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2016-29268 Reso RESOLUTION NO. 2016-29268 A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA AUTHORIZING THE CITY MANAGER TO DECLINE, IN WRITING, THE OWNER'S RECIPROCAL RIGHT OF FIRST REFUSAL, AS REQUIRED PURSUANT TO THE TERMS OF SECTION 36.2 OF THE AGREEMENT OF LEASE ("GROUND LEASE") BETWEEN THE CITY ("OWNER") AND 1691 MICHIGAN AVE INVESTMENTS LP ("TENANT"), DATED AS OF SEPTEMBER 1, 1999, INVOLVING THE IMPROVEMENTS TO THE PROPERTY ("PROJECT") LOCATED AT 1691 MICHIGAN AVENUE, MIAMI BEACH, FLORIDA; AND FURTHER APPROVING TENANT'S SALE OF THE PROJECT TO CLPF — LINCOLN, LLC, A DELAWARE LIMITED LIABILITY COMPANY ("PROPOSED PURCHASER"), SUBJECT TO THE ADMINISTRATION'S SUCCESSFUL COMPLETION OF ITS EVALUATION OF THE PROPOSED PURCHASER IN ACCORDANCE WITH ARTICLE 10 OF THE LEASE ("CITY'S DUE DILIGENCE"), AND PAYMENT TO THE CITY OF ITS REASONABLE COSTS INCURRED IN CONNECTION WITH THE PROPOSED SALE INCLUDING, WITHOUT LIMITATION, REIMBURSEMENT OF THE CITY'S DUE DILIGENCE COSTS; AND FURTHER AUTHORIZING THE CITY MANAGER AND CITY CLERK TO EXECUTE ANY AND ALL CLOSING DOCUMENTS ON BEHALF OF THE CITY. WHEREAS, On January 5, 1998, the City issued RFP No. 20-97/98, seeking proposals for the development of Public-Private Parking facilities (the "RFP"). On April 6, 1998, proposals from five (5) different development teams were submitted and evaluated by an Evaluation Committee, and on July 15, 1998, