Why , When, Where, What & How to Make A Deal

Position – Connect - Close Why, When, Where, What & How to Make A Deal June 19, 2012

Today’s subject matter expert Fred B.Córdova, III Executive Vice President Los Angeles, CA Fred Córdova joined Colliers in May of 2002. He was previously with Cushman Realty Corporation from 1999 to May of 2002. He has vast experience in real estate transactions and development across multiple product lines, including office, industrial, residential, retail and hospitality. During his extensive career, he has purchased, sold, leased and development more than $5.7 billion of real estate.“fredcordova.com”

Transacting Commercial Real Estate in 2012 • CRE Analysis – Determining Market Pricing • Why.. Invest in CRE? • When.. Does it make sense to build? • Where.. Should one build? • What.. Should be built? • How.. Should it be built/financed?

1. Why …..invest in CRE? • The role of commercial real estate as an investment class • History • Equities • Bonds • CRE – The Core Model • CRE Core Investors & risk / Return parameters • Pension funds • Insurance companies • Fund advisors • REITS • Corporate investors • Hybrids / TIC’s / Syndicators • Private Capital • Owner / Users

1. Why …..invest in CRE? • Why does CREmake sense as an investment class? • Yield performance • Income sustainability • Inflation hedge • Diversification • Visibility / image • Scale / size • Risk adjustment returns • Liquidity • Income growth • Leverage • Competitive advantage

1. Why …..invest in CRE? Core buyer investment attributes

1. Why …..invest in office buildings? Core buyer yield targets Historical Average Yield Premiums (Cap Rates) vs 10 year T = 1.5% - 2.5%

2. When….does it make sense to build? Timing / Timing / Timing?

2. When….does it make sense to build? Key office value drivers • Supply side • Existing inventory • Functionality • Age • Type • Vacancy • Location • Submarket • Development Pipeline • Market rents • Anticipated rent growth • Historical absorption • Capital markets • Investor rates • Return parameters • Demand side • Space drivers • Job growth • Office utility • Functionality • Technology • Education • Government • Inventory • Utility • Cost / Market rent • Amenities • Capital markets • Return on costs • Responsiveness

2. When….does it make sense to build? • When will market rents exceed replacement cost rents? • The Investor guide – The Broker opinion of value

2. When….does it make sense to build? • The Investor’s guide – The Broker opinion of value • The role of Argus in market pricing • Key assumptions that drive the Argus pricing model • Market rents • 10 year rent growth • Expense / expense growth rate • Stabilization costs • Lease up costs (TI’s, Commission, Concessions) • Downtime • Retention rate • Releasing costs • Exit cap rate

2. When….does it make sense to build? When will market rents exceed replacement cost rents? The Investor’s guide – The Broker opinion of value Rent growth drivers • Investment Attributes • Current NOI • Stabilized NOI • Tenant Mix / profile • Cap ex needs • Operating expenses • Yield profile • 0 • Location Attributes • Livability • Amenities • Labor pool • Transportation • Visibility • Housing • Submarket Attributes • Size of submarket • Position in submarket • Barriers to entry • Business environment • Absorption / Vacancy • Demand drivers

2. When….does it make sense to build? Analyzing rent growth

2. When….does it make sense to build? Sales comp analysis

3. Where..should one build? • Capital return parameters = Sustainable market rents • High job growth cities • Creative technologies • 24/7 livability – global cities • Entertainment / media • Trade centers • Education • Natural resources – oil, gas, agriculture, minerals • Catalytic / High growth cities • San Francisco, CA • Los Angeles – West Hollywood / Santa Monica / Downtown? • Portland, OR • Seattle, WA • Austin, TX

4. What…..should be built? New office product & new discipline • Supply constraints • Aggregate demand growth • Submarket fundamentals • Labor supply / quality • Competitive demand • Capital flows • Government actions • Macro – Capital markets • Micro – Submarket • Demand constraints • Space utilization/efficiency • Sustainable business models • Technology • Business drivers • Capital flows • Government actions • Macro – Capital markets • Micro – Submarket

4. What…..should be built? The new office user • Needs • Open floor plans • Fewer private offices • More congregate space • Flexibility • Quality employees • Collaboration • Proximity to clients • Technology / connectivity • Less government • Desires • Flexible hours • Comfortable environment • Safety / security • Nearby amenities • Easy access • Public transportation • Affordable housing • Proactive business environment • Efficient / less expensive space

5. How ……should it be built / financed? Risk & the use of debt Manage cash flow risk and the ability to repay the loan • Pros • Higher equity returns • Less equity required • Managed financial risk • Concerns • Less development flexibility • Third party oversight • Personal liability • High external / beta risk • Greater market risk • Greater capital market risk • Greater execution risk Is Spec Dead?

The Clues – Why – When – Where – What - How Key indicators to monitor The Aggregate Watch – Alignment of Capital Flows and CRE Investor Demand Government Macro Policy – Flow and direction of interest rates Government Micro Policy – Flow and direction of capital toward users & markets Submarket Fundamentals – Supply & Demand of Space Replacement Costs – Labor / Land / Steel / Concrete / Drywall / Copper Entitlement Requirements – EIR’s, Barriers to Entry, Soft Costs Tenant Space Drivers – Labor / Customers / Location / Costs / Productivity

Positioning Analytics => Positioning => What’s the Story? The Pitch => Opportunity What is it (Product type) and what condition is it in A,B C (cap ex) Where is it located – Primary, Secondary, Tertiary market How is it expected to perform – risk / yield profile What is the yield opportunity – core, core+, VA, opportunity What type of investor would want to own it

Connecting Awareness => Understanding => Who cares? Delivering the Message => Target Buyer => Action Buyer segmentation – Product type Product quality Location Risk profile Return parameters (core, core+, VA, opportunity) Engaging the buyer E Teasers Offering Memorandums On line platforms Auctions Mailers Phone calls

Closing Risk Management => Buyer Selection => Disclosure => Due Diligence Picking the right buyer => who closes at the best price Who actually can say “yes” to the deal Source of funds Timing Process Team members Achieving Commitment => Building Trust Validating the story Proving out the underwriting (Sellers are liars and Buyers are thieves) What can go wrong- anticipate challenges The Purchase and Sale Agreement Environmental Title Property condition Estoppels

Conclusions – Transacting CRE in 2012 Macro Forces Shaping CRE Investing CRE is maturing as an investment class Investing has become much more transparent Value does not equal pricing Government Macro Policy => Capital Flows => Yield Requirements => Pricing Government Micro Policy => Capital Flows => Fundamentals => Values Technology is changing the industry – capital, supply of CRE and demand for CRE Liquidity is the ultimate risk and debt magnifies liquidity risk

Contact Us Fred B.Córdova, III Executive Vice President Los Angeles, CA “fredcordova.com” Twitter: @FredBCordova thenewnexus.blogspot.com The Aggregate – Subscribe through “fredcordova.com” fredcordova@colliers.com O: 213.532.3281 License No. 01279582

Why , When, Where, What & How to Make A Deal