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PRIME PROPERTY FUNDTHIRD QUARTER 2007

®

R E A L E S T A T E

2M O R G A N S TA N L E Y P R I M E P R O P E R T Y F U N D , T H I R D Q U A R T E R 2 0 07

THIRD QUARTER 2007: PRIME AT A GLANCE

Prime Property Fund (“PRIME” or the “Fund”) generated a third-quarter total return of 2.1%, comprised of 1.0% income and 1.1% appreciation, and a 19.5% trailing 12-month return.

Gross Asset Value

$9.2 billionNet Asset Value

$6.6 billionShare Value

$15,051.00 Lease Status(2)

91.2%Consolidated Leverage(3)

28.9%Number of Assets

221Investors(4)

116

Investment Performance(1)(%)

Notes1 PRIME’s returns are presented on a before-fee basis, reflect the use of leverage and are chain-linked and time-weighted2 PRIME’s lease percentage is value-weighted and is calculated using the asset values gross of debt adjusted for ownership share3 Includes all wholly owned debt and PRIME’s proportionate share of joint venture debt4 Excludes non-voting shareholders with investments of less than $10,000; feeder fund investments are treated as a single investor

Trailing1-YearReturn




19.5 19.9

17.1

14.0

3M O R G A N S TA N L E Y P R I M E P R O P E R T Y F U N D , T H I R D Q U A R T E R 2 0 0 7

PRIME is a core portfolio comprised of high-quality properties actively managed by

Morgan Stanley to generate top performance.

Prime Property Fund’s third-quarter returns were mutedcompared to the Fund’s recent history as changes in realestate capital markets began to moderate returns across theportfolio. The return for the third quarter totaled 2.1%,comprised of a 1.0% income return and a 1.1% appreciationreturn, and resulted in a 14.0% return year-to-date. The Fundcontinues to post an extremely competitive total return overthe trailing 12-months of 19.5%.

During the third quarter, U.S. credit markets reactedunfavorably to the continued weakness in the housing sectorand the unwinding of the sub-prime mortgage markets.These factors acted as a contagion causing a broad re-pricing of risk and a rise in spreads in many financingmarkets but specifically in the Commercial Mortgage BackedSecurities (CMBS) markets. Liquidity in the real estate debtmarkets slowed as securitized lenders contracted on new lending to focus on the syndication of the debtthat was on their books from loans executed earlier in the year. It also appears we have entered a period of more conservative capital markets underwriting.

PRIME’s management team believes that properties that are most at risk for repricing are those located insecondary or tertiary markets or those that lack the quality, design and functionality desired by tenants. Dueto aggressive lending markets in effect earlier in the year, spreads between top-tier and lower-tier assetseroded considerably. We believe these “second-tier” markets and assets are likely to have the greatest“snap-back” to more normalized pricing levels.

In contrast to the sweeping repricing of risk in the capital markets and a more conservative approach in thefinancing markets, property fundamentals are favorable broadly across most property types and geographicregions. PRIME’s management team has focused the portfolio on assets and locations that we believe willbenefit most from these strong property fundamentals. The portfolio continues to witness strong gains inincome growth broadly. Trailing nine months “same store” income growth from 2006 to 2007 for the Fundtotaled 6.1%, led by PRIME’s office sector with 13.0% income growth.

Consistent with PRIME’s objective to maintain a tactical overweight to its office allocation, the Fund purchasedmore than $150 million in additional office holdings: 950 N. Glebe, located in Arlington, VA, and our partner’sremaining 8.1% interest in Two Park Avenue, allowing PRIME to now own 100% of this midtown Manhattanproperty. However, the Fund remains diligent with respect to portfolio diversification. PRIME completed its planto sell a 50% interest in One Market Plaza in San Francisco to enhance diversification among property sectors,geographic locations and single-asset exposure. Despite this partial disposition in July at a price in excess ofPRIME’s purchase price, and property level operations that met our expectations, the asset was written downin value later in the quarter, as a result of the “credit crunch” unfolding over the summer.

LETTER TO THE SHAREHOLDERS

To generate superior

performance in this

environment, PRIME

must continue to execute

at the property level and

drive income growth.


PRIME’s hotel portfolio had strong performance during the quarter, with a total return of 6.0%,comprised of an income return of 1.5% and an appreciation return of 4.4%. Renovations at boththe Marriott East Side Hotel and the Boston Harbor Hotel are beginning to evidence their valuethrough increased occupancy and room rates.

