R E A L E S TAT E

PRIME PROPERTY F U N D®

THIRD QUARTER 2007

THIRD QUARTER 2007: PRIME AT A GL ANCE Prime Property Fund (“PRIME” or the “Fund”) generated a third-quarter total return of 2.1%, comprised of 1.0% income and 1.1% appreciation, and a 19.5% trailing 12-month return.

Investment Performance (1) (%) 19.5

Gross Asset Value

19.9

$9.2 billion Net Asset Value

17.1 14.0

$6.6 billion Share Value

$15,051.00 Lease Status(2)

91.2%

Consolidated Leverage(3)

28.9%

Number of Assets

221 Trailing 1-Year Return 1 2 3 4

Trailing 3-Year Return

Trailing 5-Year Return

Trailing 10-Year Return

Investors(4)

116

Notes

PRIME’s returns are presented on a before-fee basis, reflect the use of leverage and are chain-linked and time-weighted PRIME’s lease percentage is value-weighted and is calculated using the asset values gross of debt adjusted for ownership share Includes all wholly owned debt and PRIME’s proportionate share of joint venture debt Excludes non-voting shareholders with investments of less than $10,000; feeder fund investments are treated as a single investor

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2

LET TER TO THE SHAREHOLDERS PRIME is a core portfolio comprised of high-quality properties actively managed by Morgan Stanley to generate top performance. Prime Property Fund’s third-quarter returns were muted compared to the Fund’s recent history as changes in real estate capital markets began to moderate returns across the portfolio. The return for the third quarter totaled 2.1%, comprised of a 1.0% income return and a 1.1% appreciation return, and resulted in a 14.0% return year-to-date. The Fund continues to post an extremely competitive total return over the trailing 12-months of 19.5%.

To generate superior performance in this environment, PRIME must continue to execute at the property level and drive income growth.

During the third quarter, U.S. credit markets reacted unfavorably to the continued weakness in the housing sector and the unwinding of the sub-prime mortgage markets. These factors acted as a contagion causing a broad re-pricing of risk and a rise in spreads in many financing markets but specifically in the Commercial Mortgage Backed Securities (CMBS) markets. Liquidity in the real estate debt markets slowed as securitized lenders contracted on new lending to focus on the syndication of the debt that was on their books from loans executed earlier in the year. It also appears we have entered a period of more conservative capital markets underwriting.

PRIME’s management team believes that properties that are most at risk for repricing are those located in secondary or tertiary markets or those that lack the quality, design and functionality desired by tenants. Due to aggressive lending markets in effect earlier in the year, spreads between top-tier and lower-tier assets eroded considerably. We believe these “second-tier” markets and assets are likely to have the greatest “snap-back” to more normalized pricing levels. In contrast to the sweeping repricing of risk in the capital markets and a more conservative approach in the financing markets, property fundamentals are favorable broadly across most property types and geographic regions. PRIME’s management team has focused the portfolio on assets and locations that we believe will benefit most from these strong property fundamentals. The portfolio continues to witness strong gains in income growth broadly. Trailing nine months “same store” income growth from 2006 to 2007 for the Fund totaled 6.1%, led by PRIME’s office sector with 13.0% income growth. Consistent with PRIME’s objective to maintain a tactical overweight to its office allocation, the Fund purchased more than $150 million in additional office holdings: 950 N. Glebe, located in Arlington, VA, and our partner’s remaining 8.1% interest in Two Park Avenue, allowing PRIME to now own 100% of this midtown Manhattan property. However, the Fund remains diligent with respect to portfolio diversification. PRIME completed its plan to sell a 50% interest in One Market Plaza in San Francisco to enhance diversification among property sectors, geographic locations and single-asset exposure. Despite this partial disposition in July at a price in excess of PRIME’s purchase price, and property level operations that met our expectations, the asset was written down in value later in the quarter, as a result of the “credit crunch” unfolding over the summer.

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PRIME’s hotel portfolio had strong performance during the quarter, with a total return of 6.0%, comprised of an income return of 1.5% and an appreciation return of 4.4%. Renovations at both the Marriott East Side Hotel and the Boston Harbor Hotel are beginning to evidence their value through increased occupancy and room rates. The Fund will begin to mark its debt to market beginning in the first quarter of 2008, as a result of the adoption of Statement of Financial Accounting Standards No.159, the fair value option for financial assets and financial liabilities-including an Amendment of FASB statement No.115. Although PRIME maintains modest debt levels, consistent with the strategy of a core fund, this practice may increase volatility of the Fund’s performance relative to its historic levels. We believe this is consistent with best practices in the industry and will continue to position PRIME as a leader in transparency to its investors. Additionally, PRIME now has a small queue formed for new investors entering the Fund. PRIME continues to receive strong interest from new clients, and we believe that this growth and diversification should be beneficial for the Fund and investors alike. Despite the recent evidence of a repricing of risk in all asset classes driven primarily by lack of liquidity in the debt markets, management believes that core real estate should perform well on a relative basis to other asset classes and that PRIME, specifically, is well-positioned because of its orientation towards high-quality assets, superior markets and focus on strong income growth. We appreciate your continuing support of PRIME and would be pleased to discuss any aspect of this report with you at your request. Sincerely,

