Tools for Maximizing Cash Flow in a Recovering Economy

1. Tools for Maximizing Cash Flow in a Recovering Economy March 23, 2011 8:00am – 10:00am The 100 Club 100 Market Street, Portsmouth, NH   A panel discussion for commercial property owners looking to utilize tools to help  maximize property incomes during struggling economic times.

2. Tools for Maximizing Cash Flow in a Recovering Economy Agenda Introduction of Panel Macro Perspective of Each Discipline Case Study on a 40,000sf Mixed Use Facility Questions and Answers

3. Brian O’Brien Managing Broker, NAI Norwood Group Brian has over 20 years of commercial real estate experience in the leasing and sale of office, industrial and investment real estate. He is an expert in 1031 exchanges and alternative real estate investments. Brian has sold over $30 million worth of institutional grade real estate investments to 1031 exchange buyers nationwide and has been involved in the acquisition, redevelopment and repositioning of multi-building complexes on behalf of investment groups in NH. NAI Norwood Group is a commercial real estate brokerage firm with over 40 years of history serving New Hampshire and New England. With offices in Portsmouth and Bedford, their geographic reach covers all of NH, Northern MA, and Southern ME. Their affiliation with NAI Global can help them assist their clients around the nation and the world and help give a global perspective to their real estate needs. We can assit in: -Consultation -Buyer and Tenant Representation -Business Brokerage -Sale Leaseback -Sales And Leasing -Development

4. Chris Snow President, Property Tax Advisors Chris has 18 years of experience as a property tax consultant. He has successfully negotiated millions of dollars worth of tax abatements for commercial and industrial property owners as well as land use change taxes. His strengths lie in his knowledge of the commercial real estate market, his understanding of the assessment and appeal process and his long term relationships with many of the assessors in Northern New England. Property Tax Advisors, Inc. specializes in reducing the tax liability on commercial and industrial properties throughout northern New England. We use our in-depth knowledge of state statutes, market conditions and assessment guidelines to lower your property taxes. • Analyze assessed values versus fair market values• Advocate for you during revaluations to minimize your new assessment• File Appeals and represent you at hearings • Negotiate with assessors before or after filing for a tax abatement

5. Jeff Begin President, Norton Insurance Jeff Begin joined Norton Insurance in 1978, and has served as President and CEO since 1994. Jeff is also President of the firm’s subsidiary, Fairfield Kilgore Agency, and Treasurer of Abenaki Insurance Services, LLC. Jeff specializes in the areas of workers’ compensation and malpractice insurance, and is licensed in all of New England as well as New York and Florida. Norton Insurance Agency, Inc. was founded in 1958, and created Norton Financial Services in 1988. They currently have five offices in Maine and New Hampshire. Norton provides its clients creative, customized insurance and financial services solutions that produce meaningful results, offering workers’ compensation plans, commercial property/casualty insurance, group health insurance, employer sponsored benefit and retirement plans, home and auto insurance, and investment management services to businesses and individuals throughout Northern New England.

6. Greg Bryant Managing Partner, Bedford Strategies and Solutions Greg is a managing partner for Bedford. Since 2002, Greg has successfully established the firm as a recognized industry leader, guiding Bedford in the completion of more than 6,500 cost segregation studies, covering a wide range of property types and sizes. Under his leadership, Bedford has grown to a full time staff of more than 50 and remains at the forefront of the cost segregation services field, providing engineering-based studies to hundreds of real estate owners and accounting firms nationwide. As Bedford looks to the future Greg is positioning the company to play a significant role throughout the real estate life cycle with a focus on innovative consulting services to maximize depreciation, tax credits and other financial incentives for sustainable real estate holdings. Combining experience in development, construction and engineering for more than three decades, Greg has a broad understanding of the commercial real estate industry, ranging from project conceptualization through construction and asset management.

