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Aventi

Falcon Active in Condominium Conversions

Falcon Real Estate has been active in the condominium conversion market in recent months, following the highly successful conversion of the Aventi project in Aventura, Florida earlier this year. Aventi was a 180-unit apartment complex located just north of Miami. The property was purchased in April 2004 by a syndicate put together by Falcon Real Estate, with the intention of converting the apartments to condominium ownership during the succeeding 18 to 24 months. The property was purchased at a price of $40 million and was financed with a first mortgage loan, a mezzanine loan and a portfolio loan from offshore investors. Falcon Real Estate provided the equity. Sales commenced in the fall of 2004, but were interrupted by the succession of hurricanes that hit Florida. However, sales resumed again in early 2005 and all of the units sold out very quickly. This was quite an extraordinary investment since the equity investors achieved an internal rate of return of close to 80%.

So far in 2005 three additional projects have been purchased in various markets around the country, as outlined below:

Property Location                    Purchase
                   Price
No. of
Units
Carlyle Club Plantation, Florida $ 28,750,000 150
Boca Palms Boca Raton, Florida 80,000,000 522
Crystal Cove Chandler, Arizona 21,700,000 187
  Total $ 130,450,000 859

The three projects listed above are all conversions of existing apartment complexes, and are all aimed at condominium purchasers in the lower and more affordable section of the housing market. Falcon has carried out a great amount of study in each of the local residential real estate markets to determine how much competing product there is in those markets, and we are confident that we are well positioned competitively in each case. Many studies have indicated that the housing market in the United States has been slowing from the extraordinary levels that were reached during the last few years. In our view, this slowing has taken place primarily in some of the markets such as New York and California where prices had risen the most rapidly. It has also taken place in the highest priced segments of housing markets around the country. Therefore, we have been particularly careful to purchase conversion projects that are either in the lower price ranges of the housing market or that are in markets in which housing continues to be in strong demand.

The three condo conversion projects listed above are in addition to the major construction project in Tysons Corners, Virginia, that Falcon began in August. The Park Crest Development at Tysons Corners (reported upon earlier) will eventually involve the construction of 1,354 condominiums. While these units are in a higher price range than the conversion projects listed above, the demand for this type of housing in Tysons Corners and the Washington D.C. metropolitan area continues to be very strong. In fact, sales of individual apartments in this project were so strong that the first tower has been substantially pre-sold with construction not scheduled to begin until January 2006.

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Carlyle

The Carlyle Club Apartments in Plantation, Florida, were purchased in a syndicated transaction at a price of $28,750,000 or about $191,500 per unit. A first mortgage was provided by Credit Suisse First Boston and a mezzanine loan was obtained from a group of overseas investors. The Carlyle Club consists of 150 apartments, primarily two and three-bedroom units. For marketing purposes, the project has been re-named Paragon at Plantation, and the average sales price per unit is expected to be approximately $275,000, well below the average price for a median residential dwelling in the Plantation market. Currently, this market has limited comparable product available.

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Boca Palms

Boca Palms in Boca Raton, Palm Beach County, Florida, was constructed in separate phases in 1973 and 1992. It is a 522-unit, garden-style apartment community. The first phase contains three four-story elevator buildings with 184 one- and two-bedroom apartments. The second phase contains twenty-seven two- and three- story buildings with 348 one, two and three bedroom units. The buildings are situated on a 35.2-acre parcel. The contract purchase price was $80,000,000 or $153,000 per unit. The investment will require additional funds for renovations, cosmetic improvements, marketing costs and working capital bringing the anticipated total project cost to over $110 million. The projected sellout period is approximately 12-18 months with a target average selling price per unit of $251,600. The project's name for marketing purposes was changed to Belaire Club at Boca Raton.

Note: Both Carlyle Club and Boca Palms were impacted by Hurricane Wilma. Fortunately, there was no structural damage at either property, but both suffered some damage to landscaping. Electric power was out at both projects for several days, but was quickly restored. The marketing program at Carlyle Club recommenced about two weeks after the hurricane, while the planned renovation program at Boca Palms, which had just begun, is continuing. At this point, we do not expect that Hurricane Wilma will have any significant affect on the investment results from either of these conversion programs.

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Crystal Cove

Crystal Cove is a 187-unit apartment complex located within Andersen Springs, a 440-acre master-planned community in Chandler, Arizona, approximately 20 miles from downtown Phoenix. Chandler is part of Maricopa County that in recent years has been the fastest growing county in the United States. The entire Phoenix metropolitan area has also experienced phenomenal growth, with an increase of 1.3 million residents between 1990 and 2004. This growth has propelled Phoenix to be the fifth largest city in the United States, immediately behind New York, Los Angeles, Chicago and Houston.

The purchase price for this property was $21.7 million. However, adding in additional costs for capital improvements, conversion costs, marketing and other miscellaneous costs, the total investment came to just over $26.5 million, or $142,000 per unit. The property was purchased all-cash, although financing is expected to be obtained in the near future. The projected sell-out period is between 12 to 18 months at an average price per unit of just over $162,000 per unit.

Falcon is also studying other condominium conversion projects in the Atlanta, Phoenix and Seattle metropolitan areas, since condominium conversion continues to appear to offer the most attractive investment returns in the U.S. real estate market at the present time.

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Announcements
December 2005