BRIEFING BOOK

Data Information Knowledge WISDOM

Mortimer Zuckerman

is the editor-in-chief of U.S. News & World Report; and is the chairman and co-publisher of the New York Daily News. He is chairman of Boston Properties and has extensive real estate holdings across the United States and he recently purchased New York’s iconic GM building.

Shoot: Forbes Townhouse, New York

About Mortimer Zuckerman……………………………………………… 2

Debriefing Zuckerman Pre-Interview…………………………............. 3

Suggested Questions…………………………………………………….. 7

Forbes on Zuckerman “Who’s Worried?” 9/19/08………………………………………... 8 “The 400 Richest Americans: #147,” 9/17/08………………….. 11 “GM Building Sale Shows REIT Resurgence,” 5/27/08………. 12 “Dolans Dole Out $650M For Newsday,” 5/12/08……………... 14 “The Master Builder Mort Zuckerman,” 2/28/05……………… 16

Zuckerman Transcript…………………………………………………….. 22

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ABOUT MORTIMER ‘MORT’ ZUCKERMAN Intelligent Investing with Steve Forbes

Mortimer Zuckerman is the editor-in-chief of U.S. News & World Report; Zuckerman is also the chairman and co-publisher of the New York Daily News. He is the chairman of Boston Properties and has extensive real estate holdings across the United States and most recently made waves by purchasing New York’s iconic GM building for $2.9 billion. Zuckerman is currently ranked as the 147th richest man in America on the Forbes 400. He serves as a trustee of Memorial Sloan-Kettering, New York University, the Aspen Institute, the Hole in the Wall Gang Fund, Inc. and the Center for Communications. He is also a member of the JP Morgan National Advisory Board, the Council on Foreign Relations, the Washington Institute for Near East Studies and the International Institute of Strategic Studies. Zuckerman co-founded Boston Properties in 1970; previously, he spent seven years at Cabot, Cabot & Forbes, rising to the position of Senior Vice President and Chief Financial Officer. He is also a former Associate Professor of City and Regional Planning at the Harvard Graduate School of Design, a former lecturer of City and Regional Planning at Yale University and a past president of the Board of Trustees of the Dana Farber Cancer Institute in Boston. Zuckerman is known for his frequent use of jokes, a trait that endeared him to former President Ronald Regan. A native Canadian and naturalized American citizen, Zuckerman received his undergraduate degree from McGill University in Montreal. He received his law degree from Harvard University in 1961. Zuckerman received three honorary degrees. Zuckerman was awarded Commandeur De L'Ordre des Arts et des Lettres by the government of France, the Lifetime Achievement Award from Guild Hall and the Gold Medal from the American Institute of Architecture in New York.

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DEBRIEFING ZUCKERMAN (Pre-Interview)

Interviewed by David Serchuk “It’s too big for private individuals, or companies to solve. I think it’s appropriate for the federal government to come in.” –Mort Zuckerman on the Credit Crisis.

What do you make of the bailout?

Mort Zuckerman: There is no question that the financial system had developed in ways threatening not only to functioning to financial system, but our entire economy. In principal the bailout was a necessity.

But, if by a bailout it involves what the word suggests--that the US government will buy toxic securities, that are mostly mortgage backed, and not just at market value but representing an economic value that, if seen to maturity, there will then be an enormous windfall for the companies that got everybody in such difficulty--that’s a problem.

They will be rewarded in ways they shouldn’t be. Their stocks will appreciate, and they will do very well. These assets will be bought out for prices above market value... These stocks will appreciate. But the tax payer will bear the price.

The federal government should not be in these purchases, not for above market prices. The federal government should buy preferred shares in the banking system, and restrict dividends, but still make shareholders suffer the consequences of these mortgage backed securities.

There is no way to know the value of these securities if they are held to maturity. These mortgages and mortgage backed securities, and the ones that are the most toxic, are based on houses.

I think these mortgage backed securities will decline in value. And it should not be at the taxpayer’s risk. It should be at the risk of the shareholders, who made so much money on the way up. I am opposed to this form of reliquifying the banking system.

What about the bailout raises red flags with you?

First red flag? If you had read my editorials, 18 months ago, you would see I was concerned about housing market, that it was unsustainable. We had gone into a bubble state. From 1945-2000 houses had averaged a 3% return. From 2002-2006 it was a 16% return. I knew mortgage backed securities would get us into trouble and by god that happened.

As someone deeply involved in real estate, what is your opinion on the US govt. buying all these bad mortgages?

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At a premium from today’s value, it’s a problem. Nobody knows how far the housing market will decline in value. It may decline more than many people expect, because of foreclosures. People handing foreclosures have put many homes on the market, and it could overshoot supply and demand. There may be hundreds of billions of dollars more lost. The federal government will bear the brunt. It’s ridiculous.

Warren Buffett had it right. He bought a prior preferred with Goldman Sachs. The federal government had bought a prior preferred on Fannie Mae. The shareholders and management should not be able to have their stock options appreciate, because the federal government is taking their losses off their hands.

Can the market take care of itself?

You can’t wait for that. It’s too big for private individuals, or companies to solve. I think it’s appropriate for the federal government to come in. We know what the stock prices is. If the government puts $50 billion into a large bank, it should get prior preferred, and a dividend when the bank can pay. Then later it can convert that into equity.

How would you structure the bailout?

I would put together team of people who would assist those in greatest difficulty. Develop equity participation, on preferred, stock dividends to common shareholders. Buffet will get 10% for 10 years, and then he can convert his shares to equity.

If the government invests, we should not just have all the bad assets and hope for some recovery. We should be able to perform when these companies get all this liquidity.

You own media firms and real estate, which one do you think will rebound first?

I’m in the print media business. Had collateral activity in the web. The web part is doing well. I think the overall level of activity in print world will be modest.

The commercial real estate business will continue to do well; the upper end always does better in good markets, and much better in bad markets.

Criticism comes in all different forms. What was your most memorable critique and how did you handle it?

It happens so rarely. It’s hard to remember one. The only criticism I’ve received has been, in two cases, seeking to develop properties. One was near Central Park in New York. This eventually became the Time Warner Center. Basically it is the same design. We came along at the wrong time, and we didn’t do the best job of educating the public.

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They thought there would be shadows on the park; because the sun rises in the east and sets on the west. This development is on the west side of the park. It’s not creating a shadow it’s creating a shade. At the end of the day in small amounts, as can see from the Time Warner center, there would be some slight shadows. But it’s improved that whole part of the city. We didn’t present it properly.

We pursued that project for nine years before we gave up. We failed.

What is one misplaced assumption in business today?

The misplaced assumption for long time was that the good times go on for forever. Trees grow to the sky. Values go up for forever. In the last couple of months we found that wasn’t the case. The old value of being conservatively financed, not being so leveraged, prepare for rainy days, those clichés have value. We, in our company, the real estate company sold a lot of buildings when the market was higher than it is today. We came into this period with a conservative portfolio. We had 30% of our value in debt, which is unheard of for a real estate company. We have $2 dollars of equity for every $1 of debt, which allowed us to buy the General Motors building.

What was the best financial lesson you've ever learned?