7. Tools for Maximizing Cash Flow in a Recovering Economy Agenda Introduction of Panel Macro Perspective of Each Discipline Case Study on a 40,000sf Mixed Use Facility Questions and Answers

8. Perspective: Brokerage Speaker: Brian O’Brien Viewpoint Current Market Conditions • Vacancy Rates • Industrial: 13% • Office: 18.93% (not including “shadow space”, most likely higher) • Anemic to spotty with signs of hope! Outlook • Tied to job creation • Continued decline through 2013

9. Perspective: Brokerage Speaker: Brian O’Brien Leasing Tips Be aware of current market conditions, comps, and competition. • “Forget about the past, it’s a new world!” Know the cost of vacancy. • Disruption of cash flow months to years • Increased expenses LL must pick up • $4-5 PSF Office • $2-3 PSF Industrial • $1.50 PSF Utilities • Tenant Improvement Dollars: $5-$50 PSF • Leasing Commissions could be 1.5 times normal rates in a soft market. • Professional Service: Attorneys, Architectural, Space Planner, etc. • Leasing Incentive: Required for new tenants. • Tenant Mix: Losing an anchor tenant may make your building less attractive to new prospects. • Higher vacancy rate drives up the cap rate.

10. Perspective: Brokerage Speaker: Brian O’Brien Leasing Tips Continued • “Retain is the Game: • Get a head start with renewals 1-2 years in advance of the expiration. • Give incentives now for a “blend and extend”. • Consider short term flexible arrangements over the next two years.

11. Perspective: Brokerage Speaker: Brian O’Brien Summary • Declining rents through 2013 • Stay abreast of market conditions. • Retain your existing tenants at all costs. • Know the true cost of vacancy.

12. Perspective: Tax Abatement Speaker: Chris Snow Viewpoints • Net Operating Income and Market Value • Market Rents vs. Contract Rents • Comparable Sales vs. Comparable Assessments • Vacancy and Capitalization Rates Process • Tactics for approaching and negotiating with the Assessor • The Appeals Process

13. Perspective: Insurance Speaker: Jeff Begin STATE OF THE PROPERTY/CASUALTY INSURANCE MARKET • Sustained soft market cycle- 8 years in a 6 year cycle • Excess capacity with insurance carriers vs. demand for the products • Prices for most property specific risks are extremely competitive • How does this affect the buyer of the products • Price VS Product

14. Perspective: Insurance Speaker: Jeff Begin BUSINESSOWNERS POLICIES- BUSINESS INTERRUPTION COVERAGE • Not all BOP’s are the same, but most insure loss of rents on actual loss sustained basis • 365 days from date of loss • Most can be endorsed to include 90-120 period of restoration • Define period of restoration

15. Perspective: Insurance Speaker: Jeff Begin CHANGES IN VACANCY - UNOCCUPANCY CLAUSE IMPORTANT CHANGES ISO 2002 Businessowners Coverage Form BP 0003 01 10 • Vacancy •  a. Description of Terms •  (1) As used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in Paragraphs (a) and (b) below: •  (a) When this policy is issued to a tenant, and with respect to that tenant's interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations. •  (b) When this policy is issued to the owner or general lessee of a building, building means the entire build­ing. Such building is vacant unless at least 31% of its total square footage is: •  (i) Rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; and/or •  (ii) Used by the building owner to conduct customary operations.

16. Perspective: Insurance Speaker: Jeff Begin CHANGES IN VACANCY - UNOCCUPANCY CLAUSE IMPORTANT CHANGES ISO 2002 Business owners Coverage Form BP 0003 01 10 •  (2) Buildings under construction or renovation are not considered vacant. •  b. Vacancy Provisions • If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs: •  (1) We will not pay for any loss or damage caused by any of the following even if they are Covered Causes of Loss: •  (a) Vandalism; •  (b) Sprinkler leakage, unless you have protected the system against freez­ing; •  (c) Building glass breakage; •  (d) Water damage; •  (e) Theft; or •  (f) Attempted theft. • (2) With respect to Covered Causes of Loss other than those listed in Paragraphs (1) (a) through (1) (f) above, we will reduce the amount we would otherwise pay for the loss or damage by 15%.