Scott A. Brown Co-Head of Prime Property Fund 212-761-3907 [email protected]

David F. Morrison Co-Head of Prime Property Fund 212-761-4747 [email protected]

This quarterly report is strictly confidential and may not be forwarded, copied or reproduced in any manner without permission, except as expressly indicated herein. All information is as of September 30, 2007, unless otherwise noted.

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PRIME REPORT Statements of Net Assets (in thousands) Assets

September 30, 2007

December 31, 2006

1,575,583 158,975 1,734,558 188 $6,635,711 28.9 4.3

1,008,651 122,893 1,131,544 109 $4,783,316 27.6 0.9

$7,994,817 287,297 88,343 8,370,457

Investments Cash and Short-Term Investments Other Total Assets Liabilities

Debt Other Total Liabilities Minority Interest Net Assets Consolidated Debt to Total Assets (%) Cash to Net Assets (%)

$5,751,896 40,852 122,221 5,914,969

Annualized Time-Weighted Rates of Return (1) (%)

Income

Appreciation

3Q 2007

Year-to-Date 2007

One Year

Three Year

Five Year

Seven Year

Ten Year

1.1

10.7

14.1

13.8

9.9

5.7

5.8

1.0

Total Before Fees

2.1

NCREIF Fund Index Open-End Diversified Core Equity (NFI)(2)

Total After Fees

3.1

Retail

Industrial

Self Storage Apartment Hotel

Total(5)

1.8

13.0

19.5

17.8

18.7

4.0

13.6

18.2

Income

Appreciation

1.3

1.8

0.8 1.4 0.6 1.2 1.5

1.0

-0.4 1.6 0.4 1.6

4.4

1.1

Geographic Returns (1,4) (%) East

Midwest South West

1

2

3 4 5

Notes

5.5

14.0

Property Type Returns (1,4) (%) Office

4.8

Income

Appreciation

1.1

2.4

1.3

1.0

0.8

2.7 0.7

-1.1

7.8

8.1 1.7

16.0

12.3

14.0

12.9

8.9

18.4

15.1

12.5

13.2

10.0(3)

Total

NPI Total

Income

Appreciation

3.0

2.4

5.3

11.6

0.4 3.0

1.0

2.8

6.0

2.1

4.8 3.2

N/A

2.9

4.4

17.1

7.3

13.4

Third Quarter

19.9

6.6

Since Inception (8/20/73)

4.2 5.8

3.2

6.2

8.3

Trailing 12-Month

Total

NPI Total

17.5

13.0

21.2

26.2

11.9

18.3

7.8

14.4

0.6

15.7

3.8

25.1

3.6

4.8

14.1

Total

NPI Total

Income

Appreciation

Total

3.6

3.1

6.6

9.0

16.2

Third Quarter

4.0 1.6

-0.3

4.0

3.0

3.6

6.0 4.4

4.0

19.5

Trailing 12-Month

14.6

6.2

16.6

9.9

21.3

10.8

21.2

22.8

16.6 N/A

13.3

21.5

17.3

NPI Total 18.9 13.6

13.8

19.2

Period ending September 30, 2007. Returns for periods less than one year are unannualized. Rates of return are time-weighted and include reinvestment of income. Income and appreciation returns may not equal total return due to the chain-linking of monthly returns. Except for “Total After Fees,” management fees have not been deducted in calculating “before-fee” rate of return. See Endnote 2 for important additional information on return comparisons with the NFI and Endnote 9 regarding the limitations of historical returns The NFI is a fund-level capitalization weighted, time-weighted return index and includes property investments at ownership share, cash balances and leverage (i.e., returns reflect the fund’s actual asset ownership positions and financing strategy). NFI returns presented are before fees The NFI begins as of the first quarter of 1978, inclusive. PRIME’s inception was August 20, 1973, however, NFI returns are for the 29-year 9-month period These returns do not reflect portfolio-level items (e.g., portfolio-level debt), and therefore the weighted average of the returns do not sum to PRIME's returns Represents PRIME's fund-level before-fee return and includes the effect of fund-level items

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PRIME REPORT PRIME vs. NFI PRIME