I would say, you never sell at the peak, but it’s always good when the market is rising and, there’s nothing wrong with selling. One colleague said why sell when prices going up? But if prices are not going up you will not able to sell. When we had opportunities to buy a lot of buildings at high prices, and we turned them down.

You can never pick the peak. Somebody else has to make a profit after you sell. Or else you can’t’ keep selling. If we do well, I am happy. Let the next guy also make a buck.

Bernard Baruch said never sell in the peak. Although you have to be happy at the level you do sell.

Who is the greatest financial mind working today?

I have to say Warren Buffett, that’s a man who knows when to buy and when to sell. He’s had an extraordinary record for 50 years, it’s not an accident.

What is your bold prediction for the future?

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It lies ahead. I’ll put it this way, we have the most energetic private sector in the world, and one of the worst public sectors. My boldest prediction is that the business cycle will still be with us, and if, on the public side, we can deal with our infrastructure and energy issues and allow immigrants with high skills in, we will have a brilliant future. If not we will slowly decline, versus a lot of unproved global competitors.

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SUGGESTED QUESTIONS Intelligent Investing with Steve Forbes

1. You own media firms and real estate, which one do you think will rebound first?

2. How would you structure the bailout? 3. As someone deeply involved in real estate, what is your opinion on the

possibility of the US government purchasing all these bad mortgages and holding them?

4. What about the bailout raises a red flag with you? 5. What should investors know about firms before they invest?

6. Criticism comes in all different forms. What was your most memorable critique

and how did you handle it?

7. What is the best business book you’ve ever read?

Forbes Four 8. What is one misplaced assumption in business today?

9. What was the best financial lesson you've ever learned?

10. Who is the greatest financial mind working today?

11. What is your bold prediction for the future?

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FORBES ON ZUCKERMAN Intelligent Investing with Steve Forbes

The Forbes 400 Who's Worried? Erin Gell 9.19.08

Not real estate and media baron Mort Zuckerman, who recently purchased the most expensive building in history.

"Clare, did I eat breakfast this morning?" Mort Zuckerman turns to ask his assistant. He's in his midtown Manhattan office, which currently consists of a boardroom that's empty except for a laptop perched at one end of a long table. A generic printout taped to the door reads, "Mort's Temporary Office"--the real one is being renovated, as evidenced by the buzz-saw screams that intermittently puncture the air.

Zuckerman is a busy man these days, which could explain his flawed meal memory. At the top of his agenda: Can he make his blockbuster purchase of Manhattan's General Motors Building pay off?

In May Zuckerman's Boston Properties shelled out $2.8 billion (including debt) for the GM Building on Fifth Avenue and 59th Street--the most money ever spent on a single building. The deal included three additional office properties for a total of $4 billion. (Zuckerman holds a 60% share of the GM Building; Goldman Sachs property fund U.S. Real Estate Opportunities I and the Dubai private equity firm Meraas Capital each own 20%.)

"It is the best single purchase that I've made since I've been in the business," boasts Zuckerman, who's been buying buildings since the 1960s. The 50-story, 2-million-square-foot GM Building defines a trophy property: It sits on Central Park's southeast corner, and its tenants include a chic Apple computer store, cosmetics giant Estée Lauder, Icahn Enterprises, Jana Partners and the law firm Weil, Gotshal & Manges.

Since starting the real estate investment trust Boston Properties in 1970 with partner Edward Linde, Zuckerman has steered the company toward acquisitions of the country's most iconic office buildings, including Citicorp Center, 399 Park Avenue, and Times Square Tower, which he built. It also owns Boston's Prudential Center and the Embarcadero Center in San Francisco. We put Zuckerman's net worth at $2.8 billion, some $1.2 billion of that in Boston Properties stock.

His GM strategy is simple: Buy the best and ignore the rest. In his collection of trophy buildings, the GM Building is the biggest trophy of all. "Just think, you want to be in the best building. Only 1% [of Manhattan] can go into the best building," he says.

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But the purchase comes as commercial real estate enters what could be a tough few years. Thousands of layoffs in the financial sector have softened demand for office space in Manhattan, and other tenants are cautious, given the economy's dubious state. Notwithstanding, Boston Properties' stock is up 9% since the GM purchase, perhaps reflecting confidence in Zuckerman's timing. In 2006 and 2007 Boston Properties sold off $4.5 billion of real estate near the market's peak, while the rest of the industry was on a buying binge.

"It turned out we sold at exactly the right time," he says. "Some people, alas, bought at exactly the wrong time. One of them was Harry Macklowe, and we all know what happened."

Indeed, the previous two owners of the GM Building came to grief. Conseco, an Indiana insurance company, along with the Trump Organization, bought the building in 1998 but got in over its head with leverage and went bankrupt in 2002. Macklowe, a longtime New York real estate mogul, bought it for $1.4 billion (including debt) in 2003 and surfaced on The Forbes 400 in 2007. Macklowe, too, was stretched too thin. He sold in distress and has, we estimate, suffered a more than $1 billion decline in his net worth.

Zuckerman says he's planning to hold the GM Building for a long time. He'll have to if he wants to turn a profit on it. Nearly half of the square footage in the building won't come up for lease renewal before 2018. Weil, Gotshal holds 25% of the building with a lease that lasts until 2019. Some of the older office tenants are paying only $84 per square foot. Zuckerman says he could get $175 today.

Zuckerman will attempt to nudge out some tenants before their leases turn over, but talks are in their early stages. In the meantime he'll try to capture market rates for the 15% turnover in tenants he expects in the next three years. "The initial yield starts out fairly low, so it will take them a while to get up to what they would consider a stabilized number," says Michael Knott, senior analyst at real estate research and consulting firm Green Street Advisors. Typically, if a tenant wants to leave in the middle of a below-market lease, they have subleasing rights but usually have to split profits with the landlord. Depending on the lease, tenants who leave early could extract a payment from the landlord.

Though prime office plots are the meat of the GM Building, the 150,000 square feet of retail space may prove its most lucrative asset. The building's ground floor boasts the toy haven FAO Schwarz and the glass-cubed Apple store.

"There was a day when retailers didn't want to go above 57th Street," says Karen Bellantoni, executive vice president of retail real estate firm Robert K. Futterman & Associates LLC, who brokered the Apple deal. "Apple changed the way people think about shopping on Fifth Avenue." Today the Apple store is one of the most productive big retail stores in the world, according to Haim Chera, chief investment officer of Crown Acquisitions, a real estate investment and

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development firm. He estimates its sales at $440 million a year, or $29,000 a square foot.

The GM Building's ground floor retail space currently averages rents of $150 a square foot. Zuckerman predicts he could get ten times that if he were signing a lease today. Other recently acquired retail spaces in the area have rented for upwards of $2,500 per square foot. And with GM set to vacate its remaining three floors there in 2009 (to decamp to Boston Properties' Citicorp Center), Zuckerman will soon be able to offer up naming rights to the building.

Zuckerman continues to manage the magazine and newspaper businesses he bought his way into over the past 25 years. "The media is not doing well, and it's not going to get any better," he says. "Advertising is falling off dramatically, and we are taking all kinds of what we hope are intelligent methods to respond to that." One change is the scaling back of the weekly U.S. News & World Report into a biweekly, beginning next year. Upgrades to the Daily News' printing presses are expected next fall.

