Real estate fund manager market validation discussion document final

RE Fund Manager Market Validation Discussion Document 1 CONFIDENTIAL AND PROPRIETARY

Real Estate Investment and Funds Management Operational and Infrastructure Challenges Implications for BPO Usage

Discussion Document for Market Validation Interviews

This document is confidential and is intended solely for the use and information of the client to whom it is addressed.

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Table of Contents

Introduction and Discussion Topics 3 Real Estate Investment and Funds Management Market

- Technology and Services Market Overview 5

Results of Real Estate Software Market Validation Interviews 10

Real Estate Investment and Funds Management Market - Operational Challenges and Industry Grievances

15

Implications and Conclusions for Real Estate Investment and Funds Management Back Office / Business Process Outsourcing (“BPO”) Solutions

22

Appendix - Firm Overview, Selected Experience Profiles and Case

Studies

28

Real Estate Investment and Funds Management Operational and Infrastructure Challenges Implications for BPO Usage




Introduction and Discussion Topics




Introduction and Discussion Topics FrontLine Partners is engaging with customers and participants in the real estate investment management market regarding the state of back-office support and software solutions

Introduction

Engage in an Information Exchange

that will Promote Education

About Operational Challenges / Industry Grievances / Issues

Assist You in Determining the Right

Way to Move Your Company Forward in Exploring Back-Office and BPO solutions in

the Funds Management Market

Provide an Overview of the RE Fund Manager

Technology and Services Market and

Share Our Views

Understand Your Thoughts and Views

About Back-Office and BPO Solutions and Their Place in Real

Estate Funds Management

Our purpose is to share our view of operational & infrastructure

challenges in the RE fund manager market, discuss state of software and

back-office solutions, and explore potential BPO solutions




Real Estate Fund Manager Technology and Services Market Overview

» Project Framework and Timeline

» Project Methodology and Approach

» Key Document Section Description




The market grew approximately 200% in funds (386% on fund size) from 2004 to 2008, but has since plateaued and started to rebuild itself after the financial market back-up in late 2008 and early 2009.

FRONT-END GROWTH DRIVERS

2004 (#)

2005 (#)

2006 (#)

2007 (#)

2008 (#)

2009 (#)

2010 (#)

2011 (#)

2012 (#)

Opportunity NA NA 93 118 153 168 186 191 193

Value-added NA NA 102 158 180 161 119 128 125

Core-plus NA NA 27 45 55 38 26 26 30

High-Yield Debt NA NA 28 44 54 73 67 62 59

Fund of Funds NA NA 7 17 24 26 17 20 22

Total # Funds 159 205 257 382 466 466 415 427 429

Total # Fund

Operators 121 139 206 280 355 361 342 346 359

Aggregate Equity

Goals ($B) $64 $90 $130 $235 $311 $312 $241 $244 $239

Real Estate Fund Management Growth Characteristics (2004-2012)

Source: Real Estate Alert 3/14/2012




FRONT-END GROWTH HAS SIMPLY OUT-STRIPPED BACK END SUPPORT

Real estate performance has fueled investor demand as a separate asset class and significant queue of capital raised; seeking deployment to manage risk and returns.

Significant growth in number and size of funds, as well as number of fund operators

REITs are increasingly crossing over into the fund management market (either directly by adopting the funds management model or via JV’s and co-investment programs).

Globalization of the owner/operator sector is a key trend in this sector, as exemplified by the latest estimates of 244 REITs in 24 countries.

28 countries are likely to have REITs in the next 24/36 months.

Business Growth Drivers

Currently, software providers can not handle the complex layers of visibility from property level all the way through to fund and investor reporting level.

There is a shortage of software solutions in the market, so there is a high degree of customization to platforms.

Significant industry wide operational and infra-structure challenges are facing the real estate investment management market

Data Standards

Document Management

Operational and Process Hand-offs

Complexity in Accounting and Financial / Investor Reporting

Need for Greater Portfolio Risk Management and Transparency

Gaps in Software and Back-Office Solutions

Front End Growth Has Simply Out-stripped Back End Support Tremendous growth has occurred in the institutional real estate investment management market. However the software and back-office solution providers have failed to keep pace. As a result, too much time, energy and efforts are spent by high priced fund management staff on basic data management, accounting and reporting functions.