19.5

19.9

18.2

18.4

17.1

15.1

14.0

NFI

13.2 10.0

10.0

4.0

2.1

3Q07

1-Year

3-Year

5-Year

10-Year

Since Inception(1)

PRIME vs. NCREIF Property Index (NPI) Annualized Rates of Return (2) (%) As of September 30, 2007

19.5

PRIME 19.9

17.3

1-Year

18.0

17.1

3-Year

14.8

13.4

5-Year

NPI

14.0

12.8

7-Year

13.1

10-Year

PRIME vs. NPI Property Type Sub-Index Returns (2) (%) For the 12-Month Period Ending September 30, 2007

PRIME

26.2

NPI PROPERTY TYPE SUB-INDEX

25.1 22.8

21.5 18.3

17.5

19.5 17.3

16.6 14.4

13.0

13.3

3.8 N/A Office

1 2 3 4

Retail

Industrial

Self Storage

Apartment (3)

Hotel

Total(4)

Notes

The NFI begins as of the first quarter of 1978, inclusive. PRIME’s inception was August 20, 1973, however, these returns are for the 29-year 9-month period See Endnotes 2 and 8 for important additional information on return comparisons with NPI PRIME returns include Apartments and Senior Living Represents PRIME’s fund-level before-fee return and includes the effect of fund-level items

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PRIME REPORT Prime Property Fund — Net Investment Income ($ in millions, except NII Per Share data) For the nine months ended September 30, 2007 Apartment Office

2007

% Change

50.8

13.0

30.3

28.4

6.7

8.4

11.2

-25.0

2.7

200.0

57.4

Retail

52.6

Industrial

17.5

Hotel

Self Storage

2006

$59.2

$55.9

49.8

16.4

Total Net Operating Income (1)

$225.4

$212.5

Interest Expense

(124.8)

(100.4)

Interest Income Adjustments(2)

Net Investment Income (NII)(3) NII Per Share (4) ■

■

8.1

64.3

$173.0

$436.70

5.9

5.6

6.7

11.2

6.1

24.3

$126.0

$439.63

37.3

Same property net operating income increased 6.1% over 2006.

The positive variance in the apartment sector is due to increasing market rents across the portfolio.

■ The

favorable performance of the office sector is primarily attributable to leasing activity and increased occupancy at One Post Office Square, 500 Park Avenue, 1601 K Street and Hills Plaza. Additionally, the prepayment penalty received as a result of the early repayment of the 222 E. 41st Street note receivable contributed to the outperformance.

■

■

■

■

■

Renewals and expansions at Dadeland Mall, lower taxes at Fox Run Mall, and income from Rosedale Shopping Center’s new lifestyle center drove the positive performance in the retail sector. The increase was partially offset by the closing of two anchors at Christiana Mall. The favorable variance in the industrial sector is due to higher occupancy at several properties and a warehouse expansion at 12 Applegate Drive.

The hotel sector variance is due to increased room revenue as a result of the completed room renovation project at Marriott East Side and increased room revenue and food and beverage sales at Westchester Marriott through the first six months of 2007. Higher general and administrative expenses, led by personnel and relocation costs, drove the negative performance in the self storage sector. Interest income increased in 2007 as a result of increased cash balances and investment yields.

■ Interest

expense increased in 2007 primarily due to the issuance of $400 million and $500 million of additional unsecured notes payable in January 2007 and April 2007, respectively, and the issuance of an $840 million mortgage loan at One Market Plaza in August. These increases were partially offset by the repayment upon maturity of $150 million of unsecured notes payable in May 2007.

1 2 3 4

Notes

To provide a more meaningful basis for comparison, net operating income includes income before debt service and includes only comparative months for properties held by the Fund Reflects the effects of properties that were sold/acquired during or prior to the period. Adjustments also include portfolio level items and other non-operating income and expenses NII is before investment management fees of $51.1M (2007) and $26.1M (2006) NII per share is calculated by dividing each month’s NII by each month’s beginning of period shares and summing the results for each month

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PORTFOLIO PERSPECTIVES “It appears that the challenges stemming from the

sub-prime mortgage markets have been a catalyst to a broad repricing of risk across financial markets;

we believe that PRIME is well-positioned given the

environment due to its high-quality portfolio and strong AMLI at Victoria Arbors, Rancho Cucamonga, CA

income growth potential.” David Morrison, Co-Head of PRIME

Apartment

Nationally, apartment fundamentals remained strong as demand was positively impacted by a combination of steady employment gains, a pullback in the residential mortgage markets and further expectation of falling home prices kept would-be home buyers in the rental market. PRIME’s apartment portfolio delivered a third-quarter total return of 2.8%, comprised of 1.2% income and 1.6% appreciation.