No matter. Make a few billion on real estate and you can afford not to worry about the price of newsprint.

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The 400 Richest Americans #147 Mortimer Zuckerman 09.17.08, 6:00 PM ET Net Worth $2.8 billion Source Boston Properties (quote: BXP), Real

Estate, Self made Age 71 Marital Status Divorced, 1 child, 1 divorce

Hometown New York, NY, United States Education McGill University, Bachelor of Arts / Science Harvard University, Doctor of Jurisprudence

With partners, bought Manhattan's GM Building from debt-strapped Harry Macklowe for $2.8 billion in May; highest price ever paid for a building. "It is the best single purchase that I've made since I've been in the business." Also snared Two Grand Central Tower, 540 Madison Ave., 125 West 55th St. for an additional $1.1 billion through publicly traded Boston Properties; stock up 18% since January. Owner of New York Daily News lost to Dolan family on highly contested bid for Tribune's Newsday in May. Also owns U.S. News & World Report; magazine pulling back to biweekly circulation next year. Son of Montreal tobacco-and-candy seller studied law at Harvard and McGill U. after earning Wharton M.B.A. Cofounded Boston Properties in 1970 with Edward Linde; public 1997. Has donated hundreds of millions of dollars to cancer research; regular on Sunday chat show The MacLaughlin Group.

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Real Estate Intelligence GM Building Sale Shows REIT Resurgence Peter Slatin, Forbes/Slatin Real Estate Report 05.27.08, 3:00 PM ET

The apparent conclusion of the long-running sale of the General Motors Building to a group of investors led by Mort Zuckerman and Boston Properties for $2.9 billion is a gust of cool wind in the deal-stagnant office canyons of Manhattan. \

Coming as it does with a package of another three towers for an additional $1.06 billion, the buyers, which also include Goldman Sachs and entities from Qatar and Kuwait, are signaling that investors and lenders alike are finally willing to peg a value to properties, especially high-quality ones, when such an exercise had become dangerously challenging.

Zuckerman may be blowing a cool wind now, but the billionaire real estate and media mogul was wafting hot air earlier this month when, in a conference call with analysts and investors, he unequivocally slammed news of his interest in the GM Building, first reported in the Forbes/Slatin Real Estate Report, as "totally without merit" and an "embarrassment to the press."

Maybe it is something about the GM Building. When in 1998 we called Donald Trump to confirm that he had won that year's bidding war for the trophy, he went out of his way to deny it, even calling me back to repeat the denial.

While the behavior of some developers toward the GM Building has not changed, the building's price has. Still, the value peg here is well below the $3.5 billion figure that sellers Harry and Billy Macklowe and their broker, CB Richard Ellis Group, had floated when they first put the building on the market early this year. But at least one source who has seen the building's books says the buyers will be buying a small amount of negative cash flow while making a long-term bet on the building's eventual profitability as the most prominent and expensive asset in midtown Manhattan.

Negative cash flow or not, the purchase of the GM Building is a clear-headed endorsement of the value of a trophy building from a blue-chip public real estate company known for its own high-stakes gambles on leading-edge properties. But it is the robust values given to the three other buildings in the deal that should provide some comfort and cover for investors and lenders interested in less prominent buildings.

The three other properties are 125 West 55th Street, 2 Grand Central Tower and 540 Madison Avenue. While these are certainly not as high profile as the GM Building, they are all respectable--even elegant, in the case of 125 West 55th--office towers. With an approximate combined total of 1.4 million square feet, the buildings are fetching about $700 a foot. But their real value for Boston Properties is in management fees and rent hikes as rental rolls turn over.

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The unique partnership that is acquiring the properties is about as emblematic of today's property hierarchy as can be. Boston Properties is putting up a $165 million deposit toward its eventual purchase of a 49% ownership position for $1.5 billion. Highly leveraged private equity buyers have left real estate investment trusts in the dust over the past three years, but the REITs are now in a strong cash position, operating with usually no more than 50% leverage and with access to relatively cheap money. In addition, REIT shares, after a one-year hiatus, have again been outperforming the major stock indices on Wall Street.

As for sovereign wealth funds from the Middle East, these cash-rich buyers do not need the kind of aggressive, short-term private-equity returns that propelled buyers like Harry Macklowe and his lenders to take outsized risks.

Exactly how funding for the deal, in which Boston Properties partners will assume $2.5 billion in debt, will be structured is still unknown. But with the commercial mortgage-backed securities markets virtually shut down, the buyers could turn to their own balance sheets or to life companies and other institutional investors for support.

As for Harry Macklowe, although he will lose his prized GM Building (The New York Times reports that he will keep a tiny position in it through $10 million in BXP stock), he will still get to gaze upon it from his new conjoined apartments at the Plaza across Fifth Avenue.

Macklowe will also still get to gaze upon his highly regarded modern and contemporary art collection; he is said to have bought the Plaza units as the perfect showcase for that collection. Rumors surfaced in early spring that he might be forced to auction off some of the work to meet debt obligations. That has not come to pass, and, though he is also losing the seven office buildings he bought from Equity Office Properties in February 2007--Deutsche Bank has put them all on the market--he still has a major development site at Park Avenue and 56th Street, the former Drake Hotel and a handful of other impressive assets.

It is unlikely that this deal will start a new round of overbuying in the office market, but it is an extremely welcome marker in the struggle to resume activity in the real estate capital markets.

If Macklowe's $1.4 billion purchase of the GM Building in 2003 can be cited as a catalyst for the acquisition frenzy that swept beyond New York City to the rest of the nation and global capitals, then its sale five years on at just over twice the price may be a spark that ignites a more controlled burn-off of the billions in bad debt that now encumbers commercial property everywhere following that frenzy.

Peter Slatin is editor of the Forbes/Slatin Real Estate Report. Click here to learn more about this newsletter and its real estate model portfolios.

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Market Scan Dolans Dole Out $650M For Newsday Ruthie Ackerman, 05.12.08, 5:50 PM ET

What's the difference between billionaires that own newspapers and those that don't?

Those that don't can afford to buy one.

After a three-way battle among newspaper moguls Rupert Murdoch and Mortimer Zuckerman and the cable-television-and-sports-owning Dolan family, it was the Dolans who came away with Newsday, a daily newspaper that serves New York's Long Island. Murdoch and Zuckerman, who each control newspapers in New York City proper, felt they couldn't afford to match the $650.0 million bid from Cablevision Systems, controlled by the Dolans.

Cablevision beat out a $580.0 million bid from Murdoch of News Corp. and a matching bid from New York Daily News owner Mortimer Zuckerman. Murdoch withdrew his bid on Saturday reportedly saying it was uneconomical to continue. (See “News Corp. Unexpectedly Dropped Newsday Bid”)

Cablevision investors were disappointed, sending shares falling 1.8%, or 45 cents, to $24.52. Cablevision’s shares have tumbled 30.8% in the last year.

