THE WATCH LIST NEWSLETTER 1

A WEEKLY NEWSLETTER FOCUSING ON CHANGING MARKET CONDITIONS, COMMERCIAL REAL ESTATE, MORTGAGES AND CORPORATIONS PUBLISHED BY COSTAR NEWS

IN THIS WEEK'S ISSUE:

As CRE Loan Stress Peaks, Debt Investment and Modification Strategies Change ......................................................................... 1 June Notes & Commercial REO Auctions: Hotel, Retail, Office & More ............................................................................................ 4 Good To Have You Back in U.S. Office Investing Sam ..................................................................................................................... 5 Connect Directly to Capital Sources: *Debt *Equity *Mezz *Bridge *Hedge ...................................................................................... 6 New Hotel Environment Continues To Attract New Equity ................................................................................................................ 6 Re-Sale of 'Bubble'-Era Assets Signals Recuperating CRE Market .................................................................................................. 7 Bankruptcy Auction Residential Development Land .......................................................................................................................... 8 REIT Outlook Stable… For Now ........................................................................................................................................................ 9 Scattered Signs of Pick Up in the Economy .................................................................................................................................... 10 Real Estate Deals in Florida, Vegas, and More ............................................................................................................................... 11 What Impact Will Debt Ceiling Decision Have On Commercial Real Estate? .................................................................................. 12 CRE Lending Oversight: Too Little or Too Much? ........................................................................................................................... 14 Eliminate the Stress from Distressed Properties ............................................................................................................................. 16 Freddie Mac Offers New CMBS; Expands Loan Products Eligible for Securitization ...................................................................... 17 Perkins & Marie Callender's Files Ch. 11; Looks To Cancel 65 Leases .......................................................................................... 17 Retailers Jump at Chance To Take Over Metropark Leases ........................................................................................................... 19 Loans and Properties Under Surveillance ....................................................................................................................................... 20 Watch List: Non-Performing Matured Office Loans ......................................................................................................................... 20 Readers Are Hooked on Watch List Ads ......................................................................................................................................... 21

As CRE Loan Stress Peaks,

Debt Investment and Modification Strategies Change CRE Loan Delinquencies Leveling While Severity Remains High Changing the Nature of Workouts, Deals

The level of commercial real estate loan distress appears to be at or nearing its peak — a welcome sign that the Great Recession may have exacted its worst toll. And with this new phase, the market for distressed commercial real estate borrowers and investors is also morphing. Statistically at any given point in time at least, the Great Recession has wreaked havoc on less than 10% of outstanding CRE debt to date. Overall though, the percentage of damaged CRE debt has been higher when factoring in outstanding loans that have been modified and reverted back from delinquent into current status. Where the troubled loans are has by no means been evenly distributed. For example, the overall CMBS delinquency rate remained relatively flat in May at 9.2%, after reaching all-time highs in 20 of the previous 25 months, according to CoStar Group. Delinquency rates for other groups peaked at levels lower than seen in the last major real estate downturn during the early 1990s — some by large margins, according to the Mortgage Bankers Association's (MBA). Between the fourth quarter of 2010 and first quarter of 2011, the 90+ day delinquency rate on loans held by FDIC-insured banks and thrifts remained the same at 4.18%. The 60+ day delinquency rate on loans held in life company portfolios decreased to 0.14%. The 60+ day delinquency rate on multifamily loans held or insured by Fannie Mae decreased to 0.64%. The 60+ day delinquency rate on multifamily loans held or insured by Freddie Mac increased to 0.36%. Together these groups hold more than 86% of commercial/multifamily mortgage debt outstanding.

MARK HESCHMEYER, EDITOR WWW.COSTAR.COM JUNE 16, 2011

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Still the amount of CRE loan delinquencies represents hundreds of billions of dollars in damage – hence value-add opportunities. However, the delinquency numbers don't take into account the level of severity among the delinquencies. Tiandan Wu, a debt analyst with CoStar Group and John O'Callahan, a capital markets strategist for CoStar, recently looked at the severity and timing of delinquencies. CoStar created a Delinquency Severity Index (DSITM) to capture the spectrum of severity within overall delinquencies and to provide a more meaningful indication of periodic change, such as whether conditions are improving. Although the rise in the delinquency rate began to taper off in early 2010, the Delinquency Severity Index has not begun to taper off until much more recently. If the pace of resolutions and liquidations increases in 2011, the Delinquency Severity Index could begin to turn down later this year as the more highly weighted, longer-term delinquent loans leaving the pool outweigh the newly delinquent additions, according to Wu and O'Callahan. Year-to-date in 2011, new delinquencies totaled $12 billion with CoStar predicting total new delinquencies in 2011 of approximately $42 billion. In another analysis CoStar debt strategist, Mark Fitzgerald and Steve Miller, CoStar's director of U.S. debt and risk research, examined the "extend and pretend" strategies of troubled CMBS loan modifications. Early in the recession cycle, special servicers relied almost exclusively on maturity and interest-only (IO) term extensions for their loan modifications. From first quarter of 2009 to the first quarter of 2010, more than 93% of modifications utilized one (or both) of these techniques. However, beginning in the second quarter of 2010, while the rapid ascent in the overall number of modifications continued, principal and contract rate reductions began to take up an increased share of modification activity, the two found. "For the CRE industry, the increase in the number of 'true modifications,' as opposed to simply extending the maturity or IO term of the loan, is likely a welcome sign as it helps to speed along the deleveraging process and assist distressed borrowers," the two reported. "While loans generally received term/IO extensions in 2009 and 2010, the treatment of those same loans in today's environment would likely be more varied — with many loans finding a more receptive environment today than existed in the eye of the storm." "The 'extend and pretend' moniker, while true, did not really measure the degree of 'pretending,' as the overwhelming majority of loans got similar treatment. Now we see differential approaches," the two reported. "Despite the obvious opposition from many servicers and CMBS investors to reductions in principal and/or rate,

