The Pilgrim Assurance BuildingSeptember 2005

Intro

• 795 Atlantic Avenue• 10-Story Office Building Downtown Boston• 175,000 Net Rentable SF• 100,000 occupied by Pilgrim• Half of remaining 75,000 short-term rentals

Opportunity

• Minimum acceptable bid - $15MM• Huge, prominent building blocks from Boston’s

Financial District• Considerable interest from national investors• 24 hours to decide

The Property

• 1920’s steel frame building, masonry curtain wall system

• Grand entrance with four-story, 5,000 square foot atrium

The Property

• Upgrades– High-speed elevators– Heavily insulated rubber membrane & built-up

gravel roof– Anodized, bronzed, aluminum window system– Energy-efficient heating, ventilating, and air-

conditioning system– Fire, life, and safety systems

Proposed Sale of Property

• Sealed bid auction• $1MM deposit (refunded in 3 days to

unsuccessful bidders)• Final Payment Due December 10th

Proposed Sale of Property

• Pilgrim lease back 100,000 SF – top 6 floors at $26/SF per year

• Opex paid by building owner (grows w/ inflation)– Real Estate Taxes - $4.00– Maintenance & Repairs - $4.00– Common Area Utilities - $2.00– Building Management - $.50– Miscellaneous - $.75

Proposed Sale of Property

• Pilgrim – buyer option to lease back or 6 month short term lease

• Lease back – 100,000 SF for 10 yrs• One-time CPI bump or inflation after 5 yrs• Renewal after 10 years (prevailing rents)

Proposed Sale of Property

• Gross Lease– Tenant pays increase in Opex

• Cap Reserve – $.50/SF, about $87,500/year (+inflation)– Depreciated SLN over 39 ½

• Tenant Improvements (TI)– $5/SF for entire building (+inflation)– Depreciated SLN over 39 1/2

Proposed Sale of Property

• Value of building– Depreciated for tax purposes– Less $5MM assessed value of Land

• Marginal Tax – 35%• Cap Gains Tax – 15%

Bailey’s Evaluation

• Largest private property owners in greater Boston area

• Over 20 years, accumulated 5,000 apts, and over 1.2 million SF of office space

• Specialize in updating apartment houses and office buildings– Converting in condominiums

Bailey’s Evaluation

• Local expertise – Boston based firm• 2 New York-based investment banks with

property management subsidiaries• National run REIT’s – Real Estate Investment

Trusts

Bailey’s Evaluation

• 75,000 net rentable SF – Office market soft after high-tech meltdown– $20/SF over the next 5 yrs (fixed rent rates)– 14,000 SF rent per year– 5,000 SF vacant after five years

Bailey’s Evaluation

• Potential to use 2 of the 4 Atrium floors – 10,000 additional SF ($200,000 rental income/yr)– Additional Opex included @ $11.25/SF– Cost $100,000– Depreciated SLN over 39 ½ years– Space lease over 5 yrs (2,000 SF/year)

Bailey’s Evaluation

• Bathroom Upgrades– 20 units at $35,000/each

• Atrium Lobby Upgrades– $150,000

The Market

• Office market soft• Boston’s unemployment rate • Vacancies decreased over last 2 yrs– 25% to 12%

• Flat Rental Rates• South Station competition - $11/SF lower

rental rates

The Market

• Cap Rates – down 2% to 7%– Increased competition between investors– Low interest rates

Other Options• Condominium market red hot– Urban Living

• Selling @ $600/SF (5% commission)• Commercial space $200-$250/SF• 150 apartment units with 1060 SF• Cost $200/SF (up to 18 months convert)• Rezone for residential use (6 months)

Other Options

• Late to the Party?– 14,000 residential units in construction pipeline– Market through the roof– Possible collapse up to 30%– Fire Sale concerns

Financial Analysis

• Scenario 1- Pilgrim and New Office Tenants– 100,000 SF at $26/SF for 10YRS one time CPI

(Pilgrim)– Remaining Space $20/SF (new tenants)– Assuming a $19,000,000 winning bid• IRR -8.40% Leveraged, 6.14% Unleveraged• NPV $1,187,246 Leveraged, $13,048,402 Unleveraged• NPV Diff ($3,951,597.54)

Key point: Flat rental rates and owner responsible for increasing OPEX (taxes, insurance and maintenance)

Financial Analysis cont’

• Scenario 2- Pilgrim and Short Term Office Tenants– 100,000 SF at $26/SF for 10YRS one time CPI (Pilgrim)– Remaining Space leased at prevailing rate/SF (short

term tenants)– Assuming a $19,000,000 winning bid

• IRR 19.99% Leveraged, 12.21% Unleveraged• NPV $5,356,169 Leveraged, $17,217,325 Unleveraged• NPV Diff $217,325.43

Key point: Flat rental rates and increasing OPEX (taxes, insurance and maintenance) passed on to short term tenants

Financial Analysis cont’

• Scenario 3- Redevelop into Residential Condos– 150 units sold at $600/SF with 5% commission– Conversion cost $200/SF (gradual conversion) – Construction/Zoning 24 total months

100,000 SF leased to Pilgrim at $26/SF during this process

– Assuming a $19,000,000 winning bid• IRR 31.56% Leveraged, 27.46% Unleveraged• NPV $10,234,758 Leveraged, $31,525,303 Unleveraged• NPV Diff $6,834,757.79

Key point: Fifty condos sold per year, holding period five years, all condos sold in three years.

Update on Project

• Limited information available– Case address 795 Atlantic Ave does not exist– Similar Property exist at 695 Atlantic Ave– Class A Office Building• Occupied by primarily by Plymouth Rock Assurance(own 40,000 SF, Rent 6,601 SF)• Historical Lease Rates $28.00/SF/YR

What would we do differently?

We would covert the entire building to condos as discussed in scenario 3. As a comparison similar condos in the Boston Financial district sale today for $400/SF.

A comparable 1394SF Condo in the same Boston neighborhood sold for $525,000 $376/SF on June 1, 2007.

Thank You!

Back-up Spreadsheet

Microsoft Office Excel Worksheet