Cablevision said it will acquire a 97.0% stake in Newsday through a partnership with Tribune company. Cablevision said Newsday was valued at $632.0 million and Tribune will hold a 3.0% stake, receiving $612.0 million in cash, an equity stake in the partnership valued at $20.0 million, and another $18.0 million in prepaid rent for some facilities.

Cablevision said Newsday businesses would report to Thomas Rutledge, Cablevision's chief operating officer. The deal will be financed by $650 million in debt provided by Bank of America.

Investors are concerned about Cablevision’s buying spree as well as the fact that the company has never run a newspaper. Given the turmoil in the newspaper industry as advertisers go online Newsday will need a real pro in charge. Newsday is the second major acquisition in a week for Cablevision following its nearly $500.0 million purchase of Robert Redford's Sundance Channel cable network on May 7.

Cablevision’s main business is in cable television systems and has about 3.1 million subscribers in the New York metro area. It also owns Madison Square Garden and the New York Knicks basketball and Rangers ice hockey franchises.

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Last week, Cablevision reported a loss of $31.6 million, or 11 cents a share, for the first quarter, compared with a loss of $26.3 million, or 9 cents a share, in the prior year.

But Janco Partners analyst April Horace said the testament to Cablevision's strength is its rising subscriber numbers. In the first-quarter the company beat analysts' expectations by adding 2,000 basic video subscribers. Analysts had expected Cablevision to lose an average of 4,000 subscribers as competition from Verizon Communications and FiOS TV and Internet service made gains in Cablevision's Long Island, New York region.

"I can see that some people would be concerned over the synergies" between Cablevision and Newsday, "but they're a smart company and they run a good shop," Horace said.

Newsday is currently owned by real estate mogul Sam Zell. Tribune had been looking to sell Newsday to pay off $8.2 billion in debt it took on last year when it went private under Zell.

News Corp., which completed its $5.2 billion purchase of Dow Jones in December, had planned to combine Newsday's printing and distribution operations with its New York City newspaper, the New York Post, a move Murdoch had said would have improved News Corp.'s cash flow by $100.0 million.

As recently as May 7, Murdoch had said that negotiations were at an advanced stage, though he had also indicated that he wouldn't raise his bid (See "News Corp.: Newsday In The Bag") Cablevision said owning Newsday will allow the company to better market the newspaper to the many households on Long Island that don't yet subscribe to it, while tapping Newsday's expertise in ad sales to help Cablevision's own cable TV advertising business.

The Associated Press contributed to this article.

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On The Cover/Top Stories The Master Builder Mort Zuckerman Stephane Fitch, 02.28.05

A real estate titan for a new century, Mort Zuckerman is out -Trumping Trump- revolutionizing the risky business of erecting gleaming skyscrapers.

Jutting proudly above the New York bustle, its blue-green glass walls reflecting Times Square's neon flash, Mort Zuckerman's newest skyscraper was built in 2002 at a cost of $650 million. Risky? Well, Zuckerman had a prime tenant lined up to fill half of the 47-floor Times Square Tower. Oops. The tenant was accounting firm Arthur Andersen, which disintegrated before it could move in. Mortimer B. Zuckerman and his office building empire, the publicly traded Boston Properties, survived the Andersen disaster with scarcely a hiccup. Boasting 125 buildings nationwide, a vast network of contacts and a balance sheet as solid as Manhattan bedrock, his real estate investment trust patiently gathered new tenants, including the Ann Taylor Stores headquarters and the O'Melveny & Myers law firm--and at premium prices. No fire sales for Mort.

The business of putting up skyscrapers attracts people with big egos. When their bank accounts do not match their ambitions, they build with borrowed money, taking the chance that a miscue in timing or location will wipe them out. Thus it was that William Zeckendorf, the immensely successful New York City developer of the 1950s, went bust in 1965. The brash Donald Trump, now riding high on a strong New York market (and a television show), got overextended in the early 1990s and almost lost everything. Zuckerman is no piker. "I'll build the biggest and the best," boasts the stylishly coiffed and nattily dressed 67-year-old. "In the next five years I'm putting up a lot of buildings." Just outside Boston at MIT he has broken ground on a 231,000-square-foot office building that will cost $146 million. In Washington he's starting work on a $120 million, 315,000-square-foot structure whose main tenant will be law firm Piper Rudnick. In Manhattan he is one of three developers vying to build a grandiose office tower above New York's new Pennsylvania Station, now the Farley Post Office.

What's to stop him from reaching a little too high and suffering a spectacular collapse? In a word, the REIT. Unlike Trump, whose development business is privately held, and Zeckendorf, who flourished before the real estate investment trust was invented, Zuckerman gets ample equity capital for his projects via

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share offerings of Boston Properties. He owns 10.6% of the REIT, a stake worth $870 million and enough to give him effective control of the company. The REIT has $7.4 billion in equity. It has borrowed another $6 billion to build or acquire property. So he presides over a collection of buildings holding 45 million square feet and worth $13.4 billion, but he does not have to sweat to make the monthly mortgage payments. Boston Properties' leverage is modest--comparable to buying a $500,000 house and putting $275,000 down. While Trump blats to the press about his deals and writes books trumpeting his prowess, Zuckerman keeps his own deal-making modus operandi under wraps. Trump, while professing admiration for Zuckerman's talents, says there always will be private developers. And though Zuckerman is more low-key than Trump, the two share enormous drive and ego. Zuckerman's intense side does peek out sometimes. As a pitcher in the annual celebrity softball game in tony Sag Harbor, N.Y., Zuckerman throws fastballs while others just lob them in. Zuckerman lacks the celebrity candlepower of Trump and The Apprentice television show, but the title "publisher" has added to his cachet. In 1984 Zuckerman bought U.S. News & World Report. This has been by all appearances an unprofitable venture, yet the magazine gave him an excuse to set up house in Washington, D.C., where U.S. News is produced. He bought a townhouse in Georgetown, filled it with art and held dinners for Washington big shots. Zuckerman's next media deal was his purchase of the Daily News in New York City in 1993. This publication is scarcely more lucrative than the first but gives him a certain visibility among the social elite in the financial capital, where he now lives and works. The divorced Zuckerman has dated a bevy of high-profile women, ranging from feminist Gloria Steinem to political pundit Arianna Huffington to designer Diane von Furstenberg. Zuckerman's first love is real estate. There's a heady, ego-satisfying rush about erecting a massive tower. "My sister's a shrink," he says, "and she tells me: ‘Your work is better than your fantasies.'" Trump got his start from his father, Fred C., a wealthy housing developer. Zuckerman is self-made, the Montreal-born son of a tobacco and candy wholesaler. At age 12, while his parents were away, he made an eye-opening solo trip to New York. "New York City for me was a phenomenon," Zuckerman recalls. "I would walk up and down the streets here, and I just loved the bustle and intensity and interactions and the building designs." At 13 he had a subscription to the New York Times. At 16 he entered Canada's prestigious McGill University. After law degrees from McGill and Harvard, and a Wharton M.B.A., he went to work overseeing real estate projects for Boston's Cabot, Cabot & Forbes. At 32 he struck out on his own, teaming up with Edward Linde, a numbers whiz, to start Boston Properties.

