1 Navigating Today's Lending Market Tom Detienne David Woida Investors Community Bank NorthMarq Capital 860 N. Rapids Road 325 N. Corporate Drive, # 180 Manitowoc, WI Brookfield, WI (920) (262)

2 Agenda  Industry Summary  Recent CMBS Market Slowdown  Where are Rates?  Underwriting Changes  Examples  Q & A

3 Industry Summary Expanded options for CRE finance – Conventional Banks / Portfolio Lenders – Conduit Lenders (CMBS) – Insurance Companies – GSE’s (Fannie Mae and Freddie Mac) – Private Money Lenders – Mezzanine – Credit Tenant Lease (CTL) – Equity

4 Key Differences Between Lenders Banks – Portfolio Lender, flexible terms, good $’s, shorter terms, typically recourse Conduits – Securitized Lender, little flexibility, aggressive terms GSE’s (Freddie & Fannie) – Could be either portfolio or securitized, flexible terms, attractive rates Life Companies – Portfolio Lender, very flexible, conservative terms Private Money – Portfolio Lender, flexible and attractive terms, very selective on deals

5 Holders of Commercial and Multifamily Mortgage Loans Record Levels of Just Over $3.0 Trillion of CRE Debt Outstanding in 2007!

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7 CMBS Spreads 1998 – Russian Bond Crisis CMBS spreads jump from 150 to 300 basis points Current Spreads - widened to all-time highs

8 What’s Going On in the CMBS Market? Loss of Investor Confidence - Results in billions of dollars in Commercial Mortgages being held on books waiting for Investors Risk Adjustment – Increased spreads of over 100 basis points – bps over 10-year Treasury – bps over 10-year Swap Spread –Current Market Rate Re-established at 6.35%-6.85% (Fixed 10-year Loans) Borrower Impact – Underwriting Standards have tightened –Debt Cover Ratios remain at benchmark 1.20 –Interest-Only periods reduced or eliminated –Ultimate impact = lower loan proceeds in today’s market Competition - CMBS spread increases have made Portfolio Lenders (Life Companies, Fannie Mae & Freddie Mac) more competitive

9 Federal Reserve Not a Bailout: The Fed is in a position to defend a cut in the fed funds rate based on weak economic data as opposed to lowering the federal funds to address the liquidity and credit problems

10 Yield Curve Source: Federal Reserve

11 How Did We Get Into This Mess? A Combination of factors… 1.The Fixed Income Market has driven a majority of the spread widening 2.Unlike in the past, the CMBS Market itself has contributed to the recent risk adjustment Fixed Income DriversCMBS Drivers Sub-Prime Meltdown Volatility in the Corporate Bond Market Lack of Liquidity Deterioration in Loan Underwriting Huge Issuance Calendar in Volatile Market Lack of Liquidity

12 Corporate Bond Spreads Commercial Real Estate Impact: Life Companies primarily set interest rates based on corporate bond yields, therefore mortgage spreads for this sector have seen increases in the range of basis points Source: Federal Reserve

13 CMBS Outlook Improved Long-Term Outlook Commercial Real Estate Fundamentals Remain Solid –Rental growth still being seen in many markets –Higher cost of building helps to moderate supply –Job growth remains stable –Companies strong balance sheets CMBS Community Responded Proactively to the Situation –Significantly more conservative loan underwriting –Result is lower supply in the fourth quarter Current Spreads offer tremendous value – increasing future demand for Commercial Mortgage Backed Securities

14 Capitalization Rates * 7 to 10-yr fixed rate conduit loans for properties 5 mil+

15 Where are Spreads Today Property Type 2006 Spread (1) CMBSGSELifeBank (2) Anchored Retail N/A Un-Anchored Retail N/A Multi-Tenant Office N/A Medical Office N/A Multi-Tenant Bulk Warehouse N/A Single Tenant Bulk Warehouse (non credit) N/A Multi-Family (Class A) September Indexed to LIBOR Swaps vs. Treasuries

16 How Does All This Affect Underwriting Cash flow (Debt Service Coverage) Leverage (Loan-to-value) Interest only periods Reserves / Escrows Costs of issuance Personal guarantees Prepayment penalties Assumptions

17 EXAMPLES / Q&A

18 Sources MBA Website Federal Reserve Real Capital Analytics REIS