Short Profile on Firm and Speaker A. Falcon Real Estate Investment Company, LP •

US Commercial Real Estate firm created in 1991 by Howard Hallengren and Jack Miller, both from Chase. Offers comprehensive services to high-net-worth individuals and institutional investors. 6 US Regional offices, an office in Beijing, expanding in Latin America and the European Union. $ 3 bn AUMs of US commercial real estate. 100% Outperformance vs. its benchmark (NCREIF) in 17 years.

B. Jack Miller, Co-Founder (1991) / President (New York and Chicago) •

Co-Founded Falcon after serving as Manager of the Real Estate Investment at Chase Private Bank where he was responsible for property acquisition, property management and mortgage financing. Before he was at The First National Bank of Chicago for 10 years in the bank’s real estate investment division. He is a founding member of the Accounting Standards Committee of the National Council of Real Estate Investment Fiduciaries, which is the coordinating group that sets accounting standards for U.S. institutional investors. Mr. Miller received a BS in accounting, a Master of finance in real estate from De Paul University, and an MBA from the University of Chicago.

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Conference Outline

Introduction 1. Publicly vs. Privately Held Commercial Real Estate 2. The International Perspective

Conclusion

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Conference Outline

Introduction 1. Publicly vs. Privately Held Commercial Real Estate 2. The International Perspective

Conclusion

4

Traditional Global Asset Classes A. Traditional • • •

Money Market Bonds Stocks (Listed Real Estate Investment Trusts: “REITs”)

B. Alternative • • • • • •

Private Equity (“Private Equity funds”, “Private REITs” or “Club Deals”) Hedge Funds (“Sector Specific”: Real Estate) Structured Products (“Principal Protected” around RE indices or “REITs baskets”) Managed Futures Commodities Real Estate (Direct investment by one investor in one building or owner-occupied)

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Equity

Traditional Global Real Estate Asset Classes Private

Public

Direct Property Investments

Real Estate Securities

$ 23 Trillion

$ 2 Trillion

GLOBAL REAL ESTATE •$ 25 Trillion (50% US) $ 16 Investment Grade $ 9 Non-Investment Grade ($ 10 pure investments)

Debt

•20% vs. Global Stock + Bond Market Cap.

Whole Mortgage

Structured Debt (CMOs, CLOs etc.)

• 7 times bigger than Hedge Funds • 12 times bigger than Private Equity

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Real Estate Evolves with Private Equity 1. Buyouts

Purchase of controlling interest with substantial borrowed capital Mezzanine

Mezzanine Stage

Private Company

Real Estate Distress

Private Company

Late Stage

Mature Stage

Growth Stage

Private/Public Company

Private/Public Company

Industry

Venture Stage

PIPE

IPO

Private/Public Company

Convertible Debt Public/Private Debt

Follow-on Offerings Traditional Bank Loans High Yield Debt & Equity

2. Venture Capital Funding

Focuses on investing in companies with high growth rates

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Conference Outline

Introduction

1. Publicly vs. Privately Held Commercial Real Estate 2. The International Perspective Conclusion

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Positioning Debt/Equity vs. Public/Private Risk / Return of Real Estate Investment Strategies

Equity

Opportunistic Value-Added Long/Short Public Equity Core Property

Debt

Public Debt Whole Mortgage

Risk Perception Source: Fund Evaluation Group and Falcon Asset Management

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Too Much Information? “US Housing Going down” April 26th 2007

“ Foreign Real-Estate Funds Boom Firms Unveil Scores of New Plays, Spurred by Strong Returns and Growth in Overseas REITs”. July 7, 2007

“Euro soars to new high against U.S. dollar” July 10, 2007

“Subprime poor practice risks turning to malpractice” July 4 2007

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R. Bernstein: Merrill Lynch Chief US Strategist

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Asset Allocation and Expected Return: 1 Security Selection 4.6%

Market Timing 1.8%

Other Factors 2.1%

Asset Allocation 91.5%

• 91.5% of long-term total account performance including Stocks, Bonds, Money

Markets resulted from asset allocation decisions (statistically tested over the past 20 years) • Mitigate the necessity of secondary market - like in REITs Source: Ibbotson Associates, Inc.