Year-to-date net operating income growth continues at a healthy 5.9% with Houston, Austin and Seattle exhibiting the strongest growth. The 2007 year-to-date average occupancy rate for . apartment holdings remained strong at 94.7%. During the third quarter, approval was granted for a new AMLI development just north of downtown Austin. The project, AMLI East Avenue, is to comprise 315 units and is part of a planned development that will also include office, retail and hotel uses. Leasing also commenced this quarter at AMLI Second Street, comprised of 231 units and approximately 43,000 square feet of retail in a downtown Austin mixed-use project and at AMLI La Villita in the Las Colinas submarket of Dallas, TX.

Office

Broadly, office markets continue to outpace rent and income growth relative to all other property sectors.

The lack of quality space alternatives coupled with corporations with strong profits expanding their businesses are allowing landlords to exert pricing pressure on rents. PRIME’s office portfolio delivered a third-quarter total return of 0.4%, comprised of 0.8% income and -0.4% appreciation.

Consistent with relatively tight market conditions, PRIME’s leasing activity was robust in the third quarter. Putnam Investments renewed its lease of 229,000 square feet at One Post Office Square for a term of 15 years. This tenant occupies the low-rise portion of the building and the terms achieved materially exceeded the underwritten assumptions in our valuation. At Two Park Avenue, Herrick Feinstein LLP’s existing lease of approximately 125,000 square feet was extended through late 2020 at an average rate that is $30 per square foot or 82% in excess of its current contract rate. In addition, Herrick Feinstein executed a lease for approximately 65,000 square feet of expansion space at today’s market rate. Salesforce.com is under agreement to renew and expand at One Market Plaza in San Francisco, and tenants comprising nearly 50,000 square feet at One Maritime Plaza are also committed to renew.

PRIME and its partner refinanced the mortgage at One Market Plaza in early August and secured long-term financing. The refinancing involved swapping floating rate debt to fixed rate. In accordance with accounting pronouncement, the swap instrument was required to be marked to

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PORTFOLIO PERSPECTIVES market at quarter end, resulting in a negative impact to the office and overall portfolio returns this quarter. Office transaction activity for the quarter included the $45.8 million disposition of 222 East 41st Street in midtown Manhattan that resulted in an internal rate of return of 28.4%, and the acquisition of 950 N. Glebe in Arlington, VA, for $102.9 million.

950 N. Glebe Arlington, VA

Christiana Mall Newark, DE

Retail

Despite the consumer downturn, retail property fundamentals remain brisk with competitive rental growth and consistently high occupancy levels. PRIME’s retail portfolio delivered a thirdquarter total return of 3.0%, comprised of 1.3% income and 1.8% appreciation.

Net operating income at Christiana Mall in Delaware was 6.0% above budget through September. Recent leases include the renewal of Gap and the relocation and expansions of GameStop, Sunglass Hut and Banana Republic. Rolling 12-month in-line sales at the mall were approximately $775 per square foot compared to $715 per square foot a year ago. During the quarter, plans commenced for the $170 million expansion and redevelopment of the property, expected to be completed by 2010. The redevelopment will include the addition of a new Nordstrom anchor and 100,000 square feet of additional in-line shop space.

Industrial

Strong global trade continues to create robust demand and raise national occupancy levels, especially for well-located distribution warehouse space with access to ports. PRIME’s industrial portfolio delivered a third-quarter total return of 3.0%, comprised of 1.4% income and 1.6% appreciation.

13201 Wilfred Lane Rogers, MN

During the quarter, a five-year lease was executed with Publix Supermarkets at 425 Hartman Road, a 350,000+ square foot industrial property in metro Atlanta, and Walgreen Co. committed to a 10-year lease at 13201 Wilfred Lane, a 335,000+ square foot warehouse building in Minnesota.

Self Storage

Self storage delivered a third-quarter total return of 1.0%, comprised of 0.6% income and 0.4% appreciation.

At quarter end, 52 stores are open and operating with 38 stores considered stabilized. Eleven stores are in various stages of development at the end of the quarter. This sector’s income return continues to be impacted by properties not yet stabilized or under development, corporate overhead expense and weaker than anticipated performance, primarily in the Florida and Louisiana markets.

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PORTFOLIO PERSPECTIVES Safeguard Storage Properties continues to pursue its insurance claims related to Hurricane Katrina. PRIME is also working with the company to explore strategic alternatives, which may include a recapitalization or outright sale.

