1. 2010 Market Update Headwinds in Commercial Investment Real Estate 2010 v.02

2. Overview About M&M About M&M Market Forecasts Market Forecasts Brokerage Business Brokerage Business Other Topics Other Topics

3. Who is M&M? Largest Investment Sales Brokerage Largest Investment Sales Brokerage Private Client Market Private Client Market Specialization Specialization

4. Who Am I? South Florida BSME South Florida BSME University of Florida MBA University of Florida MBA 10yrs Distressed Real Estate 10yrs Distressed Real Estate Principal, Partnerships, Brokerage Principal, Partnerships, Brokerage Creation of Special Assets Services Division Creation of Special Assets Services Division

5. Commentary “Hope is not an exit strategy” – Stacey Berger, Midland Loan Services

6. Where’s the Juice? Consumers Consumers Make money from investing & working Make money from investing & working Businesses Businesses Provide goods & services in exchange for money Provide goods & services in exchange for money Pay rent to RE Owners Pay rent to RE Owners Employ Consumers Employ Consumers

7. Where’s the Juice? RE Owners RE Owners Make money from tenants Make money from tenants Raise money from investors Raise money from investors Pay money to banks for loans Pay money to banks for loans Hire businesses to perform services Hire businesses to perform services Banks Banks Receive payments on loans Receive payments on loans Pay interest to investors Pay interest to investors

8. Growth Entire system designed to work well ONLY with constant growth Entire system designed to work well ONLY with constant growth Growth dependent upon confidence Growth dependent upon confidence No perpetual motion No perpetual motion Leverage used to “fake” returns Leverage used to “fake” returns

9. Personal Savings

10. Deleveraging?

11. Faking Returns $1mm investment at 10% $1mm investment at 10% $100k cash flow per year $100k cash flow per year Assume 8% interest, 50% LTV Assume 8% interest, 50% LTV $500k loan with $40k debt service $500k loan with $40k debt service $60k cash flow on $500k = 12% $60k cash flow on $500k = 12% Financial Engineering Financial Engineering Risk? Risk? Where did the 10% come from? Where did the 10% come from? Is it always 10%? Is it always 10%?

12. Return Trends

13. Vacancies Rising

14. Velocity

15. Local Velocity

17. Local Foreclosures

18. Appraisal Issues Cost – Irrelevant Cost – Irrelevant Comps – No Velocity Comps – No Velocity Income Capitalization (net lease) Income Capitalization (net lease) Still requires comps Still requires comps Doesn’t tell the whole story Doesn’t tell the whole story All backwards-looking All backwards-looking Volatile Market – Never Accurate Volatile Market – Never Accurate

19. Disc Cash Flows DCF is only real way to value DCF is only real way to value Requires deal data Requires deal data Bid/ask gap Bid/ask gap Demand characteristics Demand characteristics Fluctuates with the market Fluctuates with the market Similar to corporate bonds Similar to corporate bonds

20. CMBS Refi Horizon

21. Maturing Loans * Forecast Sources: Marcus & Millichap Research Services, Standard & Poors Maturing Loan Balance (billions) Number of Loans (000s)

22. Perils of Pro Forma Current Actual Current Actual 75% occ / $35 / 8% cap / 80% LTV 75% occ / $35 / 8% cap / 80% LTV “Opportunity” Numbers “Opportunity” Numbers 90% occ / $45 / 7% cap / 80% LTV 90% occ / $45 / 7% cap / 80% LTV Unfolding Reality Unfolding Reality 60% occ / $25 / 10% cap / 65% LTV 60% occ / $25 / 10% cap / 65% LTV

23. Halo Effect "We vastly underestimate the extent to which success happens because of things the individual has nothing to do with.” - Malcolm Gladwell

24. House Prices

26. The Future?

27. 2012?

28. Loss Aversion Loss aversion (emotional attachment) is one of the strongest influences any investment decision Loss aversion (emotional attachment) is one of the strongest influences any investment decision Riding the market down Riding the market down

29. Commentary "One of the misconceptions people have in investing is that I have to make it back in the same asset I lost it in.” - John Merrill, Tanglewood Wealth Management

30. Or This?

31. Interest Rates?

32. The CIRE Paradox If the economy improves, capital flows shift from debt to equity causing interest rates to rise, which lowers CIRE prices (inflation) If the economy improves, capital flows shift from debt to equity causing interest rates to rise, which lowers CIRE prices (inflation) If the economy worsens, cash flows from consumers to businesses drop leaving interest rates low but lowering asset prices (deflation) If the economy worsens, cash flows from consumers to businesses drop leaving interest rates low but lowering asset prices (deflation)

33. Brokerage Business Types of property Types of property Types of owners Types of owners Sales cycle Sales cycle How different segments operate How different segments operate

34. Brokerage Business Long hours Long hours Hard work Hard work Long lead time before $ Long lead time before $ Uncertain future Uncertain future Lumpy cash flows Lumpy cash flows

35. Typical Day Plan Day Plan Day Plan Calls Plan Calls Outbound Calls Outbound Calls Send Emails to Follow-up Send Emails to Follow-up Check Messages Check Messages Return Calls Return Calls More Outbound Calls More Outbound Calls

36. Typical Night Database Database Research Market Research Market Prepare Proposals Prepare Proposals Compile Comps Compile Comps Marketing Campaigns Marketing Campaigns Track Pipeline Track Pipeline

37. Why Bother? Money Money Barriers to Entry Barriers to Entry Freedom Freedom High Net Worth Clientele High Net Worth Clientele Sophisticated Business Experience Sophisticated Business Experience

38. Other Topics Special Assets Special Assets Loan Sales Loan Sales Advanced Pricing Advanced Pricing Deal Stories Deal Stories

39. Any More? Questions?