Market Structure and Need for Reporting / Analytics Most real estate investors are at least “arms length” from understanding and predicting the cash flow returns from the underlying asset, and need greater performance analytics and risk management solutions to drive decisions impacting fund / investor returns

Property Managers

REITS (Private, Public)1

Fund Managers

Pension and Asset Funds

What They Do …

Manage properties as owners or as sub-contractors to REITS

Their objective is to operate the building and maximize return at the asset and tenant level

Provide pools of capital to invest in assets (buildings)

Their objective is to make good decisions about which assets to purchase, determine how they should be operated,

and to maximize returns at the portfolio level

Their objective is to place capital that can be invested in real estate to return a predictable range of

cash flows / returns to the portfolio/fund

Place capital with real estate owners

Manage money for retail and institutional investors

Their objective is to determine the correct investment strategy for their investors and place the funds in the correct asset class (stock, bonds,

real estate) to achieve those returns

Who They Are …

Inst

itut

iona

l In

vest

ors

Rea

l Est

ate

Com

pani

es

What They Need …

Emphasis on NOI, tenant lease rollovers typically handled in Argus, Excel

Consolidated tenant and asset data for decision making and reporting to fund managers or Wall Street, plus the ability to model what-if scenarios and forecast at the portfolio and entity level

Consolidated asset cash flows and unit returns from real estate owners plus the ability to model what-if scenarios and forecast at the portfolio / fund level and return / distributions calculators

Consolidated asset cash flows and unit returns from fund managers plus the ability to model what-if scenarios and forecast at the portfolio level, plus comparisons across investments and fund managers

Note: (1) Select REITS may utilize a fund management business model but are still considered real estate companies (e.g., Kimco, HCP)

R/E Fund & Investment Market Structure and Requirements




Information Requirements – A Large Gap in Where to Focus Real estate companies want to value and project on asset and tenant data, while institutional investors want to value and model on cash flow and investment return basis

Property Managers

REITS (Private, Public)1

Fund Managers

Pension and Asset Funds

Their objective is to operate the building and maximize return at the asset and tenant level

Their objective is to make good decisions about which assets to purchase, determine how they should be operated,

and to maximize returns at the portfolio level

Their objective is to place capital that can be invested in real estate to return a predictable range of

cash flows and returns to the portfolio/fund

Their objective is to determine the correct investment strategy for their investors and place the funds in the correct asset class (stock, bonds,

real estate) to achieve those returns

Real Estate Market Players

Inst

itut

iona

l In

vest

ors

Rea

l Est

ate

Com

pani

es

Note: (1) REITS can look like fund managers but are still considered real estate companies (e.g., Kimco, HCP). (2) Information needs flow upwards while the capital flows down.

Information Needs2

Tenant and Asset Information

Multiple Properties

Owner Owner Owner

Asset Level Information,

Ability to model forward looking

returns and what-if scenarios

Capital Source

Capital Source

Asset and Tenant Driven

Cash Flow & Investment Return Driven

Financial/Return Information,

Ability to model forward looking

returns and what-if scenarios

Capital Source

Market Information Requirements

Ownership / Investment



10 RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL

Results of Real Estate Software Market Validation Interviews





R/E Software Market Validation Interview Targets In connection with a significant corporate development project in the real estate software market, we conducted a number of high level market validation interviews. We interviewed an average of five to six companies in each market segment.

Role

Ow

ner/

O

pera

tor

Cap

ital

Mar

kets

Company Description

SVP and CIO

Vice President of IT

Former (Retired) CIO

Global CIO

EVP and COO

CTO

Executive Vice President (COO)

Retail Owner Operator


Multi-family Owner Operator


Capital Markets Lender Servicer

Investment Manager

Vice President of Technology

Investment Manager

Lender Servicer

CTO Multi-Family Owner Operator

President Investment Manager

SVP Investment Manager

Note: Corporate Real Estate Sector excluded from this summary extract


There is a gap in the real estate software market offering; specifically in the

capital markets, owner/operator, and corporate real estate segments.

Hypothesis Conclusions

Our interview candidates agreed with this hypothesis. Most believed that the gap is

widening; and current players were unlikely to be able to close the gap on their own.

The real estate software gap is more pronounced in business analysis,

intelligence, and integration functionalities.

Respondents in capital markets and owner/operator agreed that there were very

few mature BA and BI products. The respondents all noted issues with integration

& access to data from multiple sources.