Hotel

Nationally, the hotel sector continues to produce increases in rates and occupancy levels benefiting from little new supply and healthy demand from both business and leisure travelers attracted by a weakening dollar. PRIME’s hotel portfolio delivered a third-quarter total return of 6.0%, comprised of 1.5% income and 4.4% appreciation.

Post-renovation activity in PRIME’s hotel properties has continued to be favorable. Since

completing guest room renovations, Marriott East Side has exceeded its Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR) compared to budget by 2.8% and 3.9%, respectively, over the last four quarters. ADR and RevPAR exceeded last year by 12.7% and 11%, respectively. Year to date, EBITDA exceeded budget by 10.6%, despite significant renovation displacement.

Renovations have also boasted positive effects for the Boston Harbor Hotel. RevPAR exceeded budget by 4% for the quarter and 12.1% year to date. Despite the recent openings of the Intercontinental Hotel and Westin hotel nearby, Boston Harbor Hotel revenues for the third quarter were up 7.4% over last year, resulting in an increase of 13.9% in gross operating profits.

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PORTFOLIO PERSPECTIVES Portfolio Lease Status (%) 91.0

93.3

92.9

Office

9/30/07 88.8

87.1

83.9

80.0

Industrial

Retail

94.5

78.8

Self Storage

94.9

91.2

Apartment

6/30/07 91.0

Value-Weighted Lease Status(1)

Lease Expirations (%) As of September 30, 2007 Total Sq. Ft. (MM)

1 2

2007(2)

2008

2009

2010

2011

2012

2013

2014

2015

2016

Thereafter

Office

6.5

1.7

6.6

6.9

14.3

11.7

8.6

11.8

6.7

3.9

4.4

14.4

Retail

3.3

0.6

9.8

6.9

5.4

9.5

7.0

8.2

4.2

4.3

4.9

32.5

Industrial

11.8

0.0

14.3

6.2

8.3

13.6

15.1

1.5

4.3

12.1

8.2

3.5

Total(1)

21.6

1.0

9.7

7.4

12.0

10.9

8.9

9.2

4.7

6.0

5.1

16.0

Notes

PRIME’s lease percentage is value-weighted, and is calculated using the asset values gross of debt adjusted for ownership share Represents remaining 2007 calendar year expectations

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SUMMARY OF TRANSACTIONS 3rd Quarter 2007 Acquisition and Disposition Activity Acquisitions Date

Property Name

Type

Ownership

08/13/07

Hollis (1)

SS

Joint venture

IND

Joint venture

07/30/07 08/13/07

09/27/07 09/28/07

Total

950 N. Glebe

OFF

East Williamsburg (1)

SS

2899 Mead Avenue

Two Park Avenue

OFF

(2)

Wholly owned Joint venture

Wholly owned

Ownership Share %

100.0%

Arlington, VA

93.2%

Property Name

7/3/07

75 Howard Garage(4)

9/10/07

AMLI at Park Creek

7/3/07

93.2%

99.9%

100.0%

8/17/07 9/21/07 9/28/07 Total

OFF

Wholly owned

San Francisco, CA

222 East 41st Street(5)

OFF

Wholly owned

San Francisco, CA

Last Appraised Value(3) $MM 1,386.0 70.0

Sales Price(3) $MM 1,389.9 70.1

40.2

Wheaton, IL

82.0

83.0

$1,641.4

$1,652.9

Wholly owned

Gainesville, GA

Two Park Avenue Note Receivable(7) OFF

Wholly owned

New York, NY

Wholly owned

48.2

$170.8

New York, NY

APT

APT

AMLI at Danada Farms(6)

12.7

New York, NY

Location

Wholly owned

3.3

Santa Clara, CA

Ownership

OFF

3.7

Brooklyn, NY

Type

One Market Plaza(4)

102.9

Hollis, NY

Dispositions Date

100% Purchase Price $MM

Location

19.9 43.3

45.8

20.8 43.3

Forward Purchase Commitments As of September 30, 2007 Property Name

Type

Location

Westridge Distribution Center

Industrial

Atlanta, GA

Wrigleyville Whole Foods East Belt - Phase II Total

1 2 3 4 5 6 7

Retail

Industrial

Chicago, IL

Houston, TX

Projected Closing Date Nov-07

Projected Acquisition Cost $MM

26.0

Nov-07 Mar-09

13.0

12.5

$51.5

Notes

Acquired land for development Acquired remaining 8.1% interest in joint venture. Asset is now wholly owned Value and sales price represents the Fund's gross amounts, stated at 100% Sale of 50% interest and conversion into a joint venture Repayment of mezzanine loan receivable Sale of 80% interest and conversion into a joint venture Repayment of note receivable

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CAPITAL STRUCTURE Equity Diversification

