2. NCREIF Discussion Agenda TopicDiscussion Leader IntroductionsJohn Baczewski, CPA, CRE, President, REFS; REIS Board Chair What are the Real Estate Information Standards? John Baczewski Valuation StandardsRichard Wincott, MAI, CRE; Executive Vice President Altus Timely Recognition of Development Profit Richard Wincott Debt ValuationJeff Walker, MAI, CRE; Managing Principal; US Realty Consultants Wrap-up

3. What are the Real Estate Information Standards (REIS)? Mission: to establish and implement information standards for the real estate market to facilitate informed investment decision making. 3

4. What does REIS do? InterpretationGAAP, GIPS, USPAP Consensus buildingTask force action Standard SettingREIS Vols. I and II AdvocacyFASB PartneringINREV, AREV 4

5. Who are REIS participants? NCREIFPREA Sponsorship REIS Board REIS Council Governance Volunteer Task Forces Action 5

6. REIS addresses the gaps! 6 GAAPGIPSUSPAP Fund Managers Investors Interpretation Reporting Standards

7. What are the benefits? To the industry – Build industry consensus on reporting inconsistencies – Fill reporting “gaps” by developing standards and guidance For Investors/managers – Performance comparability – Reporting clarity and transparency – Uniform accounting/valuation/performance reporting 7

8. NCREIF Mission NCREIF is a not-for-profit trade association that serves its membership and the academic and investment community’s need for improved commercial real estate data, performance measurement, investment analysis, information standards, education, and peer group interaction by: – Collecting, processing and reporting data in a secure environment; – Producing performance measurement indices; – Encouraging academic and member use of NCREIF data for objective research; – Providing forums with strong educational content to address industry issues; – Publishing informed industry related articles and performance reports; and – Contributing to the development of real estate information standards. 8

9. NCREIF Introduction to NCREIF NCREIF’s many contributions to the real estate investment management business have included: Provide indices and benchmarks that serve as the foundation for institutional investment in real estate and actively support the industry's information infrastructure. Instrumental in the creation of the Real Estate Research Institute (RERI). Created and continue to support, with PREA, the Real Estate Information Standards that serve as the backbone of consistent reporting within our industry. Actively represent our industry’s interests in dealing with authors of FASB, GIPS and USPAP standards to be sure they act in ways that reflect an informed perspective. 2

10. Product Evolution NCREIF’s Flagship Index: NCREIF Property Index (NPI) Inception Date 4q1977 Apartment, Hotel, Industrial, Office, Retail Data Consists of: Quarterly Returns by Property Type, Subtype, Region, Division, State, CBSA, Zip Code Reports and Products Consist of: “Glossy” Performance Report Detail Hard Copy Report Detail Spreadsheet Files Online Query Tool Operations Benchmarks Cap Rate and Other Trends 8

11. Product Evolution Fund Indices Open End Diversified Core Equity (ODCE) Open End Equity (OE) Timberland Fund and Separate Accounts NCREIF/Townsend Closed End Indices Under Development NCREIF Closed End Fund Indices Global Fund Index 9

12. NCREIF Data Products NCREIF Property Index (NPI) – Several Report and Spreadsheet products Fund Indices – Open End Diversified Core Equity (NFI-ODCE) – NCREIF Townsend Fund Indices – NFI All Open End Fund Index NCREIF Farmland Index NCREIF Timberland Index Custom Data Products – Website Query Tool – Operating Database Query Tool – Special Data Runs Specified by Members 12

13. NCREIF Membership Institutional Real Estate Investment Managers – 94 Major Pension Funds – 44 Service Providers (Appraisers, Accountants, Consultants, Analysts) – 102 Academics – Professors of Real Estate at major universities – 40 13

14. PREA’s Mission Founded in 1979, the Pension Real Estate Association (PREA) is a non-profit trade association for the global institutional real estate investment industry. Its mission is to serve members engaged in institutional real estate investment through the sponsorship of objective forums for education, research initiatives, membership interaction and the exchange of information.