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the realization that impairment is permanent for many of these loans has led to increased 'true modifications.' Principal/rate reductions have increased despite the fact that the costs are onerous and have actually increased slightly since 2009." Fitzgerald and Miller concluded that initial modifications were short-term solutions and logical given the economic uncertainty and the relative confusion regarding special servicers' culpability and latitude in seeking solutions in the best interests of all constituents. "The market is now morphing into the next phase, better distinguishing the winners, also-rans and outright losers. Loosely translated: Winners, if needed, will likely get more time; also-rans will likely get rate or principal reductions that should allow them to become creditworthy loans again; and outright losers will be foreclosed and sold, or result in hefty discounted payoffs," Fitzgerald and Miller noted. Just as the market is morphing for borrowers, it is also morphing for debt investors, according to accounting firm Ernst & Young. In a report summarizing the results of its 2011 Distressed Debt Investor Survey, Ernst & Young says the CRE debt market has sprung to life but with a changing set of investors. "Delve into the market for distressed real estate loans today and you'll find two categories of investors: those who have slowed or stopped their search for investment opportunities and those who continue to actively pursue them," E&Y reported. "If they stay active in the game, investors are finding more success." The slowdown in activity may result to some extent from a pullback by some individual investors or groups of smaller investors that typically pursue smaller deals in their local markets, E&Y noted. And some investors may have decided there is too much competition for a relatively limited supply of distressed loans coming on the market. Miller and Fitzgerald of CoStar also note that some investors express concern over "deal fatigue" — pursuing large pool of auctioned assets require substantial commitment of resources that can be fruitless if they do not win the bid. Meanwhile, other investors including large real estate companies and institutional investors continue to pursue buying opportunities, E&Y noted. More than two-thirds of respondents to the latest survey reported that they have bought or tried to buy loans. The respondents to E&Y latest survey included real estate investment and opportunity funds, private equity firms, institutional investors, investment banks and real estate developers and other investors.

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June Notes & Commercial REO Auctions: Hotel, Retail, Office & More

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(CRE Loan Stress cont'd from page 3)

"While some of these investors are less active in seeking to buy distressed real estate loans, other investors are forging ahead. They have stepped up their efforts to try to acquire distressed real estate loans from the pool of loans that banks offer for sale," E&Y said. "Investors expect regional U.S. banks to be most active in selling loans this year, followed by the U.S. government and money center banks." NAI Global in a corporate blog published this week, also noted the increasing trend. "As we round [into] the third quarter of 2011, we are seeing that lenders are increasingly willing to sell notes/assets to clear up their books. With the real estate recovery under way, more sideline capital are chasing the few opportunities on the market and the increased demand is prompting distressed debt owners to place more of their inventory on the market," the company said. NAI Global noted that LNR Partners and CIII Capital Partners are selling a tremendous amount of product through a large auction now and the FDIC has another $700 million portfolio to be sold in the third quarter of 2011. "We believe we are at the tipping point towards a more normalized market where new originations will commence in early in 2012 reflecting normal CMBS output and lending patterns similar to 2005 and 2006," the company said. "Though 2012 will see more distressed debt opportunities we see an overall slow down as the economy and its recovery finally impacts real estate positively."

Good To Have You Back in U.S. Office Investing Sam Famed real estate investor Sam Zell has made his first U.S. office investment in years. Equity Group Investments (EGI) a private investment firm Zell founded by more than 40 years ago, has formed a joint venture with Transwestern Investment Company LLC and Behringer Harvard to recapitalize 200 S. Wacker Drive in the West Loop of Chicago's central business district. Equity Group Investments invested in the building through the Zell Credit Opportunities Fund, which Zell created to focus on the recapitalization of over-leveraged assets and companies and to invest opportunistically in loans and credit securities in both the real estate and corporate arenas. The premier 40-story Chicago office tower comprising 754,750 rentable square feet was previously acquired by Behringer Harvard in November 2007. "We're beginning to see an increase in investment opportunities as more lenders and owners bring assets for recapitalization into the market. The 200 S. Wacker Drive transaction enabled us to acquire an interest in a great asset in a terrific location at below replacement cost, and we did it with strong partners that are also focused on improving the asset and positioning it for leasing success," Zell said. "As a result of this joint venture, 200 S. Wacker Drive will benefit from enhanced access to capital and a stronger capacity to fund broker commissions and tenant improvements," said Stephen Quazzo, co-founder and CEO of Transwestern Investment. "The new ownership team will continue to pursue the program Behringer Harvard has been implementing for capital improvements expected to further enhance the Class A appeal of this already desirable property." As a result of today's transaction, Behringer Harvard will retain a 10% ownership interest and continuing its responsibility for daily management of the property. J.F. McKinney & Associates will serve as the leasing agent. The office property is currently about 69% leased with 286,219 square feet available for lease with average asking rents of $19.5/sf/year. Space available for lease includes floor-plates of 22,000 square feet and up to 110,000 square feet of contiguous space. Major tenants at 200 S. Wacker Drive include The University of Illinois, Ziegler Wealth Management, Duff & Phelps Investment Management Company, T.Y. Lin International, Regus Business Centers, Russell Reynolds and PNC Bank.

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Connect Directly to Capital Sources: *Debt *Equity *Mezz *Bridge *Hedge

New Hotel Environment Continues To Attract New Equity The already-hot pace of hotel deals continues to accelerate and more properties are coming onto the market in response to a growing amount of capital seeking hotel investment. This week, two new groups joined the throng of private equity funds and institutional buyers joining REITs in the hunt for high quality lodging assets: Lowe Enterprises Investors, Allstate Investments and The Guardian Life Insurance Company of America have formed one investment venture; and RSR Hospitality acquired a significant ownership stake in Gemstone Hotels & Resorts to capitalize on the rebound in the hotel industry. According to preliminary CoStar data, approximately $4.21 billion in hospitality properties have sold or gone under contract in 132 sales since April 1 of this year. Nearly a dozen of those deals involve hotel portfolios or high-end properties that have closed at a price of $100 million or more. Read the full story here. Lowe Enterprises Investors, Allstate Investments and Guardian Life Insurance formed an investment venture to acquire full-service hotels in major metropolitan markets throughout the U.S. "The hotel market is in the early stages of what we believe will be a long recovery cycle," said Brad Howe, CEO of Lowe Enterprises Investors. "This is an excellent time to acquire a portfolio of top quality assets in major markets. This venture demonstrates the benefit of our strategic relationship with Guardian, which makes it possible for us to partner with a highly respected investor like Allstate Investments." The venture is targeting well-located, full-service hotels that are financially distressed due to the recent economic downturn. Lowe will seek properties that are of a three-star quality or greater that can be repositioned to take