Cost of Debt

As of September 30, 2007

As of September 30, 2007 All Debt (1) Weighted Average Cost of Debt

5.8%

Weighted Average Cost of Fixed-Rate Debt

5.8%

Weighted Average Cost of Floating-Rate Debt

6.2% 28.9%

Consolidated Debt to Total Assets Ratio

PRIME Client Type U.S. Public Pension Plans 38.9%

U.S. Fund of Funds 6.3% U.S. Corporate Pension Plans 25.5%

U.S.Taft-Hartley Pension Plans 7.4%

Other Investors (2) 6.1%

Foreign Investors 15.8%

Term Debt Maturity ($MM)(3) 930.4

201.8 —

2007 % of debt maturing

0.0%

43.3

136.0

273.1

367.2 143.5

242.3

2008

2009

2010

2011

2012

2013

2014

7.3%

1.6%

4.9%

9.9%

13.3%

5.2%

8.7%

340.4 90.0 2015

2016

Thereafter

12.3%

3.3%

33.5%

Debt Diversification As of September 30, 2007

Fixed Rate vs. Floating Rate (All Debt) (1)

Secured vs. Unsecured (All Debt) (1)

Floating 6.2%

Unsecured 47.0%

Secured 53.0%

Fixed 93.8%

1 2 3

Notes

Includes all wholly owned, joint venture, and portfolio level debt Other includes endowments and foundations, U.S. taxable investors and other investors Maturity schedule reflects wholly owned and joint venture debt at ownership share. Excludes the Fund's $600 million line of credit, which had no amounts outstanding as of September 30, 2007 and the overnight borrowing facility which had no amounts outstanding as of September 30, 2007. Information is as of September 30, 2007, and is subject to change at any time

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FUND DIVERSIFICATION & APPRAISAL ASSUMPTIONS Diversification

As of September 30, 2007

Property Sector Diversification PRIME — Gross (1) Hotel 4.5%

Land 0.8%

Apartment 24.8%

Retail 16.6%

Industrial 10.3%

Office 37.9%

Self Storage 5.1%

PRIME — Net (1) Hotel 5.3%

Apartment 25.4% Self Storage 5.9%

Industrial 10.3%

NPI(2)

Land 0.8%

Hotel 2.5%

Retail 16.5%

Apartment 23.0%

Retail 21.9%

Office 35.8%

Industrial 15.5%

Office 37.1%

Geographic Diversification PRIME — Gross (1)

PRIME — Net (1)

NPI(2)

West 35.2%

East 33.1%

West 33.6%

East 34.1%

West 35.1%

East 33.8%

South 19.0%

Midwest 12.7%

South 18.3%

Midwest 14.0%

South 21.1%

Midwest 10.0%

Appraisal Assumptions As of September 30, 2007 %

Office

Retail

Industrial

3

Average Discount Rate

Average Rent Growth

Average Expense Growth

5.2

6.5

7.1

2.9

2.7

3.7 5.4

6.2

Hotel

6.5

Total(3)

2

Average Terminal Cap Rate

Self Storage Apartment

1

Average Initial Cap Rate

5.4

4.8

6.0 7.1 7.6 6.3 7.5

6.4

6.9 7.3 8.5 7.4 8.8

7.3

3.8 3.2 3.1 3.2 3.3

3.4

3.0 2.7 3.2 3.0 3.4

2.9

Notes

Gross weightings calculated using PRIME’s proportionate share of assets’ appraised value. Net weighting calculated using proportionate share of assets’ appraised value net of debt See Endnote 8 Represents a weighted average of the appraisal assumptions for each property sector