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Risk Adjusted Returns (+ Standard Deviation): 2 HIGH

Private Equity

Return %

Global Real Estate

Hedge Funds

MEDIUM

Oil

Global Stocks

Commodities

Global Bonds Gold Global Money Markets

LOW

LOW

MEDIUM

HIGH

Risk % Source: 1995—2005 Source: BHF-BANK

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US Public vs. US Private Real Estate Returns US Public RE Benchmark (50% leveraged) vs. Private Benchmark (Unleveraged)

NAREIT

NCREIF

Source: Falcon /NCREIF & NAREIT/ Columbia Business School

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REITs Trade at NAV Premium vs. Underlying Assets 40%

30%

Long-term Average = 6.6% 20%

10%

0%

-10%

-20%

-30%

Source: Green Street Advisors, Current as of May 2007

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When Real Estate > Stock Market Volatility

S&P 500 120 Day Volatility

REITs 120 Day Volatility

1994

1996

1998

2000

2002

2004

2006

2008

Source: Bloomberg / RMS & SPX 120 Day Return Volatility

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Correlation Coefficients (+ covariance): 3 Falcon Performance Statistics vs. Benchmarks: January 1991 - June 2006 S&P 500 FTSE 100 NCREIF Index Total Quarters 62 62 62 Positive Quarters 67.74% 69.35% 87.10% Negative Quarters 32.26% 30.65% 12.90% Median Quarterly Return 2.41% 2.08% 2.36% Average Quarterly Return 2.47% 2.27% 2.08% Standard Deviation 7.43% 7.09% 1.84% Best Quarter 20.87% 25.13% 5.43% Worst Quarter -17.63% -17.80% -5.33% Maximum Drawdown -45.60% -45.55% -9.66% Sharpe Ratio* -0.04% -0.07% -0.37% * Risk free rate is 2.75% (the average 5-yr T-Note from Jan '91 Š June '06

FALCON 62 98.39% 1.61% 3.44% 3.74% 1.79% 10.42% -0.14% -0.14% 0.55%

Correlation Matrix

FALCON -0.04 0.02 0.77 1.00

S&P 500 FTSE 100 NCREIF Index FALCON

S&P 500 1.00

FTSE 100 0.73 1.00

NCREIF Index -0.04 0.01 1.00

Source: Falcon

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Steps 1+2+3 = Efficient Frontier 15.50 Efficient Frontier with 10% Alternative Investments

15.00

Efficient Frontier with 5% Alternative Investments

14.50

Return %

14.00 13.50 Efficient Frontier without Alternative Investments

13.00 12.50 12.00 11.50 10.00

10.50

11.00

11.50

12.00

12.50

13.00

13.50

14.00

14.50

Risk % Source: 1980—2000 Source: Merrill Lynch Quantitative & Equity Derivatives Research

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How Much Alternative Investments?

Cash Bond 50-60%*

Equity Alternative Invest.

*Real assets, which includes real estate and commodities, is the largest investment category with 31 cents of each Harvard endowment dollar. Source: Falcon

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Synopsis of Private vs. Public Real Estate Public Equity Advantages

Private Equity Advantages



Publicly traded (liquid)

Access to broader array of investments



Lower fees

Lower correlation to stock markets



No minimum size (individual investors)

Public Equity Disadvantages

Private Equity Disadvantages



Illiquid

Theoretically, lower returns due to liquidity premium



Performance often driven by capital flows and other non- real estate related factors



Higher correlation to public stock markets

Higher fees Appraisal-based valuations Difficult to benchmark

High dispersion of returns in value-added and opportunistic sectors

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Conference Outline

Introduction 1. Publicly vs. Privately Held Commercial Real Estate 2. The International Perspective

Conclusion

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Global: GDP $ 60 Trillion vs. $ 180 Trillion Listed Global Financial Markets (Excluding Derivatives)

2006 2005 2000 1995 1990 0

100

200

TOTAL Bank Deposits Government Debt Corporate Debt Equities

•Financial Markets offer broader access to capital from borrowers •Financial Markets offer more efficient pricing • Financial Markets increase opportunities for sharing risk BUT… • Lately securitization has led to substantial increases in leverage and greater systemic risk for the entire financial system

Source: McKinsey Global Institute

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Real Economy/Financial Markets Decoupling: G7?