For a long time Boston Properties confined itself to smallish office projects in locales like Lexington and Bedford, along the Route 128 corridor outside Boston.

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In 1984 Zuckerman and Linde took on their first tower, the 50-story edifice at 599 Lexington Avenue in New York. They shifted into high gear in 1997 by taking the firm public as a REIT, a corporation that need pay no corporate taxes so long as it sends out 90% of its profit to shareholders as dividends. The first offering hauled in $903 million to feed Zuckerman's ambitions; five follow-on offerings brought another $1.9 billion into the coffers. With this zesty infusion of equity capital Zuckerman could turn his back on the suburbs and shift his focus to the subject of his boyhood dreams: huge landmark buildings downtown.

Until recently office REITs confined their investing almost entirely to the purchase of buildings already standing. Boston Properties bought most of its early trophy properties, among them the Prudential Center (2.2 million square feet) in Boston and the Deutsche Bank headquarters (1.2 million) in New York. Now it's in the vanguard of a new trend: the REIT that adds to its portfolio by building from scratch. Indeed, Zuckerman says his company is going to sell off $450 million of buildings and throw the dice on new developments. Among the REITs acting as developers today are Reckson Associates and Carr America, both of which are constructing suburban office complexes, and Vornado Realty, led by hard-charging Chief Steven Roth, who is completing a 1.4 million-square-foot tower to house Bloomberg LP in midtown Manhattan. ("The greatest compliment to Mort is that Steve is doing development, too," says Trump.) The newly public REIT run by Los Angeles developer Robert Maguire is going to build as well as buy. While the majority of REITs remain passive purchasers for now, competitive pressures are pushing them toward development. Over the past five years the best existing stuff has been bid up too high. Since the tech bubble popped in 2000, pension funds and other institutions, hungry for stable properties in desirable areas that earn good rental income, have pounced on real estate. "You have me and ten other guys bidding," sighs Reckson head Scott Rechler. First-class existing buildings are priced to yield only around 5% to an all-cash buyer, says research firm Green Street Advisors. (The return they talk about is rent minus the costs of operating and maintaining the building and leasing any empty space.) But a skillfully developed new property can bag an annual cash return of up to 10% of its construction costs. In the competition for parcels to be developed, the REITs with fat equity cushions have a tactical advantage over private firms that rely on bank loans for their construction costs. Zuckerman easily mustered the financial firepower to blow

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away rival Douglas Durst--an iconic, old-style New York developer with ten buildings but no REIT behind him--in the 2000 bidding for the Times Square Tower site and the plot next door, now housing Ernst & Young's headquarters. "We're not going to get into a bidding war," says Durst, musing over his defeat. Nor is Boston Properties going to bid wildly, insists Linde, the numbers-crunching second-in-command. Linde, also the company skeptic, put the kibosh on a purchase with two partners of undeveloped Fan Pier in Boston from Chicago's Pritzker family. The idea was to transform a section of the waterfront into 3 million square feet of office, retail, apartments and hotels. The problem: The city insisted that the buyers first build a hugely expensive underground parking garage and seawall. Boston Properties and its partners paid $2.5 million in deal-breaking penalties.

In the stock market Boston Properties has fared well. Since the March 2000 market peak its total return (including dividends) is 22% annualized, compared with the S&P 500's negative 1.3% and in line with the 21% average for the REIT industry. (For performance and value ratings on 20 large REITs, see p. 74.) Zuckerman has faced catastrophe twice since converting to REIT status. Aside from the Times Square Tower near-fiasco, his bid for San Francisco's Embarcadero Center, using a lot of Boston Properties' stock, almost collapsed when the REIT's shares plunged amid the 1998 Asian and Russian economic crises. Luckily for him the stock climbed back in time for him to seal the deal. He paid $1.2 billion, or $325 a square foot; the building is probably now worth $425 a foot. "It's a high-wire act," says Zuckerman about development. Far worse was the plight of Trizec Properties, another REIT that dared to be a developer. Trizec built Hollywood and Highland, a 1.2-million-square-foot retail and entertainment complex that included a hotel and the Kodak Theatre (site of the Academy Awards presentation) in Los Angeles. It completed the project in 2001 at a cost of $600 million, or $500 a square foot. Last year it sold the project for $200 million. The crafty Zuckerman has a strategy to finesse a still-broader problem: Even today, despite better economic times, the office market is in the doldrums. Nationally, vacancies are at a high 17.3%, the result of corporate caution after the recent recession. That's not going to improve fast, according to New York-based brokerage Cushman & Wakefield. "Net absorption," the degree to which demand reduces vacancies, was a weak 1.3 percentage points last year. Boston Properties seeks to get around this by focusing on high-demand cities where it is difficult to build--New York, Boston, Washington--and avoiding office-glut towns like Atlanta and Chicago. Plus, the company concentrates on Class A

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buildings, the leading addresses that classy tenants want. Boston Properties' vacancy rate is a mere 7.9%. Nevertheless, Zuckerman had better hope that his strong-demand cities stay that way. Larry Silverstein, owner of the World Trade Center site, aims to build another complex there, which could end up flooding the Manhattan market, the nation's largest, with too much office inventory. With Penn Station the risk is that the Class B area is unalluring as a high-end office locale. The potential developers are hoping a shiny landmark structure will attract hordes of suburban commuters as tenants. A state agency will choose the winner this spring from among Tishman Speyer, an old-line (non-REIT) New York firm; Vornado, looking for its second big construction project after the Bloomberg building; and Boston Properties. Jerry I. Speyer has far-reaching connections. Vornado contends it knows the neighborhood, where it has several properties. And Zuckerman? He has successfully constructed two skyscrapers above subway stations without disrupting riders, so he argues he can do the same with Penn Station. Besides, he aches for this kind of assignment. "There's a psychic reward," he says.

THE SKY'S THE LIMIT

The old rule for skyscraper development: "Build tall-borrow it all." Deep-pocket corporations like Woolworth and Sears, Roebuck had the financial heft to shrug off the risk. William Zeckendorf went into hock and suffered for it. The long-term trend for landmark buildings is higher construction costs: Dollars to the right are inflation-adjusted. But Zuckerman's REIT has the capital to pay the tab and an equity cushion to fall back on if things go awry.

Year Building Cost per Sq. Ft.¹

Height

1892 Masonic Temple Chicago's first skyscraper, starts rivalry with

New York.

$124 302

1898 St. Paul Building A "spec" building, becomes New York's tallest,

for a year.

N/A 315

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1899 Park Row Building Syndicator William Ivins' small investors build

world's tallest.

N/A 386

1913 Woolworth Building Woolworth's image- making edifice, which

outlasts its creator.

219 792

1931 Empire State Building What Depression? New York Gov. Al Smith and

backers mint a classic.

200 1,250

1955 Mile High Center Zeckendorf gives Denver big-city cred with an

I.M. Pei design.

175 294

1964 Prudential Tower Insurer's push to make a mark gives Boston a

major biz landmark.

153 750

1974 Sears Tower Retailer builds world's tallest (for a while) in

Chicago; later exits.

183 1,454

1988 World Financial Center Paul Reichmann outshines World Trade Center,

renews Wall Street.