15. PREA’s Membership PREA currently lists over 702 corporate member firms worldwide representing public and corporate pension funds, endowments, foundations, Taft-Hartley funds, insurance companies, investment advisory firms, REITs, developers, real estate operating companies and industry service providers Investor members hold more than $2.29 trillion in assets, of which $241 billion is invested in real estate related products (according to respondents to PREA’s Investor Report, August 2012) PREA’s core constituency is its investor members who play a significant role in leading the organization through the Institutional Investor Council and its Executive Committee

16. PREA exists to serve and educate its members in the global institutional real estate investment community PREA hosts four major educational forums each year, the Annual Spring Conference, the CEO Leadership Forum, the PREA Institute and the Annual Plan Sponsor Fall Conference PREA publishes the highly-regarded PREA Quarterly magazine with an emphasis on quality content and publication standards PREA has augmented its traditional educational programs to include webinars, industry news blasts, topic-focused affinity groups and regional summits Many of PREA’s educational efforts are specifically tailored for the investor community PREA Education

17. Recognizing the importance of cultivating the next generation of real estate leaders, PREA has long been a resource for students and those new to the industry Since 1994, PREA’s scholarship fund has awarded over $550,000 to 192 students studying real estate and related academic fields Additionally, PREA provides an annual grant to the Robert A. Toigo Foundation which provides support and services to minority students pursuing business careers PREA launched the highly successful John W. Koza Leadership Fellows Program to promote the engagement of young investors in the organization and broader real estate community PREA Education

18. The Research Department, strongly supported by the Research Committee, is dedicated to providing the association’s members with timely, relevant and reliable information as an authoritative source for industry and academic research. Efforts include: Disseminating independent and objective real estate research Originating original research requested by members Conducting surveys to gather relevant and timely member data Creating white papers and publications of importance to members Collaborating with other industry and academic organizations on meaningful industry projects and initiatives PREA also recognizes those who contribute to the common body of knowledge practical insight gained through significant research with the James A. Graaskamp Award PREA Research

19. PREA’s Industry Commitment In fulfilling the association’s mission, PREA serves as a steward for the industry, dedicated to seeking and promoting best practices, and standards of prudence, professionalism and integrity In 1993 PREA joined forces with NAREIM and NCREIF to begin work on Real Estate Information Standards which continue to advance the goal of information standardization and transparency necessary to compare real estate with other asset classes PREA and its co-sponsor NCREIF, maintain their long-standing commitment to the Standards as they continue to evolve and reflect the industry in which we operate

20. Valuation Required: All accounts VA.01: Valuation policy statement (Annually): In addition to the required disclosures under GAAP for fair value measurements, the Account Report must contain a statement that the Account’s real estate investments are valued in accordance with the REIS Property Valuation Standards, stated below: A written Valuation Policy, including methods and procedures, must be maintained and consistently applied. Changes to this policy must be disclosed through the next annual reporting period. The policy must include: Internal hierarchy of appropriate management levels responsible for the valuation process Process by which external appraisals are conducted Frequency of valuations External valuer and/or investment manager selection process Role of USPAP in the valuation process Debt valuation procedures Minimum scope and documentation requirements for both external and internal valuations Value acceptance and dispute resolution procedures REIS standards

21. Direct real estate investment fair values must be reported on a quarterly basis. Quarterly valuations can be completed either internally or externally and approved in writing. This requirement supports quarterly production of the NCREIF Property Index. a.External valuation requirements i. Each direct real estate investment must be valued by an independent, professionally designated property valuer or appraiser at least once every 36 months. Beginning January 1, 2012, the external valuation requirement is at least once every 12 months unless client contracts for a less frequent appraisal, but no less frequently than every 36 months. ii. External appraisals completed by independent third-party appraisers must be performed in accordance with USPAP for U.S. investments and either the International Valuation Standards as set forth by the International Valuation Standards Committee (IVSC) or the appropriate authoritative standard in the country in which the property exists. iii. Material differences between external valuation and the valuation used in reporting, and the reason for the differences, must be disclosed.

22. b. Internal valuation requirements i. Scope must be sufficient to demonstrate that the value of each property has been appropriately determined. The scope should include, but not be limited, to the following: 1. Use appropriate, established valuation techniques 2. Demonstrate independence of valuation process oversight, review, and approval 3. Contain sufficient documentation for auditors to re-compute the calculations during audit 4. Reconcile any significant variance from the previous external appraisal Real Estate Information Standards (REIS) handbook 20

23. Timely Recognition of Development Profit: A Fair Value Perspective

24. Timely Recognition of Development Profit In the Open-end Fund world it is important that the periodic pricing be accurate as of the date of value. Participants buying in or selling out of a fund should not be advantaged or disadvantaged. Assets under development should reflect the current value of not only the capital expended to date, but also recognize the incremental entrepreneurial effort earned to that point.