The Fund will begin to mark its debt to market beginning in the first quarter of 2008, as a result of the adoption of Statement of Financial Accounting Standards No.159, the fair value option forfinancial assets and financial liabilities-including an Amendment of FASB statement No.115.Although PRIME maintains modest debt levels, consistent with the strategy of a core fund, thispractice may increase volatility of the Fund’s performance relative to its historic levels. We believethis is consistent with best practices in the industry and will continue to position PRIME as a leaderin transparency to its investors. Additionally, PRIME now has a small queue formed for new investorsentering the Fund. PRIME continues to receive strong interest from new clients, and we believe thatthis growth and diversification should be beneficial for the Fund and investors alike.

Despite the recent evidence of a repricing of risk in all asset classes driven primarily by lack ofliquidity in the debt markets, management believes that core real estate should perform well on arelative basis to other asset classes and that PRIME, specifically, is well-positioned because of itsorientation towards high-quality assets, superior markets and focus on strong income growth.

We appreciate your continuing support of PRIME and would be pleased to discuss any aspect ofthis report with you at your request.

Sincerely,

Scott A. Brown David F. MorrisonCo-Head of Prime Property Fund Co-Head of Prime Property Fund212-761-3907 [email protected] [email protected]

This quarterly report is strictly confidential and may not be forwarded, copied or reproduced in any manner without permission, except as expresslyindicated herein. All information is as of September 30, 2007, unless otherwise noted.

Assets September 30, 2007 December 31, 2006

Investments $7,994,817 $5,751,896Cash and Short-Term Investments 287,297 40,852 Other 88,343 122,221 Total Assets 8,370,457 5,914,969

Liabilities

Debt 1,575,583 1,008,651 Other 158,975 122,893 Total Liabilities 1,734,558 1,131,544 Minority Interest 188 109 Net Assets $6,635,711 $4,783,316Consolidated Debt to Total Assets (%) 28.9 27.6Cash to Net Assets (%) 4.3 0.9


PRIME REPORT

Statements of Net Assets (in thousands)

Annualized Time-Weighted Rates of Return(1)(%)

Property Type Returns(1,4)(%)

Notes1 Period ending September 30, 2007. Returns for periods less than one year are unannualized. Rates of return are time-weighted and include reinvestment of income. Income and appreciation

returns may not equal total return due to the chain-linking of monthly returns. Except for “Total After Fees,” management fees have not been deducted in calculating “before-fee” rate of return.See Endnote 2 for important additional information on return comparisons with the NFI and Endnote 9 regarding the limitations of historical returns

2 The NFI is a fund-level capitalization weighted, time-weighted return index and includes property investments at ownership share, cash balances and leverage (i.e., returns reflect thefund’s actual asset ownership positions and financing strategy). NFI returns presented are before fees

3 The NFI begins as of the first quarter of 1978, inclusive. PRIME’s inception was August 20, 1973, however, NFI returns are for the 29-year 9-month period4 These returns do not reflect portfolio-level items (e.g., portfolio-level debt), and therefore the weighted average of the returns do not sum to PRIME's returns5 Represents PRIME's fund-level before-fee return and includes the effect of fund-level items

Geographic Returns(1,4)(%)

Since 3Q Year-to-Date One Three Five Seven Ten Inception

2007 2007 Year Year Year Year Year (8/20/73)

Income 1.0 3.1 4.8 5.5 6.6 7.3 7.8 8.1

Appreciation 1.1 10.7 14.1 13.8 9.9 5.7 5.8 1.7

Total Before Fees 2.1 14.0 19.5 19.9 17.1 13.4 14.0 9.9

Total After Fees 1.8 13.0 17.8 18.7 16.0 12.3 12.9 8.9

NCREIF Fund Index Open-End Diversified Core 4.0 13.6 18.2 18.4 15.1 12.5 13.2 10.0(3)

Equity (NFI)(2)

Third Quarter Trailing 12-Month

Income Appreciation Total NPI Total Income Appreciation Total NPI Total

Office 0.8 -0.4 0.4 4.8 4.2 21.2 26.2 22.8

Retail 1.3 1.8 3.0 2.4 5.3 11.6 17.5 13.0

Industrial 1.4 1.6 3.0 3.2 5.8 11.9 18.3 16.6

Self Storage 0.6 0.4 1.0 N/A 3.2 0.6 3.8 N/A

Apartment 1.2 1.6 2.8 2.9 6.2 7.8 14.4 13.3

Hotel 1.5 4.4 6.0 4.4 8.3 15.7 25.1 21.5

Total(5) 1.0 1.1 2.1 3.6 4.8 14.1 19.5 17.3

Third Quarter Trailing 12-Month

Income Appreciation Total NPI Total Income Appreciation Total NPI Total

East 1.3 2.7 4.0 4.0 6.0 14.6 21.3 18.9

Midwest 1.1 2.4 3.6 3.1 6.6 9.0 16.2 13.6

South 1.0 0.7 1.6 3.0 4.4 6.2 10.8 13.8

West 0.8 -1.1 -0.3 3.6 4.0 16.6 21.2 19.2


PRIME vs. NCREIF Property Index (NPI) Annualized Rates of Return(2)(%)As of September 30, 2007