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advantage of the market's recovery. Lowe will target quality properties where it can improve performance through capital improvements, new marketing or management. "The current environment provides an opportune time to make selective commercial real estate investments within our $100 billion investment portfolio. This venture with Lowe and Guardian is an important part of our larger real estate equity program to build a diversified portfolio that is positioned to benefit from a recovering market," said Sam Davis, senior managing director of real estate investments for Allstate Investments. This week, the Lowe-led venture acquired the 297-room Red Lion Hotel on Fifth Avenue in downtown Seattle from Red Lion Hotels Corp. for $71 million or about $239,000 per room. Separately, Gemstone Hotels & Resorts, a hotel management and investment company that specializes in upscale urban hotels and resorts, announced that RSR Hospitality acquired a significant ownership stake in Gemstone. RSR Hospitality is a hotel oriented platform comprised of The Related Group, Silverpeak Real Estate Partners and River Birch Capital. "We are in a new hotel environment, one that is certainly unprecedented," said Jorge Perez, chairman and CEO of The Related Group. "While the hotel industry recovery continues to gain momentum, a significant number of troubled assets remain and many cash-flowing properties are capital-starved and need considerable investment. The ability to bring capital and proven turnaround capabilities are two key elements that will separate the winners in this cycle. This is an exceptional team that is capable of moving quickly and creatively." Gemstone will continue to focus on the 3.5-star to luxury segments in the U.S. and selectively evaluate opportunities beyond domestic borders as well. "We are opportunistic investors and have interest in both distressed and cash-flowing hotels with upside potential," Perez added. "We are very bullish on the opportunities in the hospitality segment over the next five years and strongly believe this new combination of financial and intellectual capital will give us an enviable competitive edge."

Re-Sale of 'Bubble'-Era Assets Signals Recuperating CRE Market By: Randyl Drummer Commercial properties previously acquired at bubble-era prices during the mid-2000s continued to trade at lower pricing, while year-over-year sales volume continued to rise in April as sellers shed those assets, according to the latest release of the CoStar Commercial Repeat Sales Indices (CCRSI). Opportunistic buyers paid lower prices during April for more than 77% of properties that previously changed hands at inflated prices during the 2005-2007 market peak, according to CoStar data. By comparison, only 46% of the properties that were purchased either before or after 2005-2007 were sold at a lower price in April, underscoring the huge price increases that marked that two-year period. On the plus side, year-over-year sales volume continued to rise significantly in April as sellers liquidated an accelerating volume of properties, much of it previously purchased at peak prices. Though the re-trading of those properties continues to exert downward pressure on market property pricing for now, it is a necessary part of the recuperation of the commercial real estate market and the increased sales volumes reflect growing confidence in the market. "The 81% year-over-year increase in repeat sales transaction volume is a clear sign that market confidence is increasing," said Chris Macke, senior real estate strategist for CoStar Group. "While we believe the increased clearing of those properties previously purchased at the market peak is a necessary part of the recovery process, the sale of these properties is weighing on commercial real estate price indices in the interim."

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Bankruptcy Auction Residential Development Land

(Re-Sale of 'Bubble'-Era Assets cont'd from page 7)

In April, CoStar recorded 793 sales pairs compared to 856 the prior month. However, pair volume as well as total commercial real estate volume continues to trend upward, with total number of repeat sales pairs up 18% year-over-year through the first four months.

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CoStar's Composite Commercial Repeat Sales Index declined by 1.7% in April and is now 13% below the same period last year and 38% below its peak in August 2007. The General Grade Commercial Repeat Sales Index declined by less than 1% in April, but is also 13% below the same period last year and 37% below its peak in July 2007. The Investment Grade Commercial Repeat Sales Index declined by 5.3% in April and is now 9% below its year-ago level and off 44% from its August 2007 peak. The percentage of sales of investment-grade properties that are distressed has risen to 42% this year compared to 35% in 2010, though the overall percentage of distressed sales has held steady at 31% on average, year to date. The larger, better capitalized lenders who typically finance those higher-quality properties are in a healthier financial position to liquidate the distressed assets in their loan portfolios. By property type, the highest percent of distress in April sales pairs was in hospitality at 30.8%, followed by office at 29.5%; multifamily at 26.3%; retail at 25.9% and industrial at 24.5%. The dollar volume of commercial real estate sold was up 81% year-over-year in April and 18% by the number of transactions, in contrast to single-family residential, which has yet to see a consistent uptick in sales volume. This increase in volume has boosted the average transaction size 47% for investment-grade sales to $16.4 million and 18% for general transactions to $1.8 million, reflecting higher availability of debt from lenders that finance investment-grade properties. Smaller banks that typically lend on smaller properties are still feeling the pinch of distress.

REIT Outlook Stable… For Now While it is a strong bet that the rating outlook for U.S. equity REITs will remain stable for the remainder of 2011, a confluence of factors could result in an outlook swing ratings in either direction before the year is out, according to Fitch Ratings in its mid-year Outlook report. Commercial real estate fundamentals are improving at a time when equity REITs are still enjoying strong capital market access. A notable sticking point, however, remains leverage, according to Steven Marks, a Fitch managing director and REIT group head. "High leverage has long been an impediment to improved REIT credit performance," Marks said. "However, if leverage comes down en masse, it would bolster equity REITs' already-strong footing and possibly result in a sector-wide outlook revision to positive." Other factors that may result in Fitch revising the sector outlook to positive are:

Improving fixed-charge coverage levels;

Capital markets access and liquidity levels remaining strong;

Same-store net operating income (NOI) turning positive for several consecutive quarters; and

An improving economy, resulting in sustained job growth, driving demand for space. Alternatively, it's the very same broader economy that may result in Fitch revising the sector outlook to negative. "While the U.S. economic recovery is on track, the stagnant housing market and still-declining home prices are signs that the economy remains weighed down by structural headwinds," Marks said. Other factors that may negatively weigh on Fitch's view towards equity REITs include:

If capital market access weakens to late 2008-early 2009 levels;

REITs begin embracing riskier strategies (speculative development, higher leverage);

Property-level fundamentals weaken (particularly same-store NOI declines); and

REITs increase common stock dividends to a level that significantly cuts into retained cash flows. The stable outlook drills down into each of the major REIT property types. Improved property fundamentals are gaining traction for multifamily REITs, while liquidity and capital market access remain solid. Those same positive attributes are also in the cards for central business district office REITs.