324 740

1989 U.S. Bank Tower Robert Maguire's building remakes low-rise Los

Angeles skyline.

389 1,018

2004 Times Square Tower Zuckerman's high-priced gem punctuates 42nd

Street revival.

532 726

¹ constant 2004 Dollars Sources: Forbes library research; Boston Properties; I.M. Pei.

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ZUCKERMAN TRANSCRIPT Intelligent Investing with Steve Forbes

Steve Forbes Monologue It’s a pleasure and privilege to introduce you to our featured guest, Mort Zuckerman. Mort is the editor of U.S. News and World Report, publisher of the New York Daily News, and he’s the new owner of New York’s iconic GM building. He’ll tell us how he’s guiding his businesses through the financial crisis, what the government should do and what it’s like to own a piece of the Manhattan skyline. But first, Even the Great Depression wasn't quite like this. Lehmann Brothers, AIG, Bear Stearns and now Washington Mutual are all gone, each with their own tale to tell. These firms all took on so much debt and had so many bad assets because of the easy money policy of the Federal Reserve. Chairmen Alan Greenspan and Ben Bernanke created this massive liquidity and we're all paying for it. Now we seek solutions. The federal government can turn things around, but it will have to swallow some pride. First, the Securities and Exchange Commission should reverse its foolish decision to throw out the uptick rule in short selling. The rule required short positions to be established only when a stock has risen. Reinstating it would put a speed bump in front of the short selling stampede. Also, the SEC should enforce another rule: no naked short selling. That is, you have to own or borrow shares in a firm before you can short it. Each violation should result in big fines. This would put a mountain in front of the shorts. The government has to formally and publicly strengthen the dollar. A year ago the price of gold was over $650 an ounce. It has since topped out at $1000. The Fed should say its goal for gold is from $500 to $550 dollars. That would stabilize the buck and get animal spirits moving again. We could weather this system by taking a page from the past. Twenty years ago, during the savings and loan crisis the government created the Resolution Trust Corporation as a dumping ground for bad assets. Today's bad assets could be disposed of in a similar fashion. There's no need to panic when you know what's worked before.

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Washington needs to bring these exotic instruments in from the cold. One way is by creating new exchanges for them. This would standardize and bring transparency to a perplexing, opaque market. These steps would quickly revive financial markets, and bring back trust. Already mortgage rates are coming down. Before long American homeowners will start widespread refinancing, which will boost our lagging economy. And now, my conversation with Mort Zuckerman. Steve Forbes: Mort, thank you very much for joining us. What are you-- you’re

deep in real estate, have been your whole life--what is your feeling about this

bailout that is making it’s way through? Is this going to deal with the credit crisis?

Is this going to get banks doing mortgage lending and other kinds of lending

again? How do you see it unfolding now?

Mort Zuckerman: I don’t think it’s going to cure the credit crunch. I think we’re in

for a credit crunch that is going to extend for quite a period of time, no matter

what they do. What it might help--

SF: Because of the extent of de-leveraging?

MZ: Yes because of the extent of the deleveraging and because of the weakness

of the overall economy. This is what they refer to as the dreaded adverse

feedback loop. There’s no question that the economy is going to get weaker.

The banks are going to be very nervous as they look in to that basic, the

economic future of Main Street and they are going to be very, very cautious

about their lending. They’ve been burned too much, they’re going to have to be

too cautious. They still have a sort of a certain lack of liquidity because of the

uncertainty of the value of their toxic assets. Fair enough. But if I were the federal

government and tried to deal with that issue, I would have done what Warren

Buffet did with Goldman Sachs. Now he is doing it with one of the best financial

firms and he is in a preferred position. And he’ll be able to convert that preferred

position into an equity ownership at some later date.

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It’s what they did with Fannie Mae. They put in a preferred stock position

therefore the common shareholders really have to bear the burden of what bad

decisions were made on their behalf in earlier years which is what I think I ought

to happen in the financial world. Otherwise I think the taxpayer is going to be

picking up a lot of unnecessary costs. If they, Merrill Lynch sold $32 billion of

mortgage paper, mortgage backed paper, for $6 billion, roughly 20-cents on the

dollar. What are the Feds going to pay now? Are they going to pay 50-cents on

the dollar which would be way over-valued? Who will suffer as a result of that?

Bernanke says that we’re going to try to evaluate the cash flow to maturity. And

it will be somewhat less than that value. But how the heck do we know what the

cash flow is to maturity when nobody knows what’s going to happen to the assets

that undergird the mortgages that undergird the securities?

We are still in the midst of a major decline in housing prices. And rightly so

because they got way out of whack. We had a 3% increase in housing prices on

average between 1945 and the year 2000. Between the year 2002 and 2006, we

had a 16% increase per year in housing prices. So what you’re talking about is a

bubble in housing prices that has burst. Nothing that the Feds can do can stop it.

Nobody is going to overpay for a house. If anything the danger now is that

housing prices will overshoot on the way down. And that means a lot of these

securities are going to be worth a lot less. And that means that, what, the federal

government is going to come in and bail out the people that got us into trouble in

the first place? I don’t believe that they should be doing it that way. I think they

should be taking an equity position. I think they should be taking an equity

position in the form of preferred. The preferred should have warrants at the end

of it, call it what you will. But, you give them the cash but you get a recognized

value for it. And let the management of these companies who, let me just give

you one little, I’ll ask you one question. What do you think the bonuses that were

given to the financial community, the Wall Street community in the year 2006

amounted to? It’s not a fair question. But it’s $62 billion in bonuses. Just

- 25 -

bonuses. Now if they can take up that much money on the way up they should

take whatever the cost is on the way down. And it is not, it is absolutely a joke to

say that their salaries are going to be constrained or their parachutes, golden

parachutes are going to be restricted. The fact is a lot of these guys have stock

options. And their stock options are going go if their stuff gets bought out at a

number that is unrealistic in terms of the market. So they’re going to benefit

again and the taxpayer is going to bail them out and I don’t think we ought to do

that.

SF: So in the bill that’s making it’s way through now, does that have provisions

now with all the negotiating where they can now start taking an equity position?

MZ: Well, they can get warrants is what’s attached to it as I understand it. But

they are still buying these so called toxic assets at prices that nobody will be able

to understand. Nobody understands the way, there, there are, you have houses

which undergird the mortgages, the mortgages undergird the mortgage-backed

securities. Then you have all kinds of credit defaults swaps that are tied into all

of that. It’s a very complicated thing, very difficult to evaluate. Nobody’s been

able to evaluate it. Why do we think the federal government, of all people, will

understand how to evaluate it?

SF: So even an auction process?

MZ: The auction process is also not going to solve the problem. Because they’re,

it’s, it’s a reverse auction process, okay? The fact is that the people who are

putting these assets into the auction process are going to have and know a lot

more about them than the people, namely the government, who are trying to buy

them. So I don’t think that’s a solution either. There’s no way that the

government can really inform itself about what the real value of these securities

may be.

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SF: So even a real auction instead of a reverse auction, there’s just not enough

private players?