PRIME NPI

Notes1 The NFI begins as of the first quarter of 1978, inclusive. PRIME’s inception was August 20, 1973, however, these returns are for the 29-year 9-month period2 See Endnotes 2 and 8 for important additional information on return comparisons with NPI3 PRIME returns include Apartments and Senior Living4 Represents PRIME’s fund-level before-fee return and includes the effect of fund-level items

PRIME REPORT

1-Year 3-Year 5-Year 7-Year 10-Year

19.5 19.9

14.0 13.113.4 12.8

17.114.8

17.3 18.0

PRIME vs. NPI Property Type Sub-Index Returns (2)(%) For the 12-Month Period Ending September 30, 2007

NPI PROPERTY TYPE SUB-INDEX

PRIME

Office

26.2

22.8

13.0

17.514.4

3.8

N/A

25.1

21.5 19.5

17.318.3

Retail Industrial Self Storage Apartment(3) Hotel

16.6

13.3

Total(4)

PRIME vs. NFI

PRIME NFI

2.1

19.5 19.9

14.0 13.217.1

15.1

10.0

3Q07 1-Year 3-Year 5-Year 10-Year Since Inception(1)

18.4

4.0

18.2

10.0


Prime Property Fund—Net Investment Income ($ in millions, except NII Per Share data)For the nine months ended September 30, 2007

n Same property net operating income increased 6.1% over 2006.

n The positive variance in the apartment sector is due to increasing market rents across the portfolio.

n The favorable performance of the office sector is primarily attributable to leasing activity and increased occupancy at One Post Office Square, 500 Park Avenue, 1601 K Street and Hills Plaza. Additionally, the prepayment penalty receivedas a result of the early repayment of the 222 E. 41st Street note receivable contributed to the outperformance.

n Renewals and expansions at Dadeland Mall, lower taxes at Fox Run Mall, and income from Rosedale Shopping Center’snew lifestyle center drove the positive performance in the retail sector. The increase was partially offset by the closing oftwo anchors at Christiana Mall.

n The favorable variance in the industrial sector is due to higher occupancy at several properties and a warehouseexpansion at 12 Applegate Drive.

n The hotel sector variance is due to increased room revenue as a result of the completed room renovation project at Marriott East Side and increased room revenue and food and beverage sales at Westchester Marriott through thefirst six months of 2007.

n Higher general and administrative expenses, led by personnel and relocation costs, drove the negative performance in the self storage sector.

n Interest income increased in 2007 as a result of increased cash balances and investment yields.

n Interest expense increased in 2007 primarily due to the issuance of $400 million and $500 million of additional unsecurednotes payable in January 2007 and April 2007, respectively, and the issuance of an $840 million mortgage loan at OneMarket Plaza in August. These increases were partially offset by the repayment upon maturity of $150 million of unsecurednotes payable in May 2007.

PRIME REPORT

Notes1 To provide a more meaningful basis for comparison, net operating income includes income before debt service and includes only comparative months for properties held by the Fund2 Reflects the effects of properties that were sold/acquired during or prior to the period. Adjustments also include portfolio level items and other non-operating income and expenses3 NII is before investment management fees of $51.1M (2007) and $26.1M (2006)4 NII per share is calculated by dividing each month’s NII by each month’s beginning of period shares and summing the results for each month

2007 2006 % Change

Apartment $59.2 $55.9 5.9

Office 57.4 50.8 13.0

Retail 52.6 49.8 5.6

Industrial 30.3 28.4 6.7

Hotel 17.5 16.4 6.7

Self Storage 8.4 11.2 -25.0

Total Net Operating Income(1) $225.4 $212.5 6.1

Interest Income 8.1 2.7 200.0

Interest Expense (124.8) (100.4) 24.3

Adjustments(2) 64.3 11.2

Net Investment Income (NII)(3) $173.0 $126.0 37.3

NII Per Share (4) $436.70 $439.63


PORTFOLIO PERSPECTIVES

AMLI at Victoria Arbors, Rancho Cucamonga, CA

ApartmentNationally, apartment fundamentals remainedstrong as demand was positively impacted by a combination of steady employment gains, apullback in the residential mortgage markets and further expectation of falling home priceskept would-be home buyers in the rental market. PRIME’s apartment portfolio delivered a third-quarter total return of 2.8%, comprised of 1.2% income and 1.6% appreciation.

Year-to-date net operating income growthcontinues at a healthy 5.9% with Houston, Austinand Seattle exhibiting the strongest growth. The2007 year-to-date average occupancy rate forapartment holdings remained strong at 94.7%.

