jonathan rose

Green Building Retrofits: Smart Investing, Sustainable Solutions

Jonathan F.P. Rose

November 11, 2011

SMART INVESTING. SMART GROWTH. VALUE CREATION

Jonathan Rose Companies Overview


Today’s world is …

Volatile

Uncertain

Complex

Ambiguous


We are seeking investment opportunities that respond

to VUCA conditions

Volatile Stable

Uncertain Safe

Complex Simple

Ambiguous Supple


The 4 S’s of a Real Estate Investment

Strategy

Stable

Safe

Simple

Supple

• Strong, connected cities

• Controlled supply,

deep market demand

• Focus on cash flow

• Appropriate leverage

• Clear value proposition

• Few dependent factors

• Responds to volatile markets

• Adapts to changing energy and

climate conditions

Jonathan Rose Companies Investment Thesis

Two Investment Strategies

Affordable Housing Strategy

• Core-like risk/return

• 8-12% net IRR / 11-15% gross IRR

Office Retrofit Strategy

• Moderate risk, value-add return

• 15-18% gross IRR

High cost-of-living, high barrier-to-entry cities:

Jonathan Rose Companies Target Markets

Seattle

Portland

San

Francisco

Los Angeles

Denver

Chicago

Washington, DC

New York City

Boston


Strong cash flow and low-risk returns through green affordable

housing.

• Affordable housing in the right cities = strong and reliable income

• Plentiful supply of low-cost, long-term, non-recourse debt

• Green strategies and hands-on asset management reduce/control expenses & lead to strong

capital appreciation

• Passive resilience provides a hedge against volatile energy prices availability of resources

• Target IRR: 8-12% net / 11-15% gross

• 4-6% annual cash-on-cash return

• Supply / Demand Imbalance

° High cost-of-living in major urban markets creates affordability burden

° 95%-100% occupancy rates and long tenant waiting lists

° National average vacancy rate in project-based Section 8 < 5%

• Steady income stream access to low-cost, long-term financing


Opportunity for strong cash flow and significant capital appreciation

through acquisition of high-demand product.

Jonathan Rose Companies Opportunity

35%31% 29% 32% 29% 28%

32% 29%25% 26%

32%27% 28%

23%

27%30% 32% 28%

30% 31%27%

29%33% 31%

24%29% 27%

32%

0%

10%

20%

30%

40%

50%

60%

70%

% Income Spent on Housing % Income Spent on Transportation

* Source: Center for Neighborhood Technology

The Transportation + Housing Affordability Burden

Jonathan Rose Companies Investment Strategy: Target Product

Project Types:

• Federally subsidized rent contracts (project-

based Section 8)

• Tax credits leveraging private capital (Low-

Income Housing Tax Credit)

• Mixed-Income (50/30/20 and 80/20 programs)

• Rent Stabilized / Rent Controlled

Acquire well-located affordable

housing with in-place cash flow

Jonathan Rose Companies Investment Strategy: Tailored Capital Improvements

• High-leverage, low-cost technologies

• Grants / incentives that defray costs

• Reduced energy costs, reduced R&M

costs, reduced environmental impact

• Retrofits can yield 25-40% efficiency gains

with modest investment*

Implement practical green capital

improvements that yield paybacks

* Source: Government Accountability Office

Jonathan Rose Companies Investment Strategy: Active Asset Management

• Energy Benchmarking

• “Living Green” Guides

• Smart-Plug Technologies

• Tenant Meetings

Encouraging tenant behavior that reinforces green

capital investments and creates sense of community.

Jonathan Rose Companies Case Study: 107-145 West 135th Street

Public

Library

Harlem

Hospital

Public

School

Harlem

YMCA



AfterBefore

Project Summary


Acquisition Date:

Purchase Price:

Appraised Value:

Occupancy:

NOI Increase

12/22/2008

$26.5 million

$39.4 million

98%

84%


Class B Office Retrofits =

Prime Value-Add Investment

• Assets can be acquired at below replacement

cost

• Potential for high-multiple returns through

well-executed capital and leasing programs

• Diverse multi-tenant rent rolls that spread

risk & preserve cash flow

• Hedge against volatile energy prices

• Target IRR: 12-15% net / 15-18% gross


* Source: Cushman & Wakefield

Urban markets outperform suburban markets

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211

U.S. Office Vacancy Rates

CBD Vacancy Non-CBD Vacancy


* Source: CBRE

Value-add opportunity

Market Class A Stabilized Cap Rate Class B Value-Add Cap Rate

Boston 6.50% - 7.00% 8.00% - 9.00%

Chicago 6.25% - 6.75% 7.75% - 8.25%

Denver 6.25% - 7.25% 8.50% - 9.50%

Los Angeles 5.50% - 6.50% 7.00% - 8.00%

New York City 5.50% - 6.00% 6.50% - 7.50%

Philadelphia 6.50% - 7.50% 9.00% - 10.00%

Portland 7.50% - 8.50% 9.00% - 10.00%

San Francisco 6.00% - 7.00% 7.00% - 7.75%

Seattle 6.25% - 7.00% 8.25% - 8.75%

Washington, DC 5.50% - 6.25% 7.00% - 8.00%

Jonathan Rose Companies Investment Strategy: Target Locations

• Enable businesses to attract top talent

• Class A locations for companies seeking

downtown amenities at Class B rents

• More resilient markets with steadier

occupancy

Smart Growth = Smart Investing

Jonathan Rose Companies Investment Strategy: Target Product

• Centrally located Class B buildings

• Underperforming assets that offer

opportunity for repositioning & rebranding

• Frequently with historic elements that can be

leveraged to enhance tenant appeal

• $15-50 million range

Acquire well-

located, underperforming office

assets

Jonathan Rose Companies Investment Strategy: Repositioning

• Strategic building upgrades to enhance appeal

° Competitive leasing advantage

• Green retrofit to control operating expenses

° Up to 35% reduction in energy use

° $.50 p.s.f. in cost savings

• Green, hands-on asset management

° Reduce turnover

° Drive NOI (growth as high as 76%)

Perform Value-add Repositioning

and Rebranding

Jonathan Rose Companies Vance & Sterling Buildings, Seattle, WA


V

Benaroya

Hall

Pike

Place

Market

Source: ARUP


Source: Effective Design Studio | Francis Zera



AIA SEATTLE

WHAT MAKES IT GREEN?

2009 REGIONAL TOP 10

AWARDS

Project Summary


Acquisition Date:

Purchase Price:

Improvement Cost:

Appraised Values:

Occupancy:

NOI Increase:

4/12/2006

$23.1 million

$3.5 million

$25.2 MM, 3/10

$34.5 MM, 1/08

90%

36%

Green Building Retrofits: Smart Investing, Sustainable Solutions

Jonathan F.P. Rose

November 11, 2011

SMART INVESTING. SMART GROWTH. VALUE CREATION

jonathan rose

Education

green affordable housing

green capital investments

sustainable solutions

annual cash

net irr

gross irr high cost

cities controlled supply

investment opportunities