17. Perspective: Cost Segregation Speaker: Greg Bryant Accelerated depreciation can greatly enhance cash flow Data obtained from a properly completed study can be used in the future Studies can be performed on new acquired or constructed properties Our Case Study involves a “Look-Back” approach – No need to amend tax returns Current temporary incentives in place for Qualified Leasehold Improvements Synergies with other incentives related to energy retrofits Has application for properties of approximately $1MM or more

18. Tools for Maximizing Cash Flow in a Recovering Economy Agenda Introduction of Panel Macro Perspective of Each Discipline Case Study on a 40,000sf Mixed Use Facility Questions and Answers

19. Case Study Analysis

20. Case Study Analysis 21 Fourth Street, Dover NH Gross Income: $260,000 Real Estate Taxes: $80,000 Other Expenses:$80,000 Total Expenses: $160,000 Net Operating Income: $100,000

21. Case Study Analysis 21 Fourth Street, Dover NH • BUILDING DATA • 40,000 Square Feet • 1st Floor – 10,000sf Retail “ABC Inc” $12.00 NNN • 1st Floor – 20,000sf Warehouse “XYZ Co” $5.00 gross plus utl. • 2nd Floor – 10,000 Office Vacant - $9.00 NNN asking • PURCHASE DATA • Purchased in 2006 for $2,500,000 • Currently assessed for $3,350,100 • Annual tax burden of $79,564

22. Case Study Analysis: Brokerage Perspective “ABC Inc.” not doing well and wants to reduce overhead by shrinking space in half, 10,000 SF reduced to 5,000 SF office user. Option A Reconfigure space cutting in half and keep tenant same rate PSF. Costs: $30 PSF TI, x 5,000 SF = $150K • Loss of 50% rental income, 5,000 SF x $12 PSF = $70K • Increase expenses of $5 PSF and utilities of $1.50 PSF 5,000 SF x $6.50 PSF = $32,500 or $48.50 PSF $24 PSF over 2 years Option B Reduce rent by 50% for 2 years and stay in the entire 10,000 SF “as is”. Costs: 5,000 SF x $12 PSF = $60,000 x 2 years = $120,000 Which would you choose?

23. Case Study Analysis: Property Tax Advisor Perspective The assessment values the second floor at the same value as the first. The assessment is based on Potential Gross Income that is higher than both market and actual income. The assessment is based on operating expenses that are lower than both market and actual. The Net Operating Income is significantly lower than the assessment model. Current Comparable Sales are limited, but they indicate a lower market value than the assessment. Comparable assessments have been lowered to reflect the current market conditions. • Research complete: Time to meet with the assessor! • Taking the “Bird in Hand” or trying for “Two in the Bush?” Projected Savings: 20% or $15,912

24. Case Study Analysis: Insurance Perspective Business Interruption - Timeframe for most claims scenarios exceed 12 months from date of loss to full lease up Solution - Endorse the policy to add 90 day additional period of restoration. Case study yields $45,000 loss of rents coverage for $30.00! Vacancy Clause - Assuming ABC reduces it’s footprint by $5,000 sq feet, and space remains vacant for more than 60 days – the clause will be triggered Option A: Notify agent/carrier and request that carrier waive the vacancy provision in the policy Option B: If current carrier declines, find a carrier that will waive vacancy clause

25. Case Study Analysis: Cost Segregation Perspective Assuming 39-year straight line depreciation by client since acquisition 12% accelerated to 5 year, 8% accelerated to 15-year Catch-up depreciation of $211,000 for 2010 Tax Return – NO NEED TO AMEND!! $96,000 tax savings (at 40% blended rate) $0.60 PSF tax deduction for lighting upgrade (EPACT 2005) $25,385 in asset write-down for lighting upgrade - $10,150 tax savings Certain tenant improvements would eligible for 100% bonus depreciation in 2011

26. Tools for Maximizing Cash Flow in a Recovering Economy Questions? Brian O’Brien – NAI Norwood Group Chris Snow - Property Tax Advisors Inc Jeff Begin – Norton Insurance Greg Bryant – Bedford Strategies and Solutions