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Cornerstone Research Nashville Apartment Market Analysis Dags Chen Cornerstone Real Estate Advisers LLC 0 Cornerstone Research Research drives Cornerstone investment process Strategy Tactics Public (REIT) and private real estate research integrated Cornerstone “scrubs” industry data to remove errors and refine accuracy Top Down Research Insight Data Models Forecasts Value Cornerstone’s granular analysis is more localized than typical Live access to data and forecasts throughout Cornerstone via the Research Analyst platform Regional Teams Local Data Market Presence Bottom Up 1 Cornerstone Research Economy.com’s NAICs Employment Forecast Dun & Bradstreet Establishment Data by NAICs Demand, Supply, and Local Coefficient Inputs are property-type specific Demographic Forecasts Cornerstone’s Demand Model: Employment Growth by Zip Code, County, and MSA, Benchmarked to U.S. Market Occupancy & Rate/Rent Trends Construction Activity, History and Forecast Regional Office, REIT Team and Hotel Team input Demand/Supply Forecast w/ Local Coefficients Scrubbed supply data from F.W. Dodge Pipeline Occupancy Forecast, Rent Growth, Market Weighting, Investment Recommendation 2 Forecast US GDP Growth 6 Annualiz ed Growth Rate % 4 1/12/08 Forecast 2 0 -2 Weakness is pervasive and accelerating. Forecast for negative GDP through 2009, recovery hopes in 2010, employment recovery lags. -4 6 quarters of negative growth would be the longest contraction since the Depression -6 2004 2005 2006 2007 2008 2009 2010 Source: Consensus Forecasts, Cornerstone Research 2-6-2009 3 Steep Jobs Decline and Slow Recovery Job losses likely to surpass early 1970s, 1980s 101% Months to recover peak employment Percent of Peak Em ploym ent 100% 19 28 32 48 50+ months? 99% 1972-1976 1980-1983 98% 1989-1993 2000-2005 Total Job Losses 97% 2007- ? 1972-76: -2.1mm Forecast 1980-83: -2.8mm 96% Current: -3.5mm through January, (another 2mm to go?) 95% -12 0 12 24 36 48 Months Source: Bureau of Labor Research, Cornerstone Research 12-8-2008, 1-14-2009 Source: Cornerstone Research 4 Commercial Real Estate Transaction Activity Monthly Sales Volume 75 Apartments Industrial Office Retail Hotel Blackstone purchase of EOP Blackstone purchase of Hilton Billions of US$ 50 25 0 2001 2002 2003 2004 2005 2006 2007 2008 Source: Real Capital Analytics 5 NCREIF Property Index Comparison Nu m ber of Q u art ers Fol l owi n g NCRE IF Capi t al In dex P eak Val u e 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Cu m u l at i ve % D ec l i n e Si n c e P eak 0% -5% 1990s Downturn Current Downturn -10% -15% -20% -25% -30% -35% 6 The Grove at Cumberland Bluffs 7 Economy.com Precis Report 8 Nashville Apartment Submarkets 9 Belle Meade / West End 10 Downtown 11 Rent Comps 12 Locations of Major Employers 13 Franklin/Williamson County 14 Rent Comps 15 Shadow Supply 16 Submarket and Market Rent and Occupancy 17 Rent Comps 18 Proforma Cash Flow INCOME Income Growth Assumption: Gain(Loss) to Lease Assumption: Vacancy/Loss/Model Assumption: Concessions Assumption: Total Economic Vacancy Year 1 0.0% 0.0% -6.0% 0.0% -6.0% 4,409,700 0 4,409,700 -264,582 0 4,145,118 160,792 4,305,910 Market Rents Gain (Loss) to Lease Gross Potential Vacancy/Loss/Model Concessions Rental Income Other Income Total Income EXPENSES Other Income and Expense Growth Assumption: Utilities -59,553 Variable -516,785 Taxes -563,246 Insurance -57,400 Management Fee -107,648 Replacement Res. -43,050 Total Operating Expenses -1,347,682 Net Operating Income 2,958,228 Year 2 2.0% 0.0% -5.0% 0.0% -5.0% 4,497,894 0 4,497,894 -224,895 0 4,272,999 164,008 4,437,007 Year 3 3.0% 0.0% -5.0% 0.0% -5.0% 4,632,831 0 4,632,831 -231,642 0 4,401,189 167,288 4,568,477 Year 4 3.0% 0.0% -5.0% 0.0% -5.0% 4,771,816 0 4,771,816 -238,591 0 4,533,225 170,634 4,703,859 Year 5 3.0% 0.0% -5.0% 0.0% -5.0% 4,914,970 0 4,914,970 -245,749 0 4,669,222 174,047 4,843,268 2.00% -60,744 -527,121 -574,511 -58,548 -109,801 -43,911 -1,374,635 3,062,372 2.00% -61,958 -537,663 -586,002 -59,719 -111,997 -44,789 -1,402,128 3,166,349 2.00% -63,198 -548,416 -597,722 -60,913 -114,237 -45,685 -1,430,171 3,273,688 2.00% -64,462 -559,385 -609,676 -62,132 -116,521 -46,599 -1,458,774 3,384,494 19 Proforma Cash Flow Debt Service Year 1 Year 2 Year 3 Year 4 Year 5 2,958,228 3,062,372 3,166,349 3,273,688 3,384,494 ($1,971,427) ($1,971,427) ($1,971,427) ($2,366,761) ($2,366,761) $986,802 $1,090,945 $1,194,923 $906,927 $1,017,733 1.5 1.55 1.61 1.38 1.43 All Cash Yield 6.73% 6.97% 7.20% 7.45% 7.70% Cash On Cash Leveraged Yield 8.98% 9.93% 10.87% 8.25% 9.26% Net Operating Income Debt Service Cash Flow Debt Service Coverage Ratio Price LTV % Loan Amount Interest Rate*: $43,956,000 75% $32,967,000 5.98% Amortization: 3 0 30 Term: 1 0 10 First 36 Months (Interest Only) $164,286 Months 37 - 120: $197,230 20 Commercial Mortgage Spreads (as of 2/11/2009) Source: DTZ Rockwood Financial 21 Historical Rent Growth Effective Rent Growth US, Nashville 12% Downtown 8% West End 4% Nashville U.S. 0% -4% -8% -12% 1996.2 1997.2 1998.2 1999.2 2000.2 2001.2 2002.2 2003.2 2004.2 2005.2 2006.2 2007.2 2008.2 Source: Axiometrics 22 Rent Growth Linked to Job Growth Nashville Rent and Employment Growth (4Q trailing) 6% 4% 2% Nashville Employment Growth 0% 1996.2 1997.2 1998.2 1999.2 2000.2 2001.2 2002.2 2003.2 2004.2 2005.2 2006.2 2007.2 2008.2 -2% -4% -6% Source: Axiometrics, BLS 23 Axiometrics Vacancy History Vacancy, US, Nashville 100% Downtown 98% West End 96% 94% Nashville 92% U.S. 90% 1996.2 1997.2 1998.2 1999.2 2000.2 2001.2 2002.2 2003.2 2004.2 2005.2 2006.2 2007.2 2008.2 Source: Axiometrics 24