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Even in sub-sectors where property fundamentals remain negative, there are signs that they are beginning to turn for the better, which is good news for industrial REITs. While fundamentals are likely to remain weak for retail and suburban office REITs, improved balance sheets and capitalization, liquidity and financial flexibility are helping to offset the weakened fundamentals. The sector with the rosiest picture in the near- to medium-term is health care REITs, thanks largely to stable fundamentals and strong access to capital.

Scattered Signs of Pick Up in the Economy Reports from the 12 Federal Reserve Districts indicated that economic activity is generally continuing to expand, though a few bank districts indicated some deceleration, according to the Federal Reserve's Beige Book, which comments received from businesses and other contacts. Some slowing in the pace of growth was noted in the New York, Philadelphia, Atlanta and Chicago districts. In contrast, Dallas characterized that region's economy as accelerating. Other districts indicated that growth continued at a steady pace. Commercial and industrial real estate markets were generally reported to be steady, though there were scattered signs of a pickup. Commercial leasing markets showed modest signs of improvement in the Richmond and San Francisco districts. Boston and Dallas noted some firming in property sales markets; Kansas City reported declines in prices for office buildings. Non-residential construction, though widely reported to be at very low levels, reportedly rose modestly in the Boston, Chicago, Minneapolis and Dallas districts. The Chicago district respondents noted that public sector projects are becoming smaller. Cleveland observed a pickup in industrial and high-end commercial development but a pullback in health care-related projects. Richmond reported some pockets of strength in the retail market. More broadly, contacts in a number of districts expressed a general sense of optimism about the outlook for the second half of 2011. Residential construction and real estate continued to show widespread weakness, except in the rental segment, where market conditions have strengthened and construction activity and development have picked up. Most districts indicated that home prices continued to decline: Boston, Philadelphia, Richmond, Atlanta, Kansas City and San Francisco all reported some downward drift in selling prices. Reports from the New York and Cleveland districts indicated that prices have been steady on balance. No district indicated a general increase in home prices. Residential sales activity, though widely reported to be at low levels, picked up somewhat in the Philadelphia, Atlanta, Chicago and Kansas City districts. Dallas indicated that improved traffic has raised prospects of improved sales in the second half of 2011 and Boston observed signs that the market is stabilizing. Sales activity was characterized as mostly steady in the New York, Cleveland, Dallas and San Francisco districts, but declining in the St. Louis and Minneapolis districts. Those districts reporting on the residential rental market – specifically, New York, Atlanta, Chicago, Minneapolis, Dallas and San Francisco — all indicate that conditions have strengthened. In terms of residential construction, activity has remained generally depressed, with a number of districts reporting a large overhang of distressed properties. However, a number of districts — New York, Cleveland, Atlanta, Chicago and San Francisco — report improved prospects for development of multifamily rental properties. Most districts described loan demand as mixed or slightly improved. Contacts in the Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Dallas and San Francisco districts noted a modest uptick in business loan demand. The increase in business loan demand in Cleveland was described as broad-based, including a pickup in construction loan requests for multifamily dwellings. Boston noted an improved lending environment for commercial real estate and demand for commercial mortgages increased in New York and Dallas. Commercial

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and industrial loan activity increased in Richmond, Chicago, St. Louis, Dallas and San Francisco, held steady in New York and decreased in Kansas City. Outside of banking, Chicago and San Francisco indicated increased investment activity by hedge funds, venture capital firms and other forms of private equity. Credit standards were reported to be mixed but, on balance, a bit easier in recent weeks. A number of districts noted improvements in overall credit quality: specifically, Philadelphia, Cleveland, Richmond, Kansas City, Dallas and San Francisco. New York indicated rising delinquency rates on consumer loans but declining rates on commercial loans and mortgages.

Real Estate Deals in Florida, Vegas, and More

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What Impact Will Debt Ceiling Decision Have On Commercial Real Estate? By: Randyl Drummer

With Washington facing a showdown in less than two months for reaching a deal on the government's debt ceiling, many observers are weighing the potential impact on the commercial real estate recovery depending on various scenarios the Congress may pursue in dealing with this matter. On May 16, the U.S. government smashed through the $14.29 trillion statutory limit that the government could borrow to finance obligations such as Medicare, Social Security, military salaries and interest on the national debt. The Treasury Department is using what Secretary Timothy Geithner called "extraordinary measures" to keep the government afloat until Aug. 2, at which point the nation will exhaust its borrowing authority and default on its debt obligations. On April 18, Standard & Poor's downgraded its outlook on U.S. debt from stable to negative, meaning that if fiscal deterioration is not reversed, the nation's current stellar AAA rating will be downgraded. Soon after the House of Representatives last week rejected a measure to raise the ceiling, prolonging a budget standoff between Democrats and Republicans, Moody's Investors Service also warned that the U.S. government's top credit rating could be in jeopardy. If there's no progress on increasing the statutory debt limit in coming weeks, Moody's expects to place the U.S.'s rating under review for possible downgrade due to the "very small but rising risk of a short-lived default," the rating firm said. Although Moody's fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations, the firm said. "The heightened polarization over the debt limit has increased the odds of a short-lived default." "The real question commercial real estate should be asking is how large the budget cuts will need to be to get Republicans to buy into raising the debt ceiling and what impact those budget cuts will have on GDP. Commercial real estate demand is correlated with GDP," observed Chris Macke, senior real estate strategist for CoStar Group. "If the government cuts spending, somebody has to make up the difference, or the economy will shrink. That means commercial real estate needs corporate America to increase its hiring and investment levels." A white paper addressing the topic issued by Cassidy Turley posited the potential CRE impact from three debt ceiling outcomes, ranging from the U.S. defaulting on its debt (deemed least likely) to raising the debt ceiling with drastic short- and long-term cuts to government spending (also not very likely) to the most likely scenario: The U.S. raises the debt ceiling and makes smaller short-term cuts combined with larger cuts and reforms to Social Security and Medicare/Medicaid in the long term. "The safe bet is that Congress and the Administration will come to terms and raise the debt limit as they've done 70 times in the past 60 years," said Cassidy Turley Chief Economist Kevin Thorpe, co-author of the white paper. "If it breaks that way, the economic recovery and by extension, the real estate recovery should continue." In fact, if lawmakers raise the debt limit and frame their decision in the right way, "it could send a signal that the federal government will be more fiscally responsible going forward. All of a sudden, all this uncertainty could be replaced by certainty and the market could actually take off," Thorpe said. The details on the larger cuts are likely to be worked out starting in the fall, with the short-term budget resolution enacted on April 15 resulting in $38.5 billion in cuts from 2010 levels, about a 1-2% reduction in total federal outlays. Longer term, the goal is to reduce the annual deficit from the current fiscal-year figure of nearly 11% of GDP to 2-3% by mid-decade, with further reductions following that. Assuming a 2% short-term reduction, then the decline in government spending would shave off approximately 0.4 percentage points from real GDP growth in 2012, lowering Cassidy Turley's forecasted growth rate for the U.S. economy of 4% in 2012 to 3.6%.