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ENDNOTES 1 2

3 4 5 6 7

8

9 10

11

12

13

Investor Audience. The Quarterly Report has been prepared as an aid for clients of Prime Property Fund, LLC (PRIME). It is not an offering of interests in PRIME, which offering is made only pursuant to the more detailed information set forth in the Offering Memorandum relating to the Fund as supplemented or amended from time to time (the “Offering Memorandum”), including the various risk factors and conflicts of interest disclosures set forth therein. Performance Returns: • Represent time-weighted investment (portfolio) level returns. • Are presented before (i.e., gross of) investment management fees. • For less than one year are not annualized. For periods one year or greater, the performance returns represent average annual returns, i.e., annualized. • Include interest income from short-term investments. • Are presented with finalized financial results reasonably available as of the stated time period in the return presentation, which results are generally audited by a reputable out side firm within 90 days of PRIME’s fiscal year end (and subsequent to that will be unaudited). • Reflect the use of leverage by PRIME, which may exaggerate returns on an unlevered basis. • Include income which is based on accrual accounting and recognized at the investment level. Income Return Considerations. The sum of the income return component and the appreciation return component may not equal the total gross return because of the time weighting (i.e., chain linking) of component monthly returns. The income return may or may not approximate a distributed income to the investor, depending on PRIME’s cash distribution policy and elections made by the investor. Investment Return Factors. Investment returns for PRIME and the NCREIF indices reported here may vary based on a number of factors, including fund investment strategy and execution, overall real estate market movements during the period reported, amount of leverage. Sophistication in these areas is assumed. Reinvestment of Dividends. The results portrayed can vary by investor based on whether income is reinvested. As an open-end vehicle, PRIME has no initial investment period. Valuations. Frequency of valuation updates varies by portfolios reporting to NCREIF, as does the frequency of full independent third party appraisals of assets. PRIME commissions appraisals of its assets on a quartely basis. This appraisal is generally reported in a limited restricted report format, although it is reported in an expanded summary report format on an annual basis for approximately one third of PRIME’s properties (so that each property receives an expanded summary report at least once every three years). Effect of Compounding. Performance reported herein is only on an annualized, not cumulative, return basis. The cumulative, compounded effect of advisory fees on total returns can be significant. For example, assuming an 8% annual return to a portfolio, earned evenly over the period in question, and an annual asset management fee on equity equal to 1.15%, the total after fee return to the client would nominally be 6.85%. Over a one-, three-, five- and ten-year period, however, the cumulative actual returns would be 8.24% (gross) and 7.03% (net) for one year; 26.82% (gross) and 22.60% (net) for three years; 48.59% (gross) and 40.44% (net) for five years; and 120.80% (gross) and 97.23% (net) for ten years. NCREIF Property Index (NPI). The NPI industry benchmark has characteristics that may not be fully applicable to real estate funds against which it is being compared, and may be more or less volatile than a given fund with a more focused equity real estate investment strategy. Among the more important considerations in evaluating comparisons with NCREIF numbers: • NPI returns are presented before fees, and exclude portfolio level items such as credit facilities and professional fees. PRIME returns are presented before fees as well, but include such additional items. • NPI returns are presented on a delevered basis (i.e., both leveraged and unleveraged properties are included without distinction). • NPI returns exclude development, agricultural and other non-income producing properties. Depending on the time period reported, PRIME returns may include such items. • The assets reported to NCREIF have historically tended, on an overall basis, to be more concentrated in particular asset classes (e.g., office) than may be the case for PRIME or the economy at large. In recent years, return information is also tracked by NCREIF for specific asset subindices, but on a smaller reporting base. Information reported here is from the overall index (i.e., the NPI) unless otherwise noted. • The NPI includes assets at 100% rather than at ownership share. Historical Performance Limitations; Possibility of Losses. Historical performance is not an indication of future results. Losses can result from investment in real estate, including through PRIME. To the extent target returns for PRIME are indicated, there can be no assurance that such targets will not change in the discretion of the advisor, that target returns will be achieved or that there will not be loss of principal. Limitations of Projections and Other Forward-Looking Statements. Any statements in this Quarterly Report that are not historical facts are forward-looking statements that involve risks and uncertainties. Sentences or phrases that use such words as “believe,” “anticipate,” “plan,” “may,” “hope,” “can,” “will,” “expect,” “goal,” “should,” “objective” and similar expressions also identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Readers should be aware that return projections and other forward-looking statements are by their nature uncertain insofar as actual realized returns or other projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, errors in strategy execution, acts of God, and other asset-level developments. Readers should also assume that any financial information that is not provided as of a year-end period is unaudited. PRIME undertakes no obligation to update or reverse any forward-looking statements, whether as a result of new information, future developments or otherwise. Other Funds and Assets of the Sponsor and its Affiliates; Return Portability Issues. To the extent recent transactions or individual assets are highlighted in the discussion herein, they may not be representative of all assets held by PRIME or advised by the Sponsor or its affiliates. The Morgan Stanley Real Estate Investing Group and its affiliates also manage and/or have managed other commingled funds with different investment strategies, and separate accounts, whose performance returns may be higher or lower than those highlighted here. Return information for any of these other clients, funds, or affiliated advisors may be significantly better or worse than those reported here. Also, performance information for PRIME, which was previously advised by Lend Lease Real Estate Investments, Inc. or its predecessor entities during a significant portion of the periods presented, is included where it has been concluded that because of substantial overlap of personnel and other factors, reporting such information would be helpful. Discussion Materials Not an Offer, Contract or Investment Advice; Certain Important Risks. The Quarterly Report does not constitute or form a part of, and should not be construed as, an offer to sell or a solicitation of an offer to buy securities of PRIME and does not constitute any form of commitment or recommendation on the part of Morgan Stanley. Securities offers and/or solicitations will be made only through the Offering Memorandum. As a limited liability company, only the operative documents creating such arrangements, when fully executed and delivered, will be controlling of the parties’ legal rights and obligations with respect to the subject matter thereof. Recipients must not construe the contents of this Quarterly Report as investment, legal or tax advice. Each recipient should consult its legal counsel, tax advisor and other appropriate consultants as to the business, legal, tax and related matters concerning an investment through an investment advisory relationship with Morgan Stanley or an investment in a Morgan Stanley fund including particularly, but not limited to, the risks identified in the Offering Memorandum. Availability of Adviser’s Form ADV. Morgan Stanley Real Estate Advisor, Inc., (“MSREA”) the manager and registered investment advisor for PRIME, and various other Morgan Stanley affiliates that are registered as investment advisors with the U.S. Securities & Exchange Commission (“SEC”) have filed with the SEC, and are required to update periodically, Form ADV. Part II to the Form ADV contains essential information about a given investment advisory firm, including information about firm management, clients, fee arrangements and the handling of conflicts of interest, and the SEC requires that it be sent to all prospective clients who might enter into an advisory agreement prior to execution. Upon request, MSREA will furnish a copy of its Form ADV without charge to any investor in PRIME. Please contact the Morgan Stanley Law Division (404 846-1300) for a copy.