Real estate companies are looking for more robust solutions across their business – more than just

point to point solutions.

One of the strongest conclusions from the interviews is the real estate industries desire to have a unified offering that could meet at

least 70 percent of their overall needs.

Market Validation Interview Conclusions Overall, respondents confirmed our hypothesis that the real estate software market is limited in its ability to deliver the required solutions to the market


Key R/E Software Market Validation Interview Quotes

Market/Product Specific

» “There is a lot of data coming from lots of places. No industry standards. Spending lots of time integrating.”

» “Reporting, scenario analysis, modeling and what-if’s are very difficult to do”

» “From a technology perspective, the industry has fallen short of delivery.”

» “If the solution meets our needs we are willing to pay for a one-stop-shop.”

» “The market needs a provider to build a solution to meet our needs”

» “The market is looking for a clear software leader.”

Current Technology Provider Specific

» “We also need real estate technology vendors that are committed to the industry long term.”

» We have lower expectations for generic software providers and higher expectations for real estate market players.”

» Market is full of small players with limited resources & vision”

» “Real estate software companies could do a better job of leading real estate companies.”

» “Current vendors by themselves cannot meet long-term needs of the market“

» “Our technology providers only grow when we grow, this needs to change.”

» “They need stability, focus & capital”

Key Interview Quotes

Overall, interview respondents validated the need for more robust solutions in the real estate software market


Score Card Summary – Capital Markets (Funding) The top software providers in capital markets (funding) focus on asset management and property accounting but come up short on fund management, deal analysis and investor reporting Capital Markets (Funding) Interview Score Card

» Deal Analysis and Management

» Reporting (JV Partner) Investor Relations

» Asset Funding

» Legal Compliance

» Accounting/Back-office

Market (Functional) Requirements

Technology Overview

Technology Provider Overview

Average Technology Expenditure

$0-10M $11-20M $20+M

Average Degree of Technology Adoption

Limited Follower Leader

» Deal Analysis » Investor Reporting » Asset Management » Accounting/Back-office

Key Technology Challenges

Key Uses of Technology

Top 3 Vendors

» Yardi » MRI » Argus

» Utilization of spreadsheets. » Complex modeling with limited time and

tools. » Increasing investor reporting

requirements and limited technology to provide information at the asset level.

» The market needs more integration between

software components.

» Software providers in the market have limited means to conduct BA and BI. They are mainly focused on offering transaction management.

» The market has limited solutions for work flow and collaboration.

» There is a clear opportunity to provide functionality to the capital markets (funding) segment that current providers do not offer.

Key Conclusions Strengthens » Yardi has a solid financial system for

property management and entity level accounting.

» MRI is best known for its flexibility. » Argus has a good cash flow system.

Weaknesses » The software providers do not have a

global offering. » The software providers do not have

integration capabilities. » Neither software vendor have good real

estate SME resources.

Vendor Analysis




R/E Investment and Funds Management Market - Operational Challenges and Industry Grievances







A bewildering array of evolving industry standards creates challenges for data standards and consistent industry definition sets or benchmarking

Key Operational Challenges and Industry Grievances

Operating Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.)

Data Standards

Operational Challenge Industry Grievances or Issues

There are a variety of evolving industry standards – depending on scope (i.e. accounting, tax, reporting, valuation, etc.); however no uniformly accepted data definition set and consistent benchmarking. Accounting treatments

GAAP, FASB (13, 141, 157, 159, etc.) IFRS

Tax treatments & practices

Standard & influencing bodies

NCREIF, NAREIT, NAREIM INREV, EPRA OSCRE, PISCES ALFI

Valuation mechanisms

Indexes Lease-based DCFs

Performance measures & reporting

NCREIF, etc. AMIR, AMIR Gibson IPD




Data management challenges pose one of the largest time drains of highly paid fund management talent, suggesting an opportunity for data warehousing and management

Key Grievances and Operational Challenges

Operational Challenges & Industry Grievances (R/E Inv. & Funds Mgmt.)

Operating Challenge Industry Grievances / Issues

Data Management (Collection/Ware-

housing and Mgmt.)

Processes for collections and management of data which worked on small scale are simply inefficient given size of industry

Talented, highly paid real estate personnel spend too much time chasing and inputting data.