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Granted, even modest cuts in federal spending will have a tangible impact on real estate, particularly markets closely tied to the federal government such as Washington, DC and markets in the Midwest and Southern California. "It's reasonable to assume that the days of massive federal hiring in DC are over; we're already seeing signs of that," Thorpe said. "But I see very little from the budget proposals of both sides that suggest significant cuts in the areas of information technology and cyber-security, regulatory oversight — many of the areas that drive demand for real estate in the greater D.C. region. But we don't know the specifics yet." Moody's said the nation's credit rating would be maintained if the debt limit is raised and default avoided. However, the future rating outlook will depend on the results of deficit reduction talks. What effect would it have on commercial real estate investment if debate drags on through most of the summer until near or close to the Aug. 2 drop deadline? "Our assumption is that an agreement will be reached with modest near-term cuts to spending on a scale that will not significantly slow the economy or CRE recovery," said CoStar Real Estate Strategist Kevin White. "If an agreement isn't reached by early August, the Treasury will probably find other creative ways to push off default." Waiting until the 11th hour to raise the ceiling does inject a level of uncertainty into the marketplace, Thorpe acknowledges. "For commercial real estate, this is a big deal. That's two months from now and it does have people in wait-and-see mode in terms of investment decisions. "You have to ask, where would CRE be today if the debt ceiling was already raised? I think the market would be in a stronger position." Under the worst-case scenario, most believe that a U.S. default on its debt would be devastating for the country, the economic recovery and commercial real estate. The Treasury Department would have no choice but to deeply slash spending, which would sharply reduce short-term economic growth. More importantly, a default could permanently damage the country's credit and ability to borrow. "It would wreak havoc on the property markets in the form of massive layoffs, surging interest rates, spiking vacancy across all product types including trophy assets — in other words, results much like those from the recent financial crisis, only worse," Cassidy Turley said. If Congress raises the ceiling but approves deep spending cuts such as the House's aggressive proposal to cut nearly $6 trillion over the next decade while also cutting taxes, it could also deeply hurt the recovery, the Cassidy Turley white paper said. Under the House plan, total federal outlays would shrink by $89 billion in fiscal year 2012 compared to those in fiscal year 2011. Some analysts have estimated that the U.S. would create 900,000 fewer jobs in 2012 under the House plan. Cassidy Turley emphasized that stronger up-front fiscal discipline has both short and long term benefits. Decreased spending would result in less bond issuance, causing investors to bid up the price of the existing bonds, likely pushing interest rates lower. However, nearly 1 million fewer jobs would result in a "significant reduction in potential demand for [commercial real estate] space," Cassidy Turley said. Net demand for office space would decrease by an estimated 38 million square feet in 2012, Cassidy Turley estimates. "By our estimates, [the deep cuts scenario] would slow the vacancy and rent recovery for all CRE sectors by one year," the white paper said.

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CRE Lending Oversight: Too Little or Too Much? Though the commercial real estate markets have noticeably begun the process of recovery, even while the residential housing markets have tumbled back into recession, CRE lending is drawing heightened scrutiny from financial regulators and the government regulators and the politicians who side with them. The outcome of the ongoing tug -of-war with the CRE industry and the politicians on their side may hold major ramifications for the future of capital flow to the industry. The issues they are debating are at the heart of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted by Congress to resolve issues that are believed to have led or contributed to the financial meltdown, including failures and gaps in financial regulation and the concept now generally called "too big to fail." The law itself provides mostly high-level direction to financial regulators, leaving "an extraordinary number of details and critical decision-making to regulatory discretion." As a result, the ultimate nature and future of reform rest in the hands of regulators. Various regulatory agencies and Congressional panels are presently receiving public comments on a range of issues involving implementation of Dodd-Frank, including those affecting CRE. It is not yet clear which set of arms will have the most pull and how the new law will shape up, but it is clear that they are all fighting to avoid falling into the same pit. Patrick M. Parkinson, director, Division of Banking Supervision and Regulation Commercial Real Estate at the Federal Reserve Board, laid out the problem in testimony earlier this year before a Congressional Oversight Panel. "Weakness in real estate markets, both commercial and residential, continues to be a drag on overall growth in the economy. Construction of nonresidential structures continues to lag because of weak fundamentals in the sector, including high vacancy rates and low property values, factors that are unlikely to change in the near term," Parkinson said. "CRE-related issues also present ongoing problems for the banking industry, particularly for community and regional banking organizations." "Credit losses for bank CRE loans typically continue well past the trough of recessions and we expect this pattern to continue in this cycle. Working through the large volume of troubled CRE loans will take time as banks go through the difficult process of loan workouts and loan restructurings," he said. Outstanding CRE debt has contracted 6% from its peak in 2008, while outstanding CRE loans at banks have contracted by almost 12%. The majority of the decrease in bank loans was associated with reductions in construction and development loan balances, which were largely the result of foreclosures and charge-offs. Over the last three years, FDIC-insured institutions had set aside more than $640 billion in loan loss provisions and, in the process, written off more than half a trillion dollars in bad loans. Despite the decline in aggregate CRE loans, however, almost 1,200 commercial banks, or 18% of all banks, had high CRE loan concentrations at the end of the third quarter of 2010. CRE concentrations have been the dominant factor in bank failures. Of the more than 300 commercial banks and thrifts that have failed since the beginning of 2008, more than 75% had high CRE concentrations at year-end 2007. "Since the beginning of 2008 through the third quarter of 2010, commercial banks have incurred almost $80 billion of losses related to CRE exposure, equating to a little more than 5% of the average exposure outstanding during this time. In past cycles, CRE credit and market fundamentals generally lagged the larger economy by a year or more. Given this historical experience and the recent improvement witnessed in the broader economy, it is estimated that banks have taken roughly 40% to 50% of the CRE losses that they will realize over this cycle. Using past cycles as a guide, we expect that the remaining losses will likely be incurred over the next few years," Parkinson said. Parkinson said at those hearings that CRE exposures will continue to be a focus for the Federal Reserve and the agencies they are working with, including the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC).