•

1990: 33 countries have domestic market capitalization (excluding derivatives) > GDP

•

2006: 72 countries – virtually all industrial economies and the largest emerging markets have financial markets that are two to three times the size of their GDP

Source: McKinsey Global Institute

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Global Real Estate Markets As of January 07

•Investable stock $6.1 trillion

•Mature/ Highly Mature: •Maturing: •Emerging:

•Invested stock $3.2 trillion

83% 15% 2%

Europe / Russia

•Invested stock $4.7 trillion

•Total stock $9.2 trillion

Americas

Total stock •$9.5 trillion

Middle East / Asia

•Investable stock $6.6 trillion

•Mature/ Highly Mature: •Maturing: •Emerging:

•Invested stock $1.9 trillion •97% •1% •1%

Inter-regional capital flows of $115bn in H1 2007

Total stock •$5.9 trillion

•Investable stock $3.5 trillion •Mature/ Highly Mature: •Maturing: •Emerging:

17% 72% 11%

Sources: RREEF; DTZ; ULI; PwC

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International Real Estate Risk Adjusted Returns? •Returns and risk for public real estate securities in various regions around the world can produce half of the returns for twice the risk and can produce twice the returns for half the risk depending what you targeted country allocation is. •Returns for Asia were for instance lower than other regions due to problems the region has faced, including a weak Japanese real estate market for more than a decade and the SARS outbreak in 2003 Returns and Risk of Public Property Securities Markets (1993-2006, in U.S. dollars) Return

Standard Deviation

U.S.

13.60%

14.90%

Europe

13.90%

14.40%

Asia

7.40%

33.20%

Australia

16.60%

18.20%

Source: Morgan Stanley, Global Property Research

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Correlation: International Real Estate Markets? • International diversification within public real estate equities is beneficial due to the low correlations of public real estate equities between various global regions

Correlation of Public Property Securities Markets (1993-2006, in U.S. dollars)

U.S.

Europe

Asia

Australia

U.S.

1

0.5

0.32

0.4

Europe

0.5

1

0.34

0.52

Asia

0.32

0.34

1

0.44

Australia

0.4

0.52

0.44

1

Source: Morgan Stanley, Global Property Research

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2007: $ 2 Trillion Listed Real Estate Australia Asia-Pacific 9% 25% Hong Kong 5% US 53%

Japan 11%

UK 6% Americas 57%

Euro zone 10%

Australia Hong Kong Japan Other Asian France Germany Italy Spain Netherlands Other Eurozone UK Switzerland Sweden C & E Europe Other European US Canada Mexico Brazil Other

Europe 18%

Sources: EPRA/NAREIT, LaSalle Investment Management

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Public and Private Real Estate Room to Grow HNI's Real Estate Investments (2006)

100% 90% 80%

70% 60% 50%

40% 30%

20% 10% 0% Global

North America

REIT

Latin America

Commercial

Europe

AsiaPacific

Residential*

Middle East

* Secondary Residence

Source: Merrill Lynch/Cap Gemini

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The Luxembourg Fund Center 2007 Worldwide Mutual Funds

€

billions 9 000 Luxembourg is the second largest fund center in the world after the USA

8 000 7 000 6 000 5 000

1 839 8 426

4 000 3 000

4 542

2 000 2 176 1 000 0 USA

Europe

Asia & Pacific

Sources: EFAMA & ICI

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Luxembourg Real Estate Funds: Before the SIF AUM and Number of RE Funds

Huge growth since 2004 Closed-end and Open-end funds and funds of funds 40 35

•

Strong yet flexible Regulation Cheaper for Fund Managers than the US Reputation of location Centre of sophisticated real estate investment funds  Global promoter base  Global investor base Tax efficiency and stability

AUM USD bln

Reasons for success: • • • •

140 129 120

30

100

25

80

80

20

60

15

48

10

36

5

40

36

Number of subfunds

• •

20

0

0 02

03 AUM

04

05

06

# (sub)funds

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SIF : Market Overview Specialized investment funds launched since February 13, 2007 250

220 200

150

115

119

200708

200709

93

100

72 38

50

25 8

12

0 200702

200703

200704

200705

200706

200707

200712

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SIF Launched in Feb. 07 is a Favored Structure Profile of Luxembourg Investment Funds