Credibility of data used to manage investments and report to investors is too reliant on manual data entry with no (or limited) repeatable controls to assure consistent treatment of the data.

Fund managers and their operating partners use an array of financial reporting and property management systems.

Systems include: MRI, Yardi, CTI, JDE/Peoplesoft, Treesoft and other systems

Fund managers have to extract select information to run high level portfolio reports to measure asset and fund level performance

Collecting and processing information from operating partners is typically inefficient and cumbersome, with little real protocols followed.

Complications / complexity stems from fund manager receiving data from multiple heterogeneous sources (and systems) that don’t use same data process, data requirements and /or data definitions.

Data consolidation and data integrity issues are common

Principally due to manual consolidation of reports to portfolio level reports;

Very little time for quality data analysis as majority of time in compilation




The back-office support environment is woefully under-equipped for the significant growth in number of funds and assets under management

Key Operational Challenges and Industry Grievances

Operational Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.)

Operational Challenge Industry Grievances / Issues

Lack of integration, along with a proliferation of manual processes foster complexity, threatens data integrity

Manual processes are costly. The cost of the time and resources required increases operating expenses and impacts the organization’s ability to meet growth targets and focus on its core business – delivering financial returns to its investors

Business processes are often inconsistent at the property level Limited to nominal sharing of industry best practices in any meaningfully

coordinated way at the industry level

Operational Processes & Hand-offs

Growth in number and complexity of legal entities based on fund structures and other factors has resulted in varying processes, policies and use of systems across the fund manager organization with increasingly impacts the ability of the organization to effectively report on critical information

Dissimilar and manually intensive accounting, financial reporting and analysis processes for fund operations impact the visibility across the portfolio / fund / firm’s overall holdings. As a result, interaction with and responses to joint venture partners, investors and analysts (if public) is affected.

Complexity in Financial Accounting / Investor Reporting

Portfolio Risk Mgmt. / Reporting / Transparency

The industry must now manage risk – real and perceived – much more aggressively. The loaded people cost (including hiring, training, retention and management) to support the asset (risk) management function has become a large operational expense.

Return pressures over the past few years have caused more demands from investors on the fund manager for greater transparency




Investor Interface and Reporting

Investor Information Structure / Complexity for Transparency Fund managers must account for varying degrees of ownership and have the ability to aggregate / synthesize data across multiple levels (i.e. investment, fund level, investor level, etc.) to meet increasing investor demands for transparency

Information Structure Consolidated

Investor

Investor

Portfolio

Fund / Separate Account

Investment Level

Property

Building

Investor

Office Bdg. 1 Office Bdg. 2 Premises Industrial Portfolio

1001 1002 1003 1004 1005 1006 1007

Consolidated Properties Fund Activity

Fund & Portfolio

B1 B1 B1

B1 B1 B1 B1 B1 B1

B1 B1 B1 B1




Investor Interface and Reporting

Investor Information Structure Investors rely on information gathered from the property locations to make critical investment decisions and complete the reporting cycle

Our

Foc

us

Source: Real Foundations, Whitepaper –Maximize Real Estate Fund Performance




Operational Processes and Multiple Hand-Offs

Property Mgmt.

Unrelated Databases by Property Inefficient Data Entry Multiple Charts of Accounts

Asset Mgmt

Reliance on Property Managers Lack of Timeliness Manual Data Transfer Into Multiple

Analysis and Report Tools

Portfolio Mgmt

Resource-intensive Data compilation vs. Data Analysis Manual Calculations & Reporting

from Multiple Sources

Investment Mgmt

Risk of Non-compliance with Industry Standards

Potential Loss of Credibility with Investors

Hindrance of Capital Growth

Property Manager

A

Property Manager

B

Property Manager

C

Leasing Agents

Valuation Lawyers Bankers Lawyers Leasing Agents

Investor

1

Investor

2

Investor

3

Quarterly Information & Performance

Portfolio

1

Portfolio

2

Tenants

ASSET MGMT.

