VS Bought
• Realistic Time Frames for Raising the Necessary
  Capital
• Increased Activity
• Touching a Different Rep

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Identifying Institutional Capital Sources

• Periodicals
• Property Funds World Newsletter
  (www.propertyfundsworld.com)
• Daily global e-mail newsletter with news for
  managers, investors and service suppliers in
  property funds, including new launches,
  investment/transaction activity and market
  intelligence on property funds.
• Real Estate Alert Newsletter (www.realert.com)
• Loaded with real estate fund information,
  including investors, fund size, focus, target
  return rates, fees. Also discloses participants
  in programmatic capital investments and sponsor
  equity investments.
• Pensions Investments Newsletter
  (www.pionline.com)
• Publishes annual directory of pension funds and
  their investment criteria
• Real Estate Finance Investment Newsletter
  (www.iirealestate.com)
• Annual investment fund directory of institutional
  investors making investments in real estate

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Identifying Institutional Capital Sources

• Placement Agents (sources below)
• Private Equity Intelligence (Prequin)
  www.prequin.com
• Information aggregator, searchable online
  database (subscription)
• Dow Jones Private Equity privateequity.dowjones
  .com
• Family of newsletters, reports, directories,
  conferences publisher of annual
• Directory of Alternative Investment Programs and
  online database

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Two Main Types ofInstitutional Capital

• Discretionary
• A blind pool of money for the Operating Partner
  / Sponsor to invest according to agreed-upon
  investment guidelines
• Key Investors / Capital Partners do not have
  deal-by-deal approval rights
• Programmatic
• Institution(s) form partnership with Operating
  Partner / Sponsor
• Key Capital Partners have major decision-making
  authority (e.g., acquire, sell, lease) Operating
  Partner operates freely within budget

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Institutional CapitalThe Rules
First-timers dont get discretionary capital
(and it takes a year to raise)
First-timers dont get cheap capital you
need to establish a track record
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Typical Structure

• Sponsor Operating or General Partner
• Contribute 5 - 20 of equity
• Operating partner receives promote
• Promote is disproportionate share of cash flow
  above IRR hurdle

Example 5 equity from operating partner with
promote 20 over 10
Cash flow split up to 10 IRR
After 10 IRR
80
20
95 Capital Partner 5 Operating Partner
95 Capital Partner
5 Operating Partner
Operating Partner
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Typical Structure

• Promotes may have steps
• 20 over 8 IRR
• 30 over 20 IRR
• 40 over 30 IRR
• Operating partners get paid well for home runs
  (if you do not cross the promotes between assets)
• Hurdles vary with risk of deals
• Stabilized warehouse 20 over an 8
• Ground-up development 20 over a 10

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Typical Fees

• Acquisition Fee 50 bps on asset value (reduces
  your equity)
• Asset Management 50 bps on asset value
• Property Management 2 - 2.5 of gross rents
• Leasing 2 if you do it, or 1 override on
  listing broker
• Construction Management 3 - 5
• Disposition 50 bps

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What You Need to Know

• Just start (with credible partner)
• Dont cross promotes
• Find a capital partner that wants you to get
  paid
• Check their track record with other Operating
  Partners
• Overpay for a good partner You will be
  underpaid at first and overpaid later

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TICA SPONSOR BREAKOUT PANEL Transitioning into
the World of Non-Traded REITs Presented
by Kenneth Jaffe Chief Operating Officer KBS
Capital Markets Group
DISCIPLINED
PERFORMANCE
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Transitioning Into The World of Non-Traded REITs

• Developing a Concept
• Legal
• Raising Capital

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Developing a Concept

• Size of the Marketplace
• Product Characteristics
• Distribution

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Size of the Marketplace
As of June 2007 Source The Stanger Report
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Top 10 Sponsors
Source The Stanger Report
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Product Characteristics

• Real Estate Experience
• In-The-Ground Percentage
• Commission
• Current Cash Distributions
• Dividends to FFO Ratio

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Distribution
Scenario 1
Scenario 2
Scenario 3
Real Estate Company
Real Estate Company
Holding Company
Holding Company
Real Estate Company