THE WATCH LIST NEWSLETTER 15

The U.S. Government Accountability Office (GAO) issued a report late last month calling for enhanced guidance on commercial real estate risks. The report examined, among other issues, past supervision practices of the regulators. The regulators had issued guidances encouraging banks to continue lending to creditworthy borrowers and explaining how banks can work with troubled borrowers. However, some banks had stated that examiners' treatment of CRE loans had hampered their ability to lend. The GAO found that examiners generally provided support for exam findings on loan workouts, but identified some inconsistencies in applying the 2006 CRE concentration guidance. Moreover, regulatory officials had varying views on the adequacy of the 2006 guidance and some examiners and bankers noted that the guidance lacked clarity on how to comply with it. As a result, examiners and bankers may not have a common understanding about CRE concentration risks, the GAO said. The GAO recommended that federal banking regulators should enhance or supplement the 2006 CRE concentration guidance and take steps to better ensure that such guidance is consistently applied. One of the thorniest credit risk skirmishes currently being played out is over the issue of loan securitization, in which lenders pool their mortgages into securities to be sold to investors. The process removes loans from lenders books while restocking their vaults for future lending. According to critics, during the period leading up to the recession the originators and securitizers seldom retained meaningful "skin in the game." These market participants received immediate profits with each deal while assuming that they faced little or no risk of loss if the loans defaulted. As a result, securitizers had very little incentive to maintain adequate lending and servicing standards, according to federal regulators. The substantial and immediate profits available through securitization skewed the incentives toward increased volume, rather than well underwritten, sustainable lending. Dodd Frank seeks to address that issue by requiring lenders and originators to retain a share of future securities issued. The proposed rule to address this issue generally would require sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk. The tug of war being waged in this regard is over what percentage should be retained and by what financial institutions. Lisa Pendergast, president of the Commercial Real Estate Finance Council (CREFC), expressed concern about pending regulations to implement the Dodd-Frank law's risk retention ("skin in the game") provisions, warning that they are hampering the recovery of the commercial mortgage-backed securities (CMBS) market. Speaking before the U.S. Senate Subcommittee on Securities, Insurance and Investment Hearing last month, Pendergast said that prior to the onset of the economic crisis, CMBS deals were the source of approximately half of all CRE lending, providing approximately $240 billion in capital to the CRE finance market in 2007 alone. After plummeting to a mere $2 billion in 2009 at the height of the crisis, the CMBS market began to see signs of life in 2010 with $12.3 billion in issuance. Thus far in 2011, just under $10 billion CMBS have been issued, with projections for full-year volume ranging from $30 to $50 billion. "One of the overarching questions faced at this juncture is whether CMBS will be able to satisfy the impending capital needs posed by the refinancing obligations that are coming due," Pendergast said. "Without CMBS, there simply is not enough balance sheet capacity available through traditional portfolio lenders such as banks and life insurers to satisfy these demands." "As the regulatory process moves forward, many will argue that implementing certain requirements — or the failure to implement certain requirements — will be a death knell for the market," Pendergast said. "The more likely outcome is that the failure to get the details right will restrict the overall amount of capital that is available through the securitization finance markets." "If not properly constructed, the risk retention rules could potentially result in a significantly smaller secondary market, less credit availability and increased cost of capital for CRE borrowers," she said. "As our members continue to work through the proposed rule to better crystallize our views, we cannot overstate the stakes, given that this rule will directly impact credit availability and the overall economic recovery."

THE WATCH LIST NEWSLETTER 16

Eliminate the Stress from Distressed Properties

THE WATCH LIST NEWSLETTER 17

Freddie Mac Offers New CMBS;

Expands Loan Products Eligible for Securitization Freddie Mac this week priced its second offering of Structured Pass-Through Certificates (K-702 Certificates) backed only by multifamily mortgages with a 7-year term. The $1 billion in K Certificates are expected to settle later this month. The K-702 Certificates are backed by 72 recently originated multifamily mortgages and are guaranteed by Freddie Mac. The largest loan in the offering is for $84 million on the Seven Springs Village Apartments, a 982-unit complex in College Park, MD. The loan carries an interest rate of 4.46%. The second largest loan is for $44.85 million for the Seminole Grand, a 1,554-bed student housing complex in Tallahassee, FL. The loan carries an interest rate of 5.13%. The third largest loan is for $34.4 million for The Lofts at Yale & Towne, a 225-unit housing complex in Stamford, CT. The loan carries an interest rate of 5.27%. Separately, Freddie Mac made another financing product eligible for its multifamily mortgage-backed securities. Adjustable rate mortgages are now eligible for securitization into K Certificates. In the last two years Freddie Mac has made student housing loans, seniors housing loans, conventional structured finance pools and targeted affordable housing loans eligible for its securitization program. In the first five months of 2011, Freddie Mac has brought to market six K Certificate transactions with an issuance size of about $1 billion each.