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BOARD OF DIRECTORS, ADVISORS & OFFICES Prime Property Fund Board of Directors

Morgan Stanley Real Estate Key Personnel

Morgan Stanley Real Estate U.S. Offices

Independent Directors Allan S. Bufferd, Sc.D.

Jay H. Mantz

Atlanta

Treasurer Emeritus Massachusetts Institute of Technology

Nelson C. Rising

Rising Realty Partners, LLC

Joan H. Fallon

Manager, Real Estate Investments U.S. Steel & Carnegie Pension Fund

Affiliated Directors Jay H. Mantz

Managing Director Global Co-Head of Morgan Stanley’s Merchant Banking Group

John B. Kessler

Global Head of Core Real Estate and Chief Operating Officer Morgan Stanley Real Estate

Global Co-Head of Morgan Stanley’s Merchant Banking Group

John Carrafiell

Global Co-Head of Morgan Stanley Real Estate Investing

K.S. (Sonny) Kalsi

Global Co-Head of Morgan Stanley Real Estate Investing

Brian Carr

Co-Head of Morgan Stanley Real Estate Investing—Americas

Michael Franco

Co-Head of Morgan Stanley Real Estate Investing—Americas

John B. Kessler

Global Head of Core Real Estate and Chief Operating Officer, Morgan Stanley Real Estate

Scott A. Brown

Co-Head of Prime Property Fund

David F. Morrison

Co-Head of Prime Property Fund and Head of Investment Strategy and Research

Candice W. Todd

Chief Financial Officer, Prime Property Fund

Barratt C. Johnson

Portfolio Operations, Prime Property Fund

John P. Buza

Head of Asset Management

Jay Raghavan

Deputy Head of Asset Management

3424 Peachtree Road, NE Suite 900 Atlanta, GA 30326 Tel: 404-846-1300

Boston

One International Place 13th Floor Boston, MA 02110 Tel: 617-856-8700

Chicago

440 South LaSalle Street Suite 3700 Chicago, IL 60605 Tel: 312-706-4000

Los Angeles

1999 Avenue of the Stars Suite 2400 Los Angeles, CA 90067 Tel: 310-788-2000

New York

1585 Broadway 37th Floor New York, NY 10036 Tel: 212-761-4700

San Francisco

555 California Street Suite 2200 San Francisco, CA 94104 Tel: 415-576-2000

Theodore J. Klinck Head of Acquisitions

Joyce R. Frater

Head of Client Services

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ABOUT MORGAN STANLEY REAL ESTATE Morgan Stanley Real Estate is comprised of three major global businesses: Investing, Banking and Lending. Since 1991, Morgan Stanley Real Estate has acquired $135.9 billion of real estate assets worldwide and currently manages $68.0 billion in real estate assets on behalf of its clients. A complete range of market-leading investment banking services for real estate clients include advice on strategy, mergers, acquisitions and restructurings, as well as underwriting public and private debt and equity financings. As a global leader in real estate lending, Morgan Stanley has offered approximately $156.0 billion of CMBS through the capital markets since 1997, including $35.5 billion in 2006. For more information about Morgan Stanley Real Estate, please visit www.morganstanley.com/realestate.

On the cover: One Maritime Plaza, San Francisco, CA Boston Harbor Hotel, Boston, MA AMLI 900, Chicago,IL – artist rendering

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