25. Timely Recognition of Development Profit Primary Risk Factors: Entitlement Risk Construction Risk Sales/Leasing Risk Operating Expense Risk Credit Risk Partnership Risk Capital Market Risk Pricing Risk Event Risk Valuation Risk

26. Timely Recognition of Development Profit

30. Risk profiles will vary from project to project The impact of each depends upon that particular factors magnitude and duration “It ain’t over ‘til it’s over” (Yogi Berra) The unearned profit must not only be sufficient to mitigate the remaining risk factors, but provide enough incentive for the market participant to finish the project

31. Debt Valuation Discussion Appraisal Institute July 23,2013

32. Why do we value debt? How do we value debt?

33. I. HISTORY OF GUIDANCE II. GROSS VS NET III. THE NET APPROACH

34. HISTORY OF REIS DEBT GUIDANCE

35. Source: REIS Debt Task Force Survey November, 2008 In 2007, the FASB issued SFAS 157, Fair Value Measurements and SFAS 159, Fair Value Option For Financial Assets and Liabilities, with effective dates for periods beginning after 11/15/07.

36. Source: REIS Debt Task Force Survey November, 2008

40. GROSS VS. NET APPROACH

41. Holders of the gross view o Take a rules based implementation approach to ASC Topic 820 o Argue that there are two units of account (one for the asset and one for the liability). o Value the liability (obligation to make a stream of cash payments), assuming a hypothetical transaction where the reporting entity pays a “credit equivalent” market participant to assume the liability (the liability continues, it is not settled). The amount paid in such a transfer is dependent upon changes in market conditions since the issuance of the liability. o Use different market proxies for the sale of assets and the transfer/issuance of liabilities and these markets have different participants, requiring these elements to be separate units of account o Value the asset on a free and clear basis Source: FASB ASC Topic 820 Implementation Guidance October 20, 2009; and REIS Handbook Volume II, January 2012

42. Holders of the net view: o Take a principles based implementation approach to ASC Topic 820-a principles based standard o Argue there is one unit of account o Value the liability in the context of its impact on cash flows to the net equity position o Believe the market proxy is trades of equity positions in levered investments. Source: FASB ASC Topic 820 Implementation Guidance October 20, 2009; and REIS Handbook Volume II, January 2012

43. NET METHODOLOGY

44. Appendix 3 Market Participant Behavior-Net Method Under the net view, the fundamental question asked by a market participant when valuing an existing debt instrument is, “How will the assumption of this loan impact the projected return on my investment relative to obtaining a new loan at current market terms?” Source: FASB ASC Topic 820 Implementation Guidance October 20, 2009; and REIS Handbook Volume II, January 2012

45. Market Participant Behavior = Market Evidence (Market Transaction Activity)

46. Leveraged Equity Analysis Vs. Cash Equivalency (Modified)

47. What is a Market Debt Rate? Remaining Term, Original Term, Market Term, And Floors

48. Sample Comparable Leveraged Transaction In August 2012, ABC Real Estate Partners purchased Tower Square, a 120,000 Square foot Class A office building in Washington, D.C, from XYZ Partners for $121,392,500. The property was built in 2006, and was 100% occupied with 34 total tenants at the time of sale. The property was subject to $66 million in debt at 6.19%, prepayable in November 2017. The property sold encumbered by the debt, which the broker indicated was a negative influence for potential buyers. The property sold at a 6.30% capitalization rate after 150 days on the market. According to the broker involved, and based upon alternate bids received, he believed the sale’s capitalization rate was influenced by 25 bps due to the debt. At a 25 bps influence, the impact of the debt would be 54% of cash equivalency.

49. MARKET DEBT CONCLUSION Based upon the subject attributes and the LTV of the loan, a market rate of approximately 190 to 250 basis points over the comparable term treasury is appropriate as of the valuation date. The current comparable term treasury stands at 0.55%. Therefore, the market debt rate for the subject would be approximately 2.45% to 3.05%. However, given realistic lending floors, the current market debt rate for the property is estimated to be 3.50%.

50. CASH EQUIVALENCY CALCULATION The following chart presents our cash equivalency adjustment calculations. We have added to the cash equivalency calculation the costs of a new loan only for substantially above-market debt, as the assumption of existing debt would save the buyer incurring this expense, which would lessen the negative impact of above- market debt. We have not, however, added these savings to positive cash equivalency adjustments. We have assumed that if the current loan were replaced, it would be interest-only for the remaining term.

51. MODIFIED CASH EQUIVALENCY In the case of the subject, we estimate that the market would accept 50% of full cash equivalency as an adjustment for subject debt. The calculations are shown below.

52. LEVERAGED EQUITY ANALYSIS AS A TEST OF REASONABLENESS

55. CONCLUSION Based upon the previous analysis, we estimate the market value impact of the existing encumbering debt on the subject, after rounding, as of September 30, 2012, to be: NEGATIVE ONE MILLION NINE HUNDRED THOUSAND DOLLARS -$1,900,000

56. Cash Equivalency Transaction What was the true impact of this debt on the comparable transfer?

57. Questions, Comments, Data? Jeffrey Walker, MAI, CRE jwalker@usrc.com