During the third quarter, approval was granted fora new AMLI development just north of downtownAustin. The project, AMLI East Avenue, is tocomprise 315 units and is part of a planneddevelopment that will also include office, retailand hotel uses. Leasing also commenced thisquarter at AMLI Second Street, comprised of 231units and approximately 43,000 square feet ofretail in a downtown Austin mixed-use projectand at AMLI La Villita in the Las Colinassubmarket of Dallas, TX.

OfficeBroadly, office markets continue to outpace rent and income growth relative to all otherproperty sectors.

The lack of quality space alternatives coupledwith corporations with strong profits expandingtheir businesses are allowing landlords to exertpricing pressure on rents. PRIME’s officeportfolio delivered a third-quarter total return of 0.4%, comprised of 0.8% income and -0.4% appreciation.

Consistent with relatively tight market conditions,PRIME’s leasing activity was robust in the thirdquarter. Putnam Investments renewed its lease of229,000 square feet at One Post Office Squarefor a term of 15 years. This tenant occupies thelow-rise portion of the building and the termsachieved materially exceeded the underwrittenassumptions in our valuation. At Two ParkAvenue, Herrick Feinstein LLP’s existing lease of approximately 125,000 square feet wasextended through late 2020 at an average rate that is $30 per square foot or 82% in excessof its current contract rate. In addition, HerrickFeinstein executed a lease for approximately65,000 square feet of expansion space at today’smarket rate. Salesforce.com is under agreementto renew and expand at One Market Plaza in San Francisco, and tenants comprising nearly50,000 square feet at One Maritime Plaza arealso committed to renew.

PRIME and its partner refinanced the mortgage at One Market Plaza in early August and securedlong-term financing. The refinancing involvedswapping floating rate debt to fixed rate. Inaccordance with accounting pronouncement, theswap instrument was required to be marked to

“It appears that the challenges stemming from the

sub-prime mortgage markets have been a catalyst to

a broad repricing of risk across financial markets;

we believe that PRIME is well-positioned given the

environment due to its high-quality portfolio and strong

income growth potential.”

David Morrison, Co-Head of PRIME

.

market at quarter end, resulting in a negativeimpact to the office and overall portfolio returnsthis quarter. Office transaction activity for thequarter included the $45.8 million disposition of222 East 41st Street in midtown Manhattanthat resulted in an internal rate of return of28.4%, and the acquisition of 950 N. Glebe inArlington, VA, for $102.9 million.

RetailDespite the consumer downturn, retail propertyfundamentals remain brisk with competitiverental growth and consistently high occupancylevels. PRIME’s retail portfolio delivered a third-quarter total return of 3.0%, comprised of 1.3%income and 1.8% appreciation.

Net operating income at Christiana Mall inDelaware was 6.0% above budget throughSeptember. Recent leases include the renewal of Gap and the relocation and expansions ofGameStop, Sunglass Hut and Banana Republic.Rolling 12-month in-line sales at the mall wereapproximately $775 per square foot comparedto $715 per square foot a year ago. During thequarter, plans commenced for the $170 millionexpansion and redevelopment of the property,expected to be completed by 2010. Theredevelopment will include the addition of a newNordstrom anchor and 100,000 square feet ofadditional in-line shop space.

IndustrialStrong global trade continues to create robustdemand and raise national occupancy levels,especially for well-located distribution warehousespace with access to ports. PRIME’s industrialportfolio delivered a third-quarter total return of 3.0%, comprised of 1.4% income and 1.6% appreciation.

During the quarter, a five-year lease wasexecuted with Publix Supermarkets at 425Hartman Road, a 350,000+ square footindustrial property in metro Atlanta, andWalgreen Co. committed to a 10-year lease at 13201 Wilfred Lane, a 335,000+ squarefoot warehouse building in Minnesota.

Self StorageSelf storage delivered a third-quarter total return of 1.0%, comprised of 0.6% income and 0.4% appreciation.

At quarter end, 52 stores are open and operatingwith 38 stores considered stabilized. Elevenstores are in various stages of development atthe end of the quarter. This sector’s incomereturn continues to be impacted by propertiesnot yet stabilized or under development,corporate overhead expense and weaker thananticipated performance, primarily in the Floridaand Louisiana markets.



Christiana MallNewark, DE

950 N. GlebeArlington, VA

13201 Wilfred LaneRogers, MN

10M O R G A N S TA N L E Y P R I M E P R O P E R T Y F U N D , F I R S T Q U A R T E R 2 0 0 7

Safeguard Storage Properties continues to pursueits insurance claims related to Hurricane Katrina.PRIME is also working with the company toexplore strategic alternatives, which may includea recapitalization or outright sale.

