1 Real Estate Financial and Investment Analysis INFLATIONS

1 Real Estate Financial and Investment Analysis INFLATION’S IMPACT IN THE 1970’S WINNERS LOSERS • BORROWERS • INVESTORS IN REAL ESTATE • LENDERS • INVESTORS IN FINANCIAL ASSETS • INDIVIDUALS WITH FIXED INCOME AND/OR NO JOB MOBILITY • INDIVIDUALS IN MATURE AND/OR ENERGY-INEFFICIENT INDUSTRIES • MOST TAXPAYERS AND SAVERS • INDIVIDUALS WITH HIGH SKILLS AND/OR JOB MOBILITY • INDIVIDUALS EMPLOYED IN GROWTH AND HIGHTECHNOLOGY INDUSTRIES • MOST GOVERNMENT TAX COLLECTORS

Real Estate Financial and Investment Analysis 2 THE WEALTH TRANSFER EFFECTS OF INFLATION

Real Estate Financial and Investment Analysis EFFECTS OF INFLATION ON EXISTING-PROPERTY ECONOMICS 3

Real Estate Financial and Investment Analysis 4 WHY MAY INFLATION AFFECT EXISTING AND NEWDEVELOPMENT REAL ESTATE DIFFERENTLY? SHORT-RUN IMPACT • COSTS OF FINANCING • COSTS OF GOODS AND SERVICES INTERMEDIATE IMPACT • VACANCY RATES FALL • RENTS INCREASE LONGER RUN IMPACT • EXCESS DEMAND • NEW INCENTIVES TO DEVELOP • CYCLICAL SWING BACK (MAY OCCUR)

Real Estate Financial and Investment Analysis 5 THREE ELEMENTS TO PROTECT REAL ESTATE PARCELS FROM CYCLICAL VAGARIES: • STRENGTH OF REAL ESTATE MARKET • NATURE OF LEASE CONTRACTS • FINANCING RATES AND TERMS

Real Estate Financial and Investment Analysis GRAPH FROM III-56 6

Real Estate Financial and Investment Analysis IMPACT OF INFLATION, BY LAND USE • URBAN LAND • AGRICULTURAL AND FOREST LAND • RESIDENTIAL PARCELS - OWNER - OCCUPANT UNITS - MULTI-FAMILY PARCELS • COMMERCIAL SPACE 7

Real Estate Financial and Investment Analysis INFLATION AND MACRO-CYCLES AND REAL ESTATE INVESTMENT STRATEGIES LONG CYCLES • WENZLICK • CASE SHORT CYCLES • CONSTRUCTION CYCLES • MORTGAGE AVAILABILITY CYCLES OTHER CYCLES • URBAN AREA / CITY CYCLES • NEIGHBORHOOD CYCLES • PROPERTY-SPECIFIC CYCLES – NEW CONCEPT / OVERKILL – HOT MARKET / OVERKILL 8

Real Estate Financial and Investment Analysis EXHIBIT 7 -10 9

Real Estate Financial and Investment Analysis 10 ECONOMIC RISKS RELATE TO THE EXTENT INFLATION IS PROPERLY ANTICIPATED VERSUS UNANTICIPATED

Real Estate Financial and Investment Analysis IMPORTANT INFLATION RELATED CONCEPTS • ANTICIPATED VS. UNANTICIPATED INFLATION • RELATIVE REAL RATE OF RETURN AMONG VARIOUS ASSETS - REAL ECONOMICS - TAX EFFECTS 11

Real Estate Financial and Investment Analysis EXCEL CHARTS 12

Real Estate Financial and Investment Analysis EXPECTED INFLATION, REAL AND NOMINAL INTEREST RATES, AND CAPITAL MARKET EQUILIBRIUM • A CHANGE IN THE EXPECTED RATE OF INFLATION MAY CHANGE THE REAL RATE OF INTEREST • CHANNELS FOR THE CHANGE IN THE REAL RATE OF INTEREST ARE: - INCOME SAVINGS EFFECTS - WEALTH EFFECTS NOTE: THERE MAY BE DIFFERENCES IN SHORT RUN VERSUS LONG RUN IMPACTS OF CHANGES IN INFLATION. 13

Real Estate Financial and Investment Analysis 14 INFLATION AND THE AFTER TAX REAL RATE OF INTEREST

Real Estate Financial and Investment Analysis 15 LENDER RETURN UNDER INFLATION: EXAMPLE ASSUME: • DESIRE 2% REAL RETURN AFTER TAXES • IF NOMINAL RATE IS 12% AND THE EXPECTED INFLATION RATE IS 10%, WHAT IS THE REAL RETURN FOR THE LENDER? • LENDER IS IN 50% TAX BRACKET

Real Estate Financial and Investment Analysis 16 INFLATION AND DEPRECIATION: THE FIRM NET AFTER TAX REAL REVENUE FROM INVESTMENT PROJECT = (1 - TAX RATE) X (SALES REVENUE - PRODUCTION COSTS) NOTE: • GENERAL INFLATION HAS NO REAL IMPACT IN PRINCIPLE! • BRACKET CREEP CHANGES CONCLUSION • DEPRECIATION EFFECT ALTERS INCENTIVE TO INVEST In sum, the firm will require a lower real rate of return (i. e. , and cost of financing) if high inflation persists. Hence, as inflation increases, nominal interest rates must rise less than the change in the inflation rate.

Real Estate Financial and Investment Analysis INFLATION AND THE AFTER-TAX REAL RATE OF INTEREST INSERT 17

Real Estate Financial and Investment Analysis INFLATION AND DEPRECIATION INSERT 18