Key criteria

UCITS

Non-UCITS

SIF

SICAR

Investment restrictions (eligible assets)

Restricted

Flexible

Flexible

Moderate

Risk diversification

High

Medium

Low

None

Ease of public distribution

High

Medium

Low

Low

Supervisory framework

Targeted to retail investor protection

Targeted to retail investor protection

More flexible

More flexible

Time to establish

Low - Medium

Medium - High

Very low

Low

Target investors

All

All

Institutional / HNWI

Institutional / HNWI

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The SIF Features are Tailored for Real Estate Key Features

UCITs

Non-UCITs

SIF

SICAR

Umbrella structures

Yes

Yes

Yes

Yes(1)

Share-classes

Yes

Yes

Yes

Yes

Debt financing

No

No

Yes

Yes

Leverage

No

Yes

Yes

Yes

Valuation basis

Probable realization value

Probable realization value

Fair value

Probable realization value

Subscription/ redemption price

NAV

NAV

As per offering document

NAV

NAV frequency (minimum)

Monthly

Monthly

Annual

Annual (1)

Open or closed ended

Open ended

Both

Both

Both

Annual Report

Yes

Yes

Yes

Yes

Semi-annual report

Yes

Yes

No

No

Regulatory Reporting

Yes

Yes

No

No

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The SIF: In a Nutshell •

•

• • •

Eligible investor base: Investment in a SIF is reserved for “well-informed” investors requiring a limited level of protection and looking for investment flexibility suitable to their particular expertise and needs. Investment flexibility: the range of assets (nature of assets and/or associated risks) eligible for a SIF is broad and consequently includes, but is not limited to, equities, bonds, derivatives, structured products, real estate, hedge funds and private equity type investments. The SIF should comply with the general principle of risk diversification. Light supervision Organisational adaptability Efficient tax regime

REGULATORY

TAX

DISTRIBUTION

LICENSING

Criteria

SIF

Regulated vehicle? Pre-approval by regulator? Other than local GAAP? Investment restrictions? Investment in RE, PE, HF?

Yes No Yes No All

Simplified prospectus regime?

Yes

Subscription tax? Yes Income tax? No Access to DTT? Yes / No Withholding tax on dividends paid? (residents / non No residents) Standard VAT rate? 15 % Listing possible? Yes / No Maximum number of No investors? Minimum investment Min. € 125k amount? Minimum experience Yes required? Service providers / persons •Directors subject to regulator's •Custodian approval? •Auditor

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Pension Funds Pooling: Increasingly In Demand

British Pension Fund

Irish Pension Fund

Chilean Pension Fund

Brazil Pension Fund

British Pension Fund

Irish Pension Fund

Chilean Pension Fund

Brazil Pension Fund

Asset administrator Depositary bank

Converted in

Virtual or entity pension pooling

Paying agent Administrative agent

Investments

Investments Investments Investments

Investments

Shares Bonds Deposit

Transfer agent

Real Estate

Auditors Law consultant Tax consultant

• Quantitative benefits: Economies of scales at asset management & custodian bank level up to 0.70% savings • Qualitative benefits; Improve measurement/selection of service provider Enable consistent/centralized corporate governance. • Multinationals running pension funds in several countries have implemented pension pooling vehicle

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Conference Outline

Introduction 1. Publicly vs. Privately Held Commercial Real Estate 2. The International Perspective

Conclusion

36

Conclusion

A. Privately Held vs. Publicly Held Real Estate • •

Each have their own merit, even if the Privately-held RE is likely to continue to dominate Clearly Commercial Real Estate in all its forms will continue to grow for all the reasons we discussed

B. International Perspective • • •

Trend # 1; Hard Assets logic inescapable Trend # 2: The Global Real Estate market will continue to integrate Trend # 3: The Luxembourg Real Estate Funds will continue to grow

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Questions & Answers

Muchas Gracias !

Jack D. Miller President Falcon Real Estate Investment Company, LP 150 North Michigan Avenue, Suite 2700, Chicago, IL 60601

Tel: (312) 240-9195, Fax: (312) 240-9194, E-mail: [email protected] www.falconreal.com

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