HotelNationally, the hotel sector continues toproduce increases in rates and occupancylevels benefiting from little new supply andhealthy demand from both business and leisure travelers attracted by a weakeningdollar. PRIME’s hotel portfolio delivered a third-quarter total return of 6.0%, comprised of 1.5% income and 4.4% appreciation.

Post-renovation activity in PRIME’s hotelproperties has continued to be favorable. Since

completing guest room renovations, MarriottEast Side has exceeded its Average Daily Rate(ADR) and Revenue Per Available Room(RevPAR) compared to budget by 2.8% and3.9%, respectively, over the last four quarters.ADR and RevPAR exceeded last year by 12.7%and 11%, respectively. Year to date, EBITDAexceeded budget by 10.6%, despite significantrenovation displacement.

Renovations have also boasted positive effects for the Boston Harbor Hotel. RevPAR exceededbudget by 4% for the quarter and 12.1% year to date. Despite the recent openings of theIntercontinental Hotel and Westin hotel nearby,Boston Harbor Hotel revenues for the third quarterwere up 7.4% over last year, resulting in anincrease of 13.9% in gross operating profits.



Notes1 PRIME’s lease percentage is value-weighted, and is calculated using the asset values gross of debt adjusted for ownership share2 Represents remaining 2007 calendar year expectations

Lease Expirations (%) As of September 30, 2007

Total Sq.Ft.(MM) 2007(2) 2008 2009 2010 2011 2012 2013 2014 2015 2016 Thereafter

Office

91.0 92.9 93.388.8

80.0 78.8

94.5 94.9 91.091.287.1 83.9

Retail Industrial Self Storage Apartment Value-WeightedLease Status(1)

6/30/079/30/07

Portfolio Lease Status (%)


Office 6.5 1.7 6.6 6.9 14.3 11.7 8.6 11.8 6.7 3.9 4.4 14.4

Retail 3.3 0.6 9.8 6.9 5.4 9.5 7.0 8.2 4.2 4.3 4.9 32.5

Industrial 11.8 0.0 14.3 6.2 8.3 13.6 15.1 1.5 4.3 12.1 8.2 3.5

Total(1) 21.6 1.0 9.7 7.4 12.0 10.9 8.9 9.2 4.7 6.0 5.1 16.0


SUMMARY OF TRANSACTIONS

3rd Quarter 2007 Acquisition and Disposition Activity

Acquisitions

Dispositions

Notes1 Acquired land for development2 Acquired remaining 8.1% interest in joint venture. Asset is now wholly owned3 Value and sales price represents the Fund's gross amounts, stated at 100%4 Sale of 50% interest and conversion into a joint venture5 Repayment of mezzanine loan receivable6 Sale of 80% interest and conversion into a joint venture7 Repayment of note receivable

Forward Purchase Commitments

Projected Projected Acquisition Property Name Type Location Closing Date Cost $MM

Wrigleyville Whole Foods Retail Chicago, IL Nov-07 26.0

Westridge Distribution Center Industrial Atlanta, GA Nov-07 13.0

East Belt - Phase II Industrial Houston, TX Mar-09 12.5

Total $51.5

As of September 30, 2007

Ownership 100% Purchase Date Property Name Type Ownership Share % Location Price $MM

07/30/07 950 N. Glebe OFF Wholly owned 100.0% Arlington, VA 102.9

08/13/07 Hollis(1) SS Joint venture 93.2% Hollis, NY 3.7

08/13/07 East Williamsburg(1) SS Joint venture 93.2% Brooklyn, NY 3.3

09/27/07 2899 Mead Avenue IND Joint venture 99.9% Santa Clara, CA 12.7

09/28/07 Two Park Avenue(2) OFF Wholly owned 100.0% New York, NY 48.2

Total $170.8

Last Appraised Sales Price(3)

Date Property Name Type Ownership Location Value(3) $MM $MM

7/3/07 One Market Plaza(4) OFF Wholly owned San Francisco, CA 1,386.0 1,389.9

7/3/07 75 Howard Garage(4) OFF Wholly owned San Francisco, CA 70.0 70.1

8/17/07 222 East 41st Street(5) OFF Wholly owned New York, NY 40.2 45.8

9/10/07 AMLI at Park Creek APT Wholly owned Gainesville, GA 19.9 20.8

9/21/07 AMLI at Danada Farms(6) APT Wholly owned Wheaton, IL 82.0 83.0

9/28/07 Two Park Avenue Note Receivable(7) OFF Wholly owned New York, NY 43.3 43.3

