VIEW OF THE MARKET

1/1/09 We believe that the US economy is in a financial depression. The lack of capital, closure and bankruptcy of major banking institutions and investment banks and the mark down of all assets from CDO's to commercial real estate are all having a negative effect on the US economy. The commercial real estate industry is being impacted very negatively from the lack of available credit, increase in cap rates and risk adjusted returns and more conservative deal underwriting and capitalization. From 2001 through 2007, commercial real estate cap rates compressed from an average of approximately 8.5% to an unprecedented low of 6.5% (for the four main property types). Cap rates will increase significantly back to a least the historical average of 8.5%. This expansion in cap rates will result in a commercial real estate value decrease of approximately 30%. Real estate investors in the future will make investment decisions based primarily on the income and cash flow of the property and not on projected future value increases. It may be, that 70's show all over again. Real estate investing in the 1970's was characterized by a first mortgage loan of 50%-70% of cost, initial returns on equity of 7%-10% and holding periods of ten years or more.

The repricing of commercial real estate will create tremendous opportunities for opportunistic real estate investors that have access to equity capital and hopefully, debt capital when the credit markets return to some normalcy. However, current owners of commercial real estate are in a thorny position. A tenant in common sponsor, developer or institutional investor that holds commercial real estate acquired from 2005 through 2008 may have difficulty selling or refinancing most of their properties because of the loss of value from the aforementioned cap rate expansion and investor risk aversion. A number of current real estate owners will be forced into bankruptcy or some form of loan work out reminiscent of the RTC days in the early 1990's. This will create one of the best buying and work out opportunities in the last thirty years in commercial real estate.

The CMBS market, which financed approximately $240 billion of commercial real estate loans in 2007, has basically stopped with less than $15 billion of offerings in 2008. A number of CMBS pools have seen an increase in defaults and it is expected that defaults will increase significantly in 2009 and 2010. The increase in defaults, lack of debt capital and the loss of numerous CMBS originators, conduits, sponsors and buyers will result in a muted if any CMBS market in the near future.

The economic situation is also somewhat precarious with the country facing negative growth, with fourth quarter GDP projected to be down 1.5%, layoffs, especially in the financial services sector and deflation. Poor fundamentals will also have a negative affect on commercial real estate. Lower occupancy, slower or decreased rents, higher operating expenses and space contraction are all in the cards for commercial real estate.

The financial bailouts promoted by the Treasury Department and Federal Reserve have not created confidence and calm in the financial markets nor have they been successful in establishing a floor on toxic asset prices. Some estimates are that the government has committed more than $4 trillion in bailout funds including TARP, Fannie Mae, Freddie Mac, AIG, commercial paper funding, money market funds and various financial institution loans and investments. We believe this unprecedented intervention by the government will in the short term cause severe asset deflation and over the long term increase the budget deficit by trillions of dollars, devalue our currency, cause interest rates to rise and inflation to increase.

Although the current economic situation is not ideal, we believe that the next three to five years will be one of the most profitable commercial real estate investing opportunities in the last thirty plus years. Opportunities that look attractive for investment are tenant in common sponsors that are in financial difficulty, acquiring commercial real estate loans that are or about to be in default and the work out of distressed institutional real estate portfolios. A number of tenant in common sponsors are in financial trouble and may be interested in selling their sponsor or general partner interest. This may be a way for astute real estate investors to earn deal fees and obtain equity in the syndicated real estate assets. Many commercial real estate loans are in workout, default or bankruptcy and there may be an opportunity to acquire these loans at a discount, with the ultimate objective of obtaining title to the real estate. There are also many institutional real estate portfolios that are in or will be in distress and may be ripe for investment at a discounted value.

We are very bullish on commercial real estate investment in the next three to five years and wish all our clients continued success in 2009 and beyond.

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