QRTLY Operational

Data

Monthly Financial Data

Lack of integration, along with a proliferation of manual processes foster complexity and threatens data integrity and reliability

Source: Real Foundations, Whitepaper –Maximize Real Estate Fund Performance




Implications and Conclusions for Real Estate Fund and Investment Management Back-office BPO solutions







Funds Management Value Chain Our initial assessment suggests that portfolio management and finance, investment management and fund administration be considered for back office / BPO solutions

Investment Strategy/

Market Research

» Strategy Formation

» Data collection, storage and integration

» Compilation / interpretation of analysis

» Aggregation / distribution of analytics output

• Purchase of external data

• Size of in-house research team

Capital/ Fund

Formation

» Investor/ partner

acquisition » Fund Formation » Partnership

structures » Relationship

management

• Number of clients, funds and structures

• Size of capital investment

Key Processes

Key Cost

Drivers

Fund Management Value Chain

Operational Infrastructure Support

Acquisition and

Dispositions

» Deal sourcing » Market analysis » Due diligence » Underwriting » Buy – Sell – Hold

analysis » Disposition

marketing

• Number of transactions

• Complexity of investment / type and variety of asset types

• Portfolio turnover

Property Management

» Tenant services delivery

» Tenant relationship Management

» Lease Administration

» Vendor Management

» Facilities Management

» Billing and Collections

» Invoice Management

• Number of portfolios

• Number of investors

• Leverage of operating partners

Property Accounting

» Budget / forecasting

» A/R billing and collections

» A/P / purchasing

» Financial reporting

» Closing

• Number of properties

• Portfolio roll-ups • Degree of

leverage by operating partners

Portfolio Management and Finance

» Business plan management

» Performance monitoring and reporting

» Debt management

» Fund tracking » Return/cash flow

calculations

• Number of portfolios

• Complexity and variability of underlying investments

• Tiering of Funds

Investment Management

» Investment management

» Investor or joint venture reporting

» Investor communications

» Industry compliance » Maximizing returns » Capital planning and

deployment

• Number and complexity of investor requirements

• Fund vs. programmatic vs. separate account

Fund Administration

» Fund accounting

» Statement generation

» Fund statutory and regulatory reporting

» Cash inflow/ ouflow record keeping

• Number of portfolios / funds / partnerships

• Variability in capital call and funding needs

Degree of Inclusion

Indicates primary segments for BPO solutions High Probability Low Probability Med. Probability




Fund /Portfolio Administration & Reporting

Asset Management Fund Management

Real Estate Investment Management – Functional ‘Environment’

Strategic Research / Fund Setup » Macro Research » Regional Research » Country Research » Product Research » Fund Strategy Dev. » New Fund Approval » New Fund Launch

Sourcing » Market Research » Deal Review » Feasibility Analysis » Underwriting Cash Flow » Sourcing to Fund » LOI / MOU » Deal Package Prep » Investment Approval

(Preliminary)

Post Acquisition » Deal Structuring » Entity Structuring » Asset Mgmt.

Agreement » Engage Svc. Providers » Document Turnover » Asset Takeover » Data Conversion » Asset Mgt. Handoff

Acquisition » Full Due Diligence » Financing » Market Appraisals » Purchase/Sale

Agreement » Investment Approval

Final » Closing

Investment Administration » Investor Relations » Investor Communications » Investor Reporting

Investor Marketing/ Communications » Investor Targeting » Fund Road Show » Investor Recruitment » Investor On-boarding » Event Management » Marketing Mgmt. » Investor Queries » Fund Cross Selling

Asset Management » Business Plan Mgmt. » Performance Monitoring

Property Valuation

» Provider Selection » Data Setup/Validation » Assumption Validation

• Capital Expense • Income • Market • Global

» Property Valuation » Annual Valuation

Finance » Capital Planning » Capital Development » Cash Flow Mgmt. » Cash Forecasting

Debt/Equity Mgmt. » Debt Management » Equity Management » Debt/Equity Reports

What-If Analysis » Assumption Definition &

Refinement » Portfolio/Fund What-If

Analysis Fund Accounting

» Fund Structuring » Fund Accounts Setup » SPV Accounting » Hold Co Accounting » Cash Position Tracking » Capital Call Calc. » NAV Calculations » Fee Calculations » Monthly Closing » Hedge Accounting

Fund Administration » Entity Setup » Capital Call Statement » Capital Acct. Tracking » Tax Compliance » Safe-Keeping » Trustee & Fiduciary

Supervision » Entity Wind Down

Portfolio/Fund Reporting » Monthly Actuals » Asset Mgmt. Report » Quarterly Fund Report » Return/Cash Flow

Analysis » Property Performance

and Metrics Evaluation

Data Movement & Storage » Communications (w/ Data Sources &

Consumers) » Oversight of Inbound & Outbound Data

Fidelity

Investment Selection

Data Refinement » Data Adjustments (within limits)

Data Governance » Data Standard Definition & Maintenance

• Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts

Asset Data Aggregation

KEY: Fund Manager Client Functions

Fund / Portfolio Admin & Reporting

Data Aggregation / Mgmt.