Total $1,641.4 $1,652.9


CAPITAL STRUCTURE

Notes1 Includes all wholly owned, joint venture, and portfolio level debt2 Other includes endowments and foundations, U.S. taxable investors and other investors3 Maturity schedule reflects wholly owned and joint venture debt at ownership share. Excludes the Fund's $600 million line of credit, which had no amounts outstanding as of

September 30, 2007 and the overnight borrowing facility which had no amounts outstanding as of September 30, 2007. Information is as of September 30, 2007, and issubject to change at any time

Term Debt Maturity ($MM)(3)

Equity DiversificationAs of September 30, 2007

Cost of DebtAs of September 30, 2007

Debt Diversification As of September 30, 2007

U.S. Public Pension Plans38.9%

U.S. Fund of Funds6.3%

Floating6.2%

Fixed93.8%

Unsecured47.0% Secured

53.0%

PRIME Client Type

Fixed Rate vs. Floating Rate (All Debt) (1) Secured vs. Unsecured (All Debt) (1)

All Debt (1)

Weighted Average Cost of Debt 5.8%

Weighted Average Cost of Fixed-Rate Debt 5.8%

Weighted Average Cost of Floating-Rate Debt 6.2%

Consolidated Debt to Total Assets Ratio 28.9%

—

201.8

43.3136.0

367.2

143.5242.3

340.4

930.4

90.0

273.1

2007 2008 2009 2010 2011 2012 2013 2015 20162014 Thereafter

0.0%% of debt maturing

7.3% 1.6% 4.9% 9.9% 13.3% 5.2% 8.7% 33.5%12.3% 3.3%

U.S. Corporate Pension Plans 25.5%

Other Investors (2)

6.1%

U.S.Taft-HartleyPension Plans7.4%

Foreign Investors15.8%


Diversification As of September 30, 2007

Appraisal Assumptions As of September 30, 2007

FUND DIVERSIFICATION & APPRAISAL ASSUMPTIONS

West35.2%

Midwest12.7%

South19.0%

East 33.1%

Notes1 Gross weightings calculated using PRIME’s proportionate share of assets’ appraised value. Net weighting calculated using proportionate share of assets’ appraised value net

of debt2 See Endnote 83 Represents a weighted average of the appraisal assumptions for each property sector

PRIME—Gross (1) PRIME—Net (1) NPI(2)

PRIME—Gross (1) PRIME—Net (1) NPI(2)

Apartment24.8%

Retail16.6%

SelfStorage5.1%

Industrial10.3%

Office37.9%

Land0.8%

Geographic Diversification

Property Sector Diversification

West33.6%

South18.3%

Midwest14.0%

East 34.1%

West35.1%

Midwest10.0%

South21.1%

East 33.8%

SelfStorage5.9%

Industrial10.3%

Retail16.5%

Office35.8%

Office37.1%

Retail21.9%

Industrial15.5%

Apartment23.0%

Hotel4.5%

Apartment25.4%

Land0.8%

Hotel5.3%

Hotel2.5%

Average Initial Average Terminal Average Average Average% Cap Rate Cap Rate Discount Rate Rent Growth Expense Growth

Office 3.7 6.0 6.9 3.8 3.0

Retail 5.2 6.5 7.1 2.9 2.7

Industrial 5.4 7.1 7.3 3.2 2.7

Self Storage 6.2 7.6 8.5 3.1 3.2

Apartment 5.4 6.3 7.4 3.2 3.0

Hotel 6.5 7.5 8.8 3.3 3.4

Total(3) 4.8 6.4 7.3 3.4 2.9


1 Investor Audience. The Quarterly Report has been prepared as an aid for clients of Prime Property Fund, LLC (PRIME). It is not an offering of interests in PRIME, which offeringis made only pursuant to the more detailed information set forth in the Offering Memorandum relating to the Fund as supplemented or amended from time to time (the “OfferingMemorandum”), including the various risk factors and conflicts of interest disclosures set forth therein.

2 Performance Returns:• Represent time-weighted investment (portfolio) level returns.• Are presented before (i.e., gross of) investment management fees.• For less than one year are not annualized. For periods one year or greater, the performance returns represent average annual returns, i.e., annualized.• Include interest income from short-term investments.• Are presented with finalized financial results reasonably available as of the stated time period in the return presentation, which results are generally audited by a reputable out

side firm within 90 days of PRIME’s fiscal year end (and subsequent to that will be unaudited). • Reflect the use of leverage by PRIME, which may exaggerate returns on an unlevered basis.• Include income which is based on accrual accounting and recognized at the investment level.

3 Income Return Considerations. The sum of the income return component and the appreciation return component may not equal the total gross return because of the timeweighting (i.e., chain linking) of component monthly returns. The income return may or may not approximate a distributed income to the investor, depending on PRIME’s cashdistribution policy and elections made by the investor.

