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Falcon Acquires Three Additional Properties

Falcon Real Estate Investment Company, LP closed the purchase of three additional properties during the first part of 2003, in addition to the Crescent at Carlyle Building in Alexandria that closed in January. In announcing these purchases, Howard Hallengren, Chairman of Falcon commented, “Despite the uncertainties arising from the war in Iraq and its aftermath, as well as other international issues, our clients continue to look upon U.S. real estate as an extremely attractive investment alternative. At this time, we have an unusually large number of purchase mandates that we are seeking to fulfill during the balance of the year.” (See Current Acquisition Requirements)

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220 Post Street (tall bldg on right) (228-240 Post Street on left)

The first property purchased after Crescent at Carlyle was 220 Post Street in San Francisco. This property is on a long-term lease to Saks, Incorporated for use as the Men’s Store of the Saks Fifth Avenue Division. This is the third property that Falcon has acquired in recent years on Post Street, which is one of the most important retail locations in the United States. 220 Post Street is immediately adjacent to 228-240 Post Street, already being managed by Falcon. These two buildings were formerly combined as the home of Gump’s, the famous San Francisco specialty retailer and the current purchase brings these buildings back under common ownership. In addition, two years ago Falcon purchased and now manages the very well-known Wells Fargo Building at the corner of Post and Montgomery Streets.

220 Post was acquired at a price of $31.2 million, representing a first year’s capitalization rate of 7.2%. Financing was provided by Credit Suisse First Boston resulting in a cash-on-cash yield to the investors of 8.2%.

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DeVry Building

In addition, Falcon purchased the DeVry Building in Westminster, Colorado, a suburb of Denver in the growing Denver/Boulder corridor. This is a newly constructed building of 71,580 square feet (6,657 square meters) situated on 13.1 acres that will serve as the Denver campus for DeVry University. DeVry has signed a 15-year net lease, with rental increases of 1.5% each year.

The DeVry Building was purchased at a price of $14.2 million to provide a going-in capitalization rate of 8.1%. GE Capital provided a mortgage equal to 75% of the purchase price with interest at 5.52%. Principal amortization on the mortgage is based upon a 25-year schedule. This property was purchased by a group of U.S. and overseas investors, with both groups of investors receiving current income returns of 9%. The transaction was structured so that both the U.S. and the overseas investors were able to receive their income returns with little or no income tax liability.

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Gresham Square Shopping Center

Finally, Falcon acted as real estate advisor and general partner for the purchase of the Gresham Square Shopping Center in suburban Portland, Oregon. This was a unique transaction since the property was purchased out of the U.S. District Court in Portland. The property had been taken over by a court appointed receiver after the previous owner had been convicted of misusing the investors’ assets. As a result no leasing had taken place at the center for several years, and this had led to occupancy at the center declining to the 60% level. Falcon felt, however, that with proper management and with funds available for leasing, this could again be a very profitable shopping center.

As a result, Gresham Square was purchased at a price of $9.3 million, equal to $74 per square foot, a price that is well below estimated replacement cost. In addition, the going-in capitalization rate was 8.8% on existing rental income, indicating considerable upside potential as the property is brought up to more normal occupancy levels.

The purchase of Gresham Square was financed with a $7.6 million first mortgage loan from Credit Suisse First Boston, equal to 80% of the purchase price. However, $1 million of the loan proceeds were retained by the lender to provide a reserve for projected leasing expenses. Another part of the funds required to purchase the property was provided by overseas investors through a portfolio loan that paid interest at the rate of 11% per year. The remaining equity was provided by U.S. investors who would also receive income distributions of 11% per year and were expected to benefit from an IRR of approximately 15% over a projected three-year holding period.

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Announcements
July 2003