Property Svc. Provider Functions

Property Reporting » Financial Reporting » Ops Reporting » Capital Projects Reporting

Asset Accounting » GAAP Translations » GAAP Adjustments » Ownership/ / Partnership

Entries » Tax Entries

Asset Controlling & Reporting

Dispositions » Hold / Sell Analysis » Bid / Deal Structuring » Disposition Approval » Wind Down

Billing & Collections » Lease Administration » Billing Setup » Monthly Billing » A/R & Collections

Tracking

Leasing » Market/Business Dev » Leases Execution » Lease Renewals » Lease Forecasting

Property / Building Mgmt. » Property Management » Facilities Management

Property Accounting » CAM Reconciliation » Property Accruals » Capital Expenditures » Bank Reconciliations

Accounts Payable » Vendor Setup » Invoice Management » Check Generation

Capital Projects / Development Mgmt. » Design » Bidding & Contracting » Project Management » Construction Accounting & Rptg.

Property Budgeting » Rent Roll Setup » Income & Exp.

Assumptions » Op Expense Budgeting » Cap Expense Budgeting » Budget Approval

Property Operations, Accounting & Budgeting

Fee Establishment » Asset Mgt. Fees » Performance Fees » Development Fees

JV Accounting Oversight / Interface » Financial Reporting

Review » Ops Reporting Review

» Accruals & Allocations » FX Conversions » Other Non-Cash

Adjustments » Month-End Close Potential Additional Real Estate Functions




Sourcing • Market Research • Deal Review • Feasibility Analysis • Underwriting Cash Flow • Sourcing to Fund • LOI / MOU • Deal Package Prep • Investment Approval (Preliminary)

Post Acquisition • Deal Structuring • Entity Structuring • Asset Mgmt. Agreement • Engage Svc. Providers • Document Turnover • Asset Takeover • Data Conversion • Asset Mgt. Handoff

Acquisition • Full Due Diligence, Financing • Market Appraisals • Purchase/Sale Agreement • Investment Approval Final • Closing

Investment Selection

Dispositions • Hold / Sell Analysis • Bid / Deal Structuring • Disposition Approval • Wind Down

REAL ESTATE INVESTMENT MAAGEMENT – FUNCTIONAL ‘ENVIRONMENT’

Asset Management • Business Plan Mgmt. • Performance Monitoring

Finance • Capital Planning • Capital Development • Cash Flow Mgmt. • Cash Forecasting

Property Valuation • Provider Selection • Data Setup/Validation • Assumption Validation • Capital Expense • Income • Market • Global • Property Valuation • Annual Valuation

Asset Management

Debt/Equity Mgmt. • Debt Management • Equity Management • Debt/Equity Reports

What-If Analysis • Assumption Definition &

Refinement • Portfolio/Fund What-If Analysis

Fund Management

Fund Accounting • Fund Structuring • Fund Accounts Setup • SPV Accounting • Hold Co Accounting • Cash Position Tracking • Capital Call Calc. • NAV Calculations • Fee Calculations • Monthly Closing • Hedge Accounting

Fund /Portfolio Administration & Reporting

Investor Marketing/ Communications • Investor Targeting • Fund Road Show • Investor Recruitment • Investor On-boarding • Event Management • Marketing Mgmt. • Investor Queries • Fund Cross Selling

Strategic Research/ Fund Setup • Macro Research • Regional Research • Country Research • Product Research • Fund Strategy Dev. • New Fund Approval • New Fund Launch

Investor Relations • Investor Communications • Investor Reporting

Fee Establishment • Asset Mgt. Fees • Performance Fees • Development Fees

Fund Administration • Entity Setup • Capital Call Statement • Capital Acct. Tracking • Tax Compliance • Safe-Keeping • Trustee & Fiduciary

Supervision • Entity Wind Down

Portfolio/Fund Reporting • Monthly Actuals • Asset Mgmt. Report • Quarterly Fund Report • Return/Cash Flow Analysis • Property Performance and

Metrics Evaluation

Process Selection for Inclusion in BPO / Back-Office Solutions To begin our initial assessment, we’ve highlighted in red, those functions that would be candidates for further screening / analysis




Asset Controlling & Reporting KEY:

Property Operations, Accounting & Budgeting

Fund Manager Functions

Fund / Portfolio Admin & Reporting

Data Aggregation / Mgmt.