Distribution Company
Proprietary Distribution
Independent Distribution
Alternative Distribution
Proprietary Distribution
Market Initiative 1
Market Initiative 2
Market Initiative 3
Market Initiative 4
Market Initiative 2
Market Initiative 1
Market Initiative 1
Market Initiative 2
Market Initiative 3
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Legal

• Choosing Counsel
• Filing Process
• Legal Expense

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DUE DILIGENCE USE ONLY
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Choosing Counsel

• Review Other S-11s
• Choose Counsel with
• Experience in Similar Filings

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Filing / Approval Process
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Legal Expense

• Approx. 1.5 Million to Initially File S-11
• More if SEC requests changes
• More if States request changes
• More for Accounting, Transfer Agent, Escrow
  Agent, Due Diligence Review, Board of Directors,
  Marketing, Printing, Promotional Items, Shipping
  
• More for Distribution

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Raising Capital

• Establishing a Selling Group
• Market Penetration - Wholesaling
• Costs of Raising Capital

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Establishing a Selling Group

• Setting up a Gatekeeper Meeting
• Product Differentiation Shelf Space
• Internal / External Due Diligence Review
• Investment Committee Approval
• Legal Review of the Selling Agreement
• Legal Review of Marketing Fee Agreement
• Rep Lists
• Due Diligence Meetings

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Market Penetration - Wholesaling

• Setting up a Broker/Dealer
• Possible 1017 Filing for Expansion of Business
• Establishing Territories
• Wholesaler Guarantees / Compensation
• Wholesaler Training
• Territory Splits
• Technology
• Activity Tracking
• Sales Tracking
• Metrics / Goals

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Costs of Raising Capital

• Wholesaler Carry Costs
• Approvals take time
• Breaking Escrow takes time
• Declaring a Dividend takes time
• Home Office Costs
• Marketing / Printing Costs
• Expect to spend more than 5,000,000
• (could exceed 20,000,000 if done wrong )

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Raising Corporate Level Equity Capital Presented
by Andrew MurraySenior Vice President FBR
Capital Markets
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Recent Capital Market Developments

• As a result of recent changes in the credit
  markets and the resultant real estate debt
  capital pullback,
• First mortgage loan to value ratios will be lower
  than recent historical levels,
• Availability of mezzanine financing will be
  limited and when available loan to value ratios
  also will be lowered, and thus
• More equity will be required to acquire
  commercial real estate properties.
• This in turn will require most, if not all, real
  estate sponsors (including TIC sponsors) to have
  a larger amount of pursuit capital to close on
  real estate acquisitions

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Possible Solutions to Credit Crunch

• Lower the velocity of acquisitions
• Develop alternative or non-traditional sources of
  mezzanine financing
• Attract new entity level or corporate equity
  capital to the TIC sponsor to replace lost
  mezzanine financing sources

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Sources of Entity Level Equity

• Friends and Family or private retail investors
• Non-control institutional investors
• Strategic players
• Financial investors
• 144A common stock equity offering to
  institutional investors as was done by Triple Net
  Properties aka NNN Realty Advisors
• IPO
• Sale or majority recapitalization

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Types of Entity Level Capital

• Corporate line of credit
• Corporate term debt
• Convertible debt
• Preferred stock
• Convertible preferred stock
• Common stock

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How to value TIC Sponsors

• Multiple of in-place EBITDA (Earnings before
  interest, taxes, depreciation and amortization)
• On 2006 Actuals
• On 2007 Actuals Budget
• On 2008 Projections
• Recurring income
• Acquisition fees
• Management fees
• Disposition fees etc.
• Assets under management
• Historical and projected acquisition and
  disposition volumes
• Other business lines

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Issues and Next Steps

• Issues
• Magnitude of EBITDA and Assets under Management
• Depth of management team
• Audited financials
• Other business lines
• Next Steps
• Develop capital needs analysis for 2008
• Address additional building block needs
• Evaluate willingness to dilute current ownership
• Develop exit strategy