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Falcon Completes Five Transactions in Early 2005

The high level of activity that characterized 2004 carried over into the first part of 2005 as Falcon Real Estate completed five transactions on behalf of our investors – including three purchases and two sales. At the present time, we would expect that this level of activity would be maintained throughout the year.

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Ralph's Supermarket

The two sales were both properties that had produced particularly good returns for our investors. The first sale was of the Ralph’s Supermarket in West Hollywood, California. This property had been purchased nine years earlier in 1996 by an institutional client of Falcon's when the principal tenant was Alpha Beta. At that time, Alpha Beta was not considered to be a credit tenant but Falcon recommended the property because it was a newly constructed supermarket in an excellent location. It was our belief that even if something happened to Alpha Beta, another supermarket would want to occupy this property. Over time, Alpha Beta was absorbed through a series of mergers by Ralph's, which was in turn merged into Kroger's. As a result, the property that was purchased at a price of $13.6 million in 1996, with a cash investment of $5.1 million, was sold nine years later, with the enhanced credit that resulted from the mergers, at a price of $23 million – for a capital gain of over $9 million. Since the property also produced a high cash return during the holding period, the investor realized an overall internal rate of return of 17.5% annually during the nine-year holding period. We consider this an excellent example of a case in which the investor took some credit risk that we felt at the time was mitigated by the quality of the property and its location.

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One Montgomery

The second sale was of a property known as One Montgomery – the Wells Fargo Bank Building in San Francisco, California. In May 2001 Falcon Real Estate put together a group of investors in a syndicated transaction to purchase One Montgomery, an historic building at the corner of Montgomery and Post Streets in downtown San Francisco. One Montgomery was purchased at a price of $26 million and a mortgage of $19 million was provided by Credit Suisse First Boston. Although there were nine years remaining on a lease to Wells Fargo Bank at the time of purchase, the building was bought with the intention of repositioning it when such action became possible. Prior to repositioning, the building provided a secure income return because of the Wells Fargo lease.

After the building was purchased, Falcon pursued two different routes to enhance the value of the property. On the one hand, negotiations were undertaken with Wells Fargo to have them give up some of their space so that it could be re-leased at higher rental rates for either office or retail use. At the same time, a major study was undertaken as to the feasibility of constructing a residential tower above the existing building. Although negotiations with Wells Fargo were positive and although the City of San Francisco gave initial encouragement to the development of housing units in the downtown area, Falcon was able to negotiate the sale of the property to American Financial Realty Trust at a price of $36.6 million. This price surpassed our initial projections for the property and it provided the equity investors with a compound annual rate of return of close to 25%.

The three properties purchased during the first part of 2005 included the Nova Nordisk Building in Princeton, New Jersey, which is reported on separately in our Announcement Archive. The next property purchased by Falcon was the Hartford Fire Insurance Building in San Antonio, Texas. The principal investor in this deal was one of Falcon's long-time Latin American clients, who was joined in a syndication by several American investors. This property was purchased at a price of $18.5 million, for a going-in capitalization rate of 7.6%. The purchase was structured as two separate transactions so that the Latin American investors could take advantage of a tax-free exchange under Section 1031 of the U.S. income tax code. All of the other investors in this transaction received an annual tax-free return of 9%.

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Carlyle Club Apartments

Finally, Falcon purchased the Carlyle Club Apartments in Plantation, Florida, again in a syndicated transaction, this time on behalf of a group of Kuwaiti and American investors. This property is another condominium conversion deal in southern Florida, similar to the Aventi deal the purchase of which closed last year. The Carlyle Club consists of 150 apartments, primarily two and three-bedroom units. It is an infill location in the midst of a highly developed area just to the west of the Ft. Lauderdale Airport. The Carlyle Club was purchased at a price of $28.8 million, and a first mortgage was provided by Credit Suisse First Boston. In addition, a mezzanine loan was obtained from a group of foreign investors. The sale of the condominium units was planned to begin shortly after purchase.

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Announcements
May 2005