Property Svc. Provider Functions

Potential Additional Real Estate Functions

REAL ESTATE INVESTMENT MANAGEMENT – FUNCTIONAL ‘ENVIRONMENT’

• Rent Roll Setup • Income & Exp.

Assumptions • Op Expense

Budgeting • Cap Expense

Budgeting • Budget Approval

Property Budgeting

• CAM Reconciliation

• Property Accruals • Capital

Expenditures • Bank

Reconciliations

Property Accounting

• Lease Administration

• Billing Setup • Monthly Billing • A/R &

Collections Tracking

Billing & Collections

• Vendor Setup • Invoice

Management • Check

Generation

Accounts Payable

• Property Management

• Facilities Management

Property / Building Mgmt.

• Market/ Business Dev

• Leases Execution

• Lease Renewals • Lease

Forecasting

Leasing

• Design • Bidding & Contracting • Project Management • Construction

Accounting & reporting

Capital Projects/ Development Mgmt.

Property Reporting • Financial Reporting • Ops Reporting • Capital Projects Reporting

Asset Accounting • GAAP Translations • GAAP Adjustments • Ownership/ Partnership Entries • Tax Entries

Accruals & Allocations • FX Conversions • Other Non-Cash Adjustments • Month-end Close

JV Accounting Oversight / Interface • Financial Reporting Review • Ops Reporting Review

Data Aggregation / Management

Data Governance • Data Standard Definition & Maintenance • Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts

Data Movement & Storage • Communications (w/ Data Sources & Consumers) • Oversight of Inbound & Outbound Data Fidelity

Data Refinement • Data Adjustments (within limits)

Process Selection for Inclusion in BPO / Back-Office Solutions To begin our initial assessment, we’ve highlighted in red, those functions that would be candidates for further screening / analysis.




» On the whole, software providers in real estate are not evolving quickly enough to meet the needs of the money sources (e.g., REITs, fund managers). They view the market from a property management (asset) perspective and not a financial (cash flow) perspective. Additionally, the market is going global and most providers lack the financial resources to go global.

» REITs, funding sources, and investment fund managers require more sophisticated analysis on cash flows. They want to achieve modeling capabilities that exist in equity and fixed income markets. They do not currently have the tools or methodologies to analyze risk, what-if scenarios, portfolio benchmarking and modeling.

» Current software providers are enabling real estate companies to do very basic investor reporting and income distribution. They are not enabling the higher value modeling and portfolio management required by the financial institutions.

» Software providers see the growth in moving from property management to investment/portfolio management in real estate and going global. We believe the real opportunity is providing those services and solutions to the financial services companies and institutional investors.

» We believe a dedicated real estate funds administration / BPO firm focused on this market will enable clients to continue to focus on activities that are higher value, than data collection, management and reporting

Conclusions

Implications and Conclusions for R/E Fund & Investment Mgmt. Real estate software providers have not provided the depth of service required by investors and owners – the software model has not been widely embraced and the market is open to new service based solutions



28 CONFIDENTIAL AND PROPRIETARY

Firm Overview

Select Experience Profiles (BPO/Optimization)

Select Case Studies

Appendix



29 CONFIDENTIAL AND PROPRIETARY

FrontLine Partners - Market Offering and Focus

FrontLine Partners tailors our services to meet the requirements of each of the market segments we support. Each of our customers requires different approaches to building or restructuring their business; some businesses require a consultancy approach while others require a deeper operating partnership. Whatever the requirement, our firm's partners and experts can deliver the required execution and long-term support.