Perkins & Marie Callender's Files Ch. 11; Looks To Cancel 65 Leases Perkins & Marie Callender's Inc. this week filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The Memphis-based operator of family- and casual-dining restaurants operates primarily in the Midwest, Florida and Pennsylvania under the name Perkins Restaurant and Bakery and in the Western U.S. under the name Marie Callender's Restaurant and Bakery. As of April 17, the company owned and operated 160 Perkins restaurants and 85 Marie Callender's restaurants The company posted revenues of $507 million in 2010. In the weeks preceding the bankruptcy filing, the company entered into a restructuring support agreement with private investment funds managed by Wayzata Investment Partners LLC, a Minnesota-based private equity firm. Wayzata controls about $293 million of Perkins outstanding debt. In connection with the restructuring agreement, the company and Wayzata negotiated the principal terms of Perkins' plan of reorganization and debt maturity extensions. The company also entered into an agreement with Wells Fargo Capital Finance to provide it with a $21 million debtor-in possession financing facility. As part of its restructuring plan, the company closed 58 restaurants and is looking to cancel leases on those eateries as well as seven other previously closed restaurants. Address Landlord Address Landlord

305 NW Burnside St., Gresham, OR AEI Real Estate Fund 85-A LP

5705 La Costa Drive, Orlando, FL Lerual Inc.

245 S. Wilmot Road, Tucson, AZ Allied Trading & Transacting Corp.

5411 Harvey St., Muskegon Heights, MI LK Center LLC

THE WATCH LIST NEWSLETTER 18

Address Landlord Address Landlord

8965Conroy-Windermere Road, Orlando, FL AmProp Corners Inc.

7262 State Ave., Kansas City, KS M & N Partners No, 4

3800 S. 9th St., Lincoln, NE

B&J Partnership Ltd.; Subleasee: Jetsplash LLC

2090 Diamond Blvd., Concord, CA Mario H. & Patsy W. Chan

3300 Alpine Ave. NW, Grand Rapids, MI Bahram and Farzaneh Fata

3025 William Pereira, Norman, OK MCAL LLC

1571 Sycamore View Road, Memphis, TN, Belz lnvestco GP

1435 V St., Merced, CA Merced Auto Center Inc.

1101 S. California Blvd., Walnut Creek, CA Berkeley Land Co. Inc.

3244 S. Wadsworth Blvd., Lakewood, CO Mitchel Cory Family LLC

4111 Wolfin Ave., Amarillo, TX

Billy D. Burnett, Trustee The Burnett Trust; Subleasee: Tres Bubba's Inc.

3850 S. Broadway, Edmond, OK MTV Real Estate LP

N2111 Argonne Road, Spokane, WA c/o Alvin J. Wolff Management Co.

2001 Consulate Drive, Orlando, FL

Nadlan Corteen Place Apartments LLC

901W. Morten Ave., Jacksonville, FL

c/o American Asset Mgmt. Svcs. Corp.

9538 1st Ave. NE, Seattle, WA Northgate Station

7455 W. Chandler Blvd., Chandler, AZ c/o Arizona Industrial Properties Inc.

6081 Center Drive, Los Angeles, CA Passco Property Management Inc.

2420 W. Northern Ave., Phoenix, AZ c/o Business Properties

2332 N Park Drive, Holland, MI, Pompano by The Sea LLC

3400 Clares St., Capitola, CA c/o Cypress Properties

2853 Federal Highway SE, Stuart, FL Renieris Properties Holdings Inc.

1295 Silas Creek Pkwy., Winston Salem, NC

c/o ERT Australian Management LP; Subleasee: IHOP Properties Inc.

20 W. Cochran St., Simi Valley, CA

Richard & Nina K. Johnson, Trustees, The Dick and Nina Family Trust

963 E. Fort Union Blvd., Midvale, UT c/o General Growth Properties Inc.

5601 Brodie Lane, Suite 1500, Austin, TX RREEF America Reit II Portfolio LP

2585 S. Military Trail, West Palm Beach, FL c/o Sansone Group

4875 W. Flamingo Road, Las Vegas, NV Russell M. and Mary Lou Bate

3450 E, Thomas Road, Phoenix, AZ

CEMB Properties LLC; Subleasee: Thomas G. Sell,Trust, The Thomas G. Sell Living Trust

31 920 Gateway Center Blvd., Federal Way, WA San Cha, LLC

8472 N. Highway 51, Millington, TN, Cypress Realty Holdings Co. II LLC

3295 E. Platte Ave., Colorado Springs, CO

Segura Investors X LLC & Segura Investors XI LLC

5 B Serramonte Center, Daly City, CA Daly City Serramonte Center LLC

3810 E. Cork St., Kalamazoo, MI Shao Hua Shen and Mei Han Shen

2615 Lancaster Drive NE, Salem, OR David and Nancy Holloman

3837 E. 51 St. South, Tulsa, OK Sierra Nevada Developers LLC

833-C Deerfield Road, Deerfield, IL

Deerfield Square LP; Subleasee: Ramon and Diane Abarca

155 Chicago Drive, Jenison, MI, Snyder Investments LP

2882 W 4700 South , West Valley City, UT Diamond Properties Inc.

790 W. Winton Ave., Hayward. CA Southland Mall LP

1990 Trower Ave., Napa, CA Ehikian Family Residuary Trust

2460 Mendocino Ave., Santa Rosa, CA Spinardi Properties LP

3429 Freedom Drive, Springfield, IL Firethorn Capital Partners LLC

1391 N. Davis Road Salinas, CA

The Anthony and Christine Sammut Revocable Trust

THE WATCH LIST NEWSLETTER 19

Address Landlord Address Landlord

6023 Nicollet Ave., Minneapolis, MN GFDFT-Perkins Nicollet, LLC

5121 28 St. SE, Grand Rapids, MI The Bea Wiles Trust

18070 San Ramon Valley Blvd., San Ramon, CA Hollister Land & Cattle Co.

5190 N. Academy Blvd., Colorado Springs, CO

The Benito and Anita Chua-Laddaran 1985 Family Trust

503 Hamlin St., Lake Wales, FL Ingrid Treffehn Meno

5320N. Orange Blossom Trail, Orlando, FL

The Daniel M. Hunter Revocable Trust

6005 Constitution Ave., Colorado Springs, CO J.B.R. Enterprises Inc.

4930 W. Bell Road, Glendale, AZ

The Donald W. Callender Family Trust

16261 NW Cornell Road, Beaverton, OR Jackson Union LLC

4573 E. Cactus Road, Phoenix, AZ

The Donald W. Callender Family Trust; Ground Lessor: Financial Trading & Transacting LLC & Lynn Morrison LLC