MZ: No, no there will be no private players. Everybody’s had, right, even now,

when these, they don’t even trust the institutions that own these securities. Now,

so are private players going to go and start buying the securities except at really

fire sale prices? That I understand. But if we’re going to invest as a public

authority into these businesses, I don’t think we should buy the assets, I think we

should be the stock. It should be preferred stock. And if there are, if there are

losses, the shareholders should bear those losses. Not the public. Not the

taxpayer.

SF: And preferred would do that?

MZ: That’s right. It’s what we did with Fannie Mae and Freddie Mac. That’s

exactly the approach and it’s the best approach to take. It’s not a perfect

approach but it’s the best approach to take. Now, I also think it’s exactly what

Warren Buffet did. If Warren Buffett had started to buy these toxic assets, you

could follow him. He was smart enough to figure out exactly what to do. He’s

going to buy preferred stock. Goldman Sachs was, had a $5 billion secondary

issue in addition to the $5 billion that he bought, right? And they called me and

asked me if I would like to participate and I said, “What I would like to participate

in, I would like to participate in Warren Buffett’s deal. That I’ll invest in.”

[Laughter]

SF: And on that Merrill Lynch deal. Merrill Lynch financed the deal anyway.

MZ: Yes. Right. Absolutely. They gave 75% of the financing for the $6 billion in

acquisitions. The guy, whoever it was, I forget who bought it, had a billion and a

half in it. But, I mean, that’s the problem. Nobody quite, what, what John Thain

- 27 -

did when he did that, is he made the company saleable. I mean that’s what

Lehman Brothers never did or never could sort of belly up to do that. Although

we now see, and there’s a big story out in the Wall Street Journal, I believe,

saying what a mistake it was not to have in fact bailed out Lehman Brothers.

Lehman Brothers had, I think, something like $150 to $160 billion in unsecured

paper. A lot of that money has been lost. The vast bulk of it. That’s what

caused the run on the money market funds. Because that what broke the buck in

the money market.

SF: Right

MZ: So I think that was, I mean, if they didn’t have the wisdom to save Lehman

Brothers, why do we think they are going to be able to start buying in these toxic

securities?

SF: So where do we go from here? The bailout you say is not going to, it’s just

going to lead to more trouble?

MZ: Yeah I think there’ll be--

SF: It’s not going to get banks lending to one another? We don’t have to mention

to us. So where do we go from here?

MZ: You will have some banks lending to each other. I will agree with that. I

think that happen if they can get rid of all of their securities. But having said that,

the banks are going to be very cautious about lending. You look at what’s going

to happen to mortgage lending on housing. The lenders are now really actually

looking for a genuine credit score on the part of the borrowers. And they are

looking for more equity on the part of the borrowers. There are going to be

higher interest rates on the part of the borrowers. And it’s going to be based on

an appraisal and that appraisal-- I can guarantee you-- is not going to imagine

- 28 -

that home prices are going up but that home prices are going down. So it’s going

to be much more conservative financing for this, the individual home buyer. And

that is going to undoubtedly constrain the ability for people to buy homes. The

same thing is going to happen in business. It’s going to be a lower, there’s going

to be lesser amounts. The terms are going to be tougher. The interest rate is

going to be higher. It’s going to constrain what business can do. Particularly if

you get to the larger amounts of financing that are needed.

SF: So what, what should the government do now?

MZ: Well, I mean it’s hard for me to see once they got this far into the political

process, knowing the way it works, it’s, it’s probably going to get through. It won’t

be, people are not going to be happy with it. The public is outraged about it. If

John McCain had wanted to win the election, he could have sat there at that

debate and said, “This is an outrage. We should not be bailing out the very

people who got us into the trouble. If we do anything, we should buy equity into

the companies so that we can participate and let the shareholders pay.” If he

had said that he would win the election. But anyways, nobody is going to stop the

political process at this stage of the game. This is the only game that’s going to

be left in town. They’ll do whatever they can with respect to it. I just hope it

doesn’t turn out to be a huge financial boon doggle because I think in a number

of years people are going to be going after the people who’ve proposed this

program and say look this is a scandal.

SF: Now going beyond the bailout, what should be done now? Because, you

pointed out, there’s plenty of credit out there but it’s frozen. People are just

clutching whatever they have out of fear. How do we get water running through

the pipelines again? The waters in the reservoir, but it’s not going through the

pipelines.

- 29 -

MZ: Well you know the word credit is based on the Latin word “credere,” which

means to believe. And there is no confidence in this system. It’s going to take

quite awhile for it to be rebuilt. And confidence is the essence of the world of

finance. I mean I don’t diminish the world of finance as a critical player in our

economy. It is really the brains of our economy in the sense that it really

determines the allocation of resources to the various kinds of industries and to

various companies within those industries. And they do it better than any

number of bureaucrats could do.

SF: Right.

MZ: So I accept all of that. But that’s going to take time to rebuild. I mean we’re

into something now that is unprecedented. Nobody knows when it ends. Nobody

knows where the bottom is. We have to see, at the very least, the bottoming of

housing prices. And housing prices, I will point out to you, are much worse than

the numbers look like because those numbers do not take into account sales

incentives. And those sales incentives are thousands upon thousands of dollars

for every home. So in fact, the decline of prices has gone down even more than

what it looks. We still have a ways to go. Until we know that there is a market

clearing price for housing, I think we’re still going to be in trouble. And the more

housing that gets foreclosed, and goes, that’s an artificial depression on housing

prices. Because those homes are going to be thrown on the market. That’s

another problem.

By the way, going back to that, I’m sorry, I’m just sort of rambling on about these

things. But what are they going to do when they are buying back securities

where these securities are sliced and diced. I mean they’re all over the place.

They’re not really getting control over these mortgages or of these houses. So

how are they going to deal with that kind of a problem? I mean it’s so

complicated to get into that murky world of securitized paper and securitized

mortgages and you know, credit default swaps and derivatives. I just think it’s a

- 30 -

huge mistake for the government to get into that particular swamp. I think what

they have to do, as I said, is top invest in the companies at the upper level where

they know what the stock price is. They know what the preferred price can be.

They get a yield on the preferred. Let the shareholders go up and down

depending on how their previous investments failed or succeeded.

SF: Now you did very well in ’07 in selling some premiere properties. Good

timing. And in ’08--

MZ: Not an accident--

SF: You got the trophy of trophies, GM. Do you regret--

MZ: No, not at all.

SF: Do you think you might have, should have waited on that?

MZ: No, not at all. I will say one other thing, I would point out: we sold a lot of

real estate. When, we didn’t know that the, that the--shall we say-- that the

market was going to-- shall we say-- turn in the way that it did. What we did

know was the following: we knew it was a wonderful price for the assets that we

were selling. And we knew that it was a wonderful market to sell into. We

decided it would be very good to get very liquid at that point. We sold $4.5 billion

roughly, a little bit less of real estate. And we also did some refinancing in the

company. We got a $750 million mortgage on one of our buildings-- ten years at

about 5.4% or something like that. Ten year money interest. You couldn’t do that

today. But we did something else about five or six weeks ago. We raised

another $750 billion-- million, look how casually [laughter]… it was a convertible

issue. Although convertible at 40% over, we’re paying 5.38%. We couldn’t do

that today. And we did it because we had decided we’re going to get money

when you can get it. You know, not when you need it. And so we’re in a very,

- 31 -

very liquid position now. We were able to buy the General Motors building at a

price that was roughly 20% below what it would have been the previous year.