4 Investment Return Factors. Investment returns for PRIME and the NCREIF indices reported here may vary based on a number of factors, including fund investment strategy and execution, overall real estate market movements during the period reported, amount of leverage. Sophistication in these areas is assumed.

5 Reinvestment of Dividends. The results portrayed can vary by investor based on whether income is reinvested. As an open-end vehicle, PRIME has no initial investment period.6 Valuations. Frequency of valuation updates varies by portfolios reporting to NCREIF, as does the frequency of full independent third party appraisals of assets. PRIME commissions

appraisals of its assets on a quartely basis. This appraisal is generally reported in a limited restricted report format, although it is reported in an expanded summary report formaton an annual basis for approximately one third of PRIME’s properties (so that each property receives an expanded summary report at least once every three years).

7 Effect of Compounding. Performance reported herein is only on an annualized, not cumulative, return basis. The cumulative, compounded effect of advisory fees on total returnscan be significant. For example, assuming an 8% annual return to a portfolio, earned evenly over the period in question, and an annual asset management fee on equity equal to1.15%, the total after fee return to the client would nominally be 6.85%. Over a one-, three-, five- and ten-year period, however, the cumulative actual returns would be 8.24%(gross) and 7.03% (net) for one year; 26.82% (gross) and 22.60% (net) for three years; 48.59% (gross) and 40.44% (net) for five years; and 120.80% (gross) and 97.23%(net) for ten years.

8 NCREIF Property Index (NPI). The NPI industry benchmark has characteristics that may not be fully applicable to real estate funds against which it is being compared, and maybe more or less volatile than a given fund with a more focused equity real estate investment strategy. Among the more important considerations in evaluating comparisons with NCREIF numbers:• NPI returns are presented before fees, and exclude portfolio level items such as credit facilities and professional fees. PRIME returns are presented before

fees as well, but include such additional items.• NPI returns are presented on a delevered basis (i.e., both leveraged and unleveraged properties are included without distinction).• NPI returns exclude development, agricultural and other non-income producing properties. Depending on the time period reported, PRIME returns may

include such items.• The assets reported to NCREIF have historically tended, on an overall basis, to be more concentrated in particular asset classes (e.g., office) than may be the case for PRIME

or the economy at large. In recent years, return information is also tracked by NCREIF for specific asset subindices, but on a smaller reporting base. Information reported here is from the overall index (i.e., the NPI) unless otherwise noted.

• The NPI includes assets at 100% rather than at ownership share.9 Historical Performance Limitations; Possibility of Losses. Historical performance is not an indication of future results. Losses can result from investment in real estate, including

through PRIME. To the extent target returns for PRIME are indicated, there can be no assurance that such targets will not change in the discretion of the advisor, that targetreturns will be achieved or that there will not be loss of principal.

10 Limitations of Projections and Other Forward-Looking Statements. Any statements in this Quarterly Report that are not historical facts are forward-looking statements thatinvolve risks and uncertainties. Sentences or phrases that use such words as “believe,” “anticipate,” “plan,” “may,” “hope,” “can,” “will,” “expect,” “goal,” “should,” “objective”and similar expressions also identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Readers should be aware that return projections and other forward-looking statements are by their nature uncertain insofar as actual realized returns or other projected results can change quickly based on, amongother things, unexpected market movements, changes in interest rates, legislative or regulatory developments, errors in strategy execution, acts of God, and other asset-leveldevelopments. Readers should also assume that any financial information that is not provided as of a year-end period is unaudited. PRIME undertakes no obligation to update orreverse any forward-looking statements, whether as a result of new information, future developments or otherwise.

11 Other Funds and Assets of the Sponsor and its Affiliates; Return Portability Issues. To the extent recent transactions or individual assets are highlighted in the discussion herein,they may not be representative of all assets held by PRIME or advised by the Sponsor or its affiliates. The Morgan Stanley Real Estate Investing Group and its affiliates also manage and/or have managed other commingled funds with different investment strategies, and separate accounts, whose performance returns may be higher or lower than thosehighlighted here. Return information for any of these other clients, funds, or affiliated advisors may be significantly better or worse than those reported here. Also, performanceinformation for PRIME, which was previously advised by Lend Lease Real Estate Investments, Inc. or its predecessor entities during a significant portion of the periods presented,is included where it has been concluded that because of substantial overlap of personnel and other factors, reporting such information would be helpful.

12 Discussion Materials Not an Offer, Contract or Investment Advice; Certain Important Risks. The Quarterly Report does not constitute or form a part of, and should not be construed as, an offer to sell or a solicitation of an offer to buy securities of PRIME and does not constitute any form of commitment or recommendation on the part of Morgan Stanley. Securities offers and/or solicitations will be made only through the Offering Memorandum. As a limited liability company, only the operative documents creating such arrangements, when fully executed and delivered, will be controlling of the parties’ legal rights and obligations with respect to the subject matter thereof. Recipients must not construe the contents of this Quarterly Report as investment, legal or tax advice. Each recipient should consult its legal counsel, tax advisor andother appropriate consultants as to the business, legal, tax and related matters concerning an investment through an investment advisory relationship with Morgan Stanley or an investment in a Morgan Stanley fund including particularly, but not limited to, the risks identified in the Offering Memorandum.

13 Availability of Adviser’s Form ADV. Morgan Stanley Real Estate Advisor, Inc., (“MSREA”) the manager and registered investment advisor for PRIME, and various otherMorgan Stanley affiliates that are registered as investment advisors with the U.S. Securities & Exchange Commission (“SEC”) have filed with the SEC, and are required toupdate periodically, Form ADV. Part II to the Form ADV contains essential information about a given investment advisory firm, including information about firm management,clients, fee arrangements and the handling of conflicts of interest, and the SEC requires that it be sent to all prospective clients who might enter into an advisory agreementprior to execution. Upon request, MSREA will furnish a copy of its Form ADV without charge to any investor in PRIME. Please contact the Morgan Stanley Law Division(404 846-1300) for a copy.

ENDNOTES


Morgan Stanley Real EstateKey Personnel

Jay H. MantzGlobal Co-Head of Morgan Stanley’s

Merchant Banking Group

John CarrafiellGlobal Co-Head of Morgan Stanley

Real Estate Investing

K.S. (Sonny) KalsiGlobal Co-Head of Morgan Stanley

Real Estate Investing

Brian CarrCo-Head of Morgan Stanley

Real Estate Investing—Americas

Michael FrancoCo-Head of Morgan Stanley

Real Estate Investing—Americas

John B. KesslerGlobal Head of Core Real Estate and Chief

Operating Officer, Morgan Stanley Real Estate

Scott A. BrownCo-Head of Prime Property Fund

David F. MorrisonCo-Head of Prime Property Fund and

Head of Investment Strategy and Research

Candice W. ToddChief Financial Officer, Prime Property Fund

Barratt C. JohnsonPortfolio Operations, Prime Property Fund

John P. BuzaHead of Asset Management

Jay RaghavanDeputy Head of Asset Management

Theodore J. KlinckHead of Acquisitions

Joyce R. FraterHead of Client Services

Prime Property FundBoard of Directors

Independent DirectorsAllan S. Bufferd, Sc.D.Treasurer Emeritus

Massachusetts Institute of Technology

Nelson C. RisingRising Realty Partners, LLC

Joan H. FallonManager, Real Estate Investments

U.S. Steel & Carnegie Pension Fund

Affiliated DirectorsJay H. MantzManaging Director

Global Co-Head of Morgan Stanley’s

Merchant Banking Group

John B. KesslerGlobal Head of Core Real Estate and

Chief Operating Officer

Morgan Stanley Real Estate

BOARD OF DIRECTORS, ADVISORS & OFFICES

Morgan Stanley Real EstateU.S. Offices

Atlanta3424 Peachtree Road, NE

Suite 900

Atlanta, GA 30326

Tel: 404-846-1300

BostonOne International Place

13th Floor

Boston, MA 02110

Tel: 617-856-8700

Chicago440 South LaSalle Street

Suite 3700

Chicago, IL 60605

Tel: 312-706-4000

Los Angeles1999 Avenue of the Stars

Suite 2400

Los Angeles, CA 90067

Tel: 310-788-2000

New York1585 Broadway

37th Floor

New York, NY 10036

Tel: 212-761-4700

San Francisco555 California Street

Suite 2200

San Francisco, CA 94104

Tel: 415-576-2000


Morgan Stanley Real Estate is comprised of three major

global businesses: Investing, Banking and Lending.

Since 1991, Morgan Stanley Real Estate has acquired

$135.9 billion of real estate assets worldwide and

currently manages $68.0 billion in real estate assets on

behalf of its clients. A complete range of market-leading

investment banking services for real estate clients

include advice on strategy, mergers, acquisitions and

restructurings, as well as underwriting public and

private debt and equity financings. As a global leader

in real estate lending, Morgan Stanley has offered

approximately $156.0 billion of CMBS through the

capital markets since 1997, including $35.5 billion in

2006. For more information about Morgan Stanley Real

Estate, please visit www.morganstanley.com/realestate.

ABOUT MORGAN STANLEY REAL ESTATE

On the cover:One Maritime Plaza, San Francisco, CABoston Harbor Hotel, Boston, MAAMLI 900, Chicago,IL – artist rendering

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