We bring our knowledge and market access to our clients

Business Strategies and Feasibility Research

Business Formation and Launch

Acquisition (Buy Side) Due Diligence

Pre and Post Merger Integration

Troubled Loan / Asset Workouts

Portfolio and Risk Management Reviews

Ser

vice

Offe

ring

Our typical clients are: » Owners / Operators / Developers

» Lenders (Portfolio / Securitized)

» Institutional Investors

» Fund Managers

» Intermediaries

» Service Providers

» Technology Providers

Corporate Entity Level Restructuring

BPO / Operations Diagnostics

Our Services Include …




FrontLine Experience with BPO / Enterprise Optimization

Client or Employer*

Industry Project Profile Outcome

New Plan Retail REIT

Outsourcing strategy and migration of over 100 retail accounting jobs offshore for a top ten retail REIT

» Formulated outsourcing strategy after considering range of control options (captive, BOT, supplier);

» Identified, evaluated and selected supplier through RFP and competitive bidding process

» Advised on three year supplier contract » Created enterprise cost savings and better A/R collection

New Plan / GRO retail industry JV

Retail REIT industry JV

Planning for industry JV for retail accounting captive

» Conducted initial planning and JV structuring formation for industry JV targeting captive Build – Operate – Transfer model for major Retail REITs

ING R/E R/E Fund Manager

Operational Process Improvement

» Conducted core process improvement across entire real estate fund management platform

Security Capital Group*

Public R/E Investment Company

Developed and oversaw shared service center supporting multiple entities

» Transformed shared services of a global, public real estate company with investments in major real estate operating businesses with over $26 billion in total assets.

Top Five R/E Fund Manager

Real Estate Fund Manager (in process)

Shared service center feasibility for back office fund mgmt. functions

» Subcontractor to consulting firm assisting large real estate fund manager evaluate feasibility and operating migration plans for shared service center

BNY Asset Solutions

Rated Master and Special Servicer

Turn-around rated servicer for Bank of New York

» Turned around BNY servicing subsidiary ($16B of servicing, 90+ institutional accounts, 70+ employees, and six business lines) in one year

Ocwen Financial*

Global BPO Business for Resi Mortgages

Build and manage Global BPO business - Mortgages

» Built and managed Ocwen’s BPO business for mortgage outsourcing to number 2 position in the world

FrontLine Partners – Selected Experience Profiles (BPO/Optimization)



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FrontLine Partners Case Study

For a leading retail REIT, FrontLine Partner Jim Vincent assisted client with BPO strategy formulation, supplier selection, contract structuring and process migration.

Results Objective

» Evaluate BPO strategies and options after existing off-shore supplier was acquired by larger company, causing the supplier to steadily lose focus on our client’s account

» Re-evaluate BPO strategy and structural / control options to minimize risk of repeat circumstances

» Address client’s desire to broaden the outsourcing platform beyond existing work on CAM recovery pools to broader retail accounting services (six functional processes)

» Find a supplier (and partner) who could evolve to truly take on the recurring BPO work as part of their operations

» Assisted client in evaluating several different outsourcing options ranging from strategic sourcing, Build-Operate-Transfer, joint venture and building out a captive BPO platform

» Led evaluation of BPO strategy selection across seven forms of ownership and control options, based on five core criteria and 13 decision elements

» Prepared RFI materials for short list of suppliers to capture relevant information to evaluate providers

» Conducted evaluation, due diligence assessment and selection of outsourcing provider to meet client’s objectives in off-shoring selected processes, as well as criteria to serve as a joint venture partner

» Provided transaction structuring, negotiations and closing support on the supplier contract, including key performance measures

» Developed initial process migration planning and transition management efforts until BPO provider had fully scoped work and staffed up team in India

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FrontLine Partners Case Study

For a global real estate institutional investment company with over $50B in A.U.M., members of FrontLine Partners designed a portfolio of business improvement initiatives spanning all business units within the company.

Results Objective

» Increase EBITDA by 200 basis points

» Improve access to and quality of business information

» Define current sate processes, applications, data flows and data owners

» Identify major business issues and design initiatives to address these issues

» Implement a program office to manage the execution of these initiatives.

» Deploy solutions to the over 900 properties under management.

» Facilitated a group session of over 50 employees to identify and prioritize current state business issues

» Setup a portfolio of 30+ business improvement projects, each with defined objectives, benefits, participants, major activities and duration

» Assisted in the development of a new budgeting and business planning process which reduced the time by 40% and increased consistency across the company (translates into $1mm in annual time savings/year)

» Designed and facilitated a future state design session for the Acquisitions group resulting in a new investment memo process and organizational design

» Outlined the structure for a data governance program within the company

» Defined the approach for a major ERP re-implementation initiative