We may not have hit the bottom anymore than we thought we were going to be

hitting the top when we sold our assets.

SF: Right

MZ: We have a very long-term view of these kinds of an asset. We’re at this

stage, we bought that building with a minimum of a 5% yield that will go up every

year. It’s not the greatest yield, but virtually every, there was a huge gap between

the current rents and the market rents. A huge gap. And so as these things

rollover over time it will yield to us, in our judgment, the highest internal rate of

return of any acquisition we have ever made or probably ever will make. So we

think that’s a wonderful asset. We’ve always taken a very long term view of these

assets. And we have focused exclusively on the very best buildings in supply-

constrained markets. That’s got to be the 100% location in New York City. And

it’s the most desired building in New York City. It’s virtually completely leased.

We have very little space rolling over. And in the first three years we have 15% of

the space rolling over. Our rents are going to go up, not down from where they

are now. And in fact we are in negotiations where that’s, with various tenants,

where that’s quite clear. So we’re very optimistic about how that building will

work out. It doesn’t mean that we think that the market is going to be as ebullient

as it’s been. But we factored that into our estimates going forward.

SF: So looking out ten years when these leases expire, so it’s only going to be

on the upside?

MZ: Oh look, there are two major tenants in that building occupying about almost

a million square feet where the rents are, you know, in the 6o’s, high 60’s and

70’s. There at the upper levels of the building. Now, today we are renting that

- 32 -

space above $200 a foot. So there’s going to be a moment when there will be

equity in the world and we’ll catch up in the rents. Not for awhile but we take a

long term view in this thing.

SF: Got the wherewithal to do the long term.

MZ: Yes. I mean that’s the whole idea. The whole idea is-- we have always-- A)

all of our investments in Boston Properties are in supply-constrained markets like

New York where there are very few sites--

SF: Washington--

MZ: Like Washington, for example, where we have a huge portfolio now doing

extremely well which where virtually unaffected by what we see in other markets,

San Francisco, where we own the Embarcadero Center and in Boston where we

have a very big position in Cambridge, the Prudential Center and Cambridge

Center. So we have properties that we think are literally at the very top of each

market. We find that those are the properties that do very well in good times but

they also do much better relatively in what we euphemistically can be called

challenging times. There are always tenants who want to move into those

buildings just as in residential. The highest quality residential are still doing very

well in New York. And there is the highest quality office space is still doing very

well in New York. We have virtually no vacancies from our existing operations at

this point. We will because I’m sure we’re going to lose some tenants, perhaps

out of bankruptcy or whatever. We are having that experience now with a law

firm and the good news again, we have a fully built-up space and we’re going to

be able to re-lease that space within a very short period of time. Because there

are still a lot of firms that are growing in New York.

SF: So the key in real estate in your mind is: go in markets where the cost of

entry is high, because if you get in, it is pretty good.

- 33 -

MZ: Right. It’s not just the cost of getting in. You have--

SF: The difficulty of building--

MZ: You cannot get a site. It’s very difficult to get a site on the east side of New

York. The Upper East Side of New York. It’s almost impossible. I mean believe

me, we’re in that market, we’ve been in that market for years. It’s very, very

difficult to do that. So when you can get buildings in that area, you’re in a-- by

definition-- a supply-constraint area. And the better the building the better you will

do over time because there are still a lot of companies that are doing well and

those companies want to be in the best buildings. So they always end up doing

well over the long haul. That’s been our experience now for over 40 years. And

that’s been the philosophy that we’ve had and it’s really worked through every

downturn.

SF: So is real estate going to recover faster than media in these tough times?

MZ: Well, let’s disaggregate media. Let’s talk about print. I don’t know why I

bring this up between the two of us. [Laughter] I do think that, and you all have

learned this lesson well before many others, that the brand that we bring to the

websites that we develop is going to make a huge difference. And that part of our

business is really doing well. The traditional role of print media, magazines and

newspapers, is going to be a much more difficult role as it goes forward. The

websites that are based on the brands that we have established will make up

some of the difference. But for the moment, we are losing dollars in print

advertising and gaining nickels on website advertising. That is not a formula for

long term success. But there is no doubt that website businesses will be come

increasingly successful. You just have to wait for the lines to cross.

SF: Like sometimes in real estate.

- 34 -

MZ: Yes, exactly. You always have to have a long term view. I’m not a short term

trader in anything.

SF: What’s the best financial lesson you ever, you learned during your--

MZ: You know, I will say I don’t know quite how to put this. But I have never

believed that I could sell out at the top. You know when we were selling these

buildings, when we embarked on this program, one of my colleagues said, “Well,

why do you want to sell? The prices are still going up.” And I said to him, “Look,

if the price weren’t going up, we wouldn’t be able to sell them. I’m very happy to

sell them at the prices that we’re talking about.” And we got wonderful prices for

them. We got, we sold them at yields, in effect, some of them were under 4%

CAP rates. Now I have to tell you I’m a seller at those prices. I’m not a buyer at

those prices. I’m a seller at those prices. And just to give you an example, we

sold a building at a 3.76% CAP rate. We bought the General Motors building at a

5% CAP rate, which is a much better price to buy a General Motors building.

SF: Great arbitrage.

MZ: So it’s a great arbitrage and I don’t ever expect to buy at the bottom or sell

at the top. The one thing that I have learned is: you can never predict these

things with any degree of accuracy. So you have to be satisfied with what you

can get. I was not only satisfied, as I said on the phone call with our investors, I

was not only happy. I was very, very, very, very happy and I didn’t mind if I lost

the top 2% on the price. It doesn’t, I don’t even think about it.

SF: As the saying goes, you can never go broke taking a profit.

MZ: That’s right. That’s right. I always want the next guy to make a profit.

Otherwise, I’ll never be able to do what I want to do.

- 35 -

SF: And what is your bold prediction for the future?

MZ: I think this, as you and I were talking before, I do think that credit constraints

are going to put us into not just a recession but a longer term recession than we

have experienced since the end of World War II. It will not be a recession that

will be over in six months or a year. Ken Rogoff, who’s a very good economist,

studied 18 recessions. When those recessions, in Western-style economies,

when those recessions began in their equivalent of Wall Street and then moved

to Main Street, and then bounced back to Wall Street, those recessions were

deeper and longer than the recession that started in Main Street and then

affected Wall Street. So that is what happened here. This recession that really

began with a bubble bursting in not just in housing-- which is a financial matter--

but in the financial world itself. It’s now going to seep much more directly into

Main Street. We’re going to see much slower economic activity. It’s going to go

on for a couple of years. I’ve been bearish, well, for 18 months. I gave an

interview to the Financial Times when people thought I was so bearish that I was

nuts. Well, I wasn’t bearish enough. I now say that the difference between an

optimist and a pessimist is that an optimist thinks this is the best of all possible

times and a pessimist fears he may be right.

SF: With that, thank you Mort.

MZ: You’re very welcome.

[### 21:09]