5401 Northland Drive, Grand Rapids, MI James H. Tolchiner

1680 Appleton Road, Menasha, WI, The Feiwell Family Trust - 1986

5602 W. Waters Ave., Tampa, FL Jappah Management LLC

6365 S. McCarran Blvd., Reno, NV

The Louis and Audrey Demartini Family Trust

9134 E. Stockton Blvd., Elk Grove, CA Koda, Kimble and Kids LP

15500 E. Centertech Parkway, Aurora, CO

Yasuka Aoki-Carnachan; Sublessee: Tamale Kitchen, Inc.

408 E. Bearss Ave., Tampa, FL, LaVilla Del Mar LLC

Retailers Jump at Chance To Take Over Metropark Leases GA Keen Realty Advisors, a division of Great American Group LLC, found retailers to purchase leases for 41 properties formerly operated by high-end clothing company Metropark. Retained by Metropark three weeks ago to assist the debtor's financial advisors CRG Partners Group LLC and debtor's counsel Cooley LLP, GA Keen was selected to market and sell stores across 21 states that had been operated by Metropark. Metropark operated stores in some of the best malls and shopping centers in the country, which offered retailers an opportunity to move into store space with little up-front costs on build-out and a chance to obtain "A-type" space in multiple locations at the same time. The properties, which range in size from 2,000 square feet to 3,500 square feet, are located throughout the country. The majority are concentrated in the Western U.S. (California, Arizona, Colorado, Nevada and Texas) and the East Coast (New York, New Jersey, Pennsylvania, Georgia and Florida). In an auction last week: Cotton On Group won 35 leases in exchange for $910,000 – which included stores in Houston and Brea, CA. Perry Ellis Menswear acquired six leases for properties in California, Nevada, Texas and Georgia in exchange for $775,000. All transactions are subject to bankruptcy court approval.

THE WATCH LIST NEWSLETTER 20

Loans and Properties Under Surveillance

Watch List: Non-Performing Matured Office Loans The following information for these lead listings was provided by Trepp LLC, an industry leader in providing surveillance data on loan and commercial real estate performance underlying the CMBS market.

Property Name Address Curr Bal Maturity Date CMBS Special Servicer

Gateway At Lake Success

1981 & 1983 Marcus Ave., Lake Success , NY $110,000,000 9/6/2010 GC 2005-GG5 LNR Partners

Met Park East 1730 Minor Ave., Seattle , WA $79,700,000 11/6/2010 GS 2006 - GG6

ING Clarion Capital Loan Servicing

Menlo Oaks Corporate Center

4100 - 4700 Bohannon Drive, Menlo Park , CA $59,301,639 9/9/2009 JPM 2006 - FL2 LNR Partners

Novo Nordisk Headquarters

100 & 150 College Road West, Princeton , NJ $53,000,000 3/11/2010 Citi 2005-C3

CW Capital Asset Management

4000 Macarthur Boulevard

4000 Macarthur Blvd., Newport Beach , CA $50,000,000 4/9/2011

Wachovia 2006-Whale 7 Wachovia Bank

Meadowbrook North

100 300 500 1200 Corporate Pkwy, Birmingham , AL $48,000,000 8/6/2010 GC 2005-GG5 LNR Partners

Austin Oaks Office

3409 - 3737 Executive Center Drive, Austin , TX $46,550,204 11/6/2010 GC 2005-GG5 LNR Partners

Tri - County Business Park

13300 Mccormick Drive, Tampa , FL $38,160,000 9/11/2010

LB-UBS 2005-C7 Midland Loan Services

Goodwin Square 225 Asylum St., Hartford , CT $33,000,000 10/1/2010 CD 2005-CD1 LNR Partners

The Biltmore 817 West Peachtree St., Atlanta , GA $32,743,455 3/1/2011 BofA 2006-2 Helios AMC

THE WATCH LIST NEWSLETTER 21

Property Name Address Curr Bal Maturity Date CMBS Special Servicer

Enterprise Technology Center

100 Enterprise Way, Scotts Valley , CA $32,497,665 5/11/2011

LB-UBS 2004 - C4 LNR Partners

Chatsworth Business Park

21605 - 21415 Plummer St., Chatsworth , CA $31,941,476 4/1/2010 GE 2005 - C2 LNR Partners

Shepherd Office Center

2401 Northwest 23rd St., Oklahoma City , OK $30,775,207 12/11/2010

LB-UBS 2003-C7

ING Clarion Captial Loan Servicin

LXP - Experian - Trw

601 & 701 Experian Pkwy, Allen , TX $30,582,338 5/1/2011

JPMorgan 2005-LDP5

CW Capital Asset Management

Foothill Plaza 27422 Portoloa Pkwy, Foothill Ranch , CA $30,363,000 2/1/2010 GE 2005-C1 LNR Partners

Met Center 10 7551 Metro Center Drive, Austin , TX $29,428,774 5/1/2010 BofA 2005-3 LNR Partners

Minnesota Center 7760 France Ave. South, Bloomington , MN $27,243,609 11/1/2010 GC 2003-C2 LNR Partners

Rambus, Inc 4434 El Camino Real, Los Altos , CA $26,011,198 4/11/2011

CSFB. 2001 - CK3

Key Bank Real Estate Capital

Rivercenter Office Building

1515 - 1575 N. Rivercenter Drive, Milwaukee , WI $25,479,034 4/1/2011 PNC 2001-C1 Midland Loan Services

River Plaza 9 West Broad St., Stamford , CT $24,779,004 11/11/2010

LB-UBS 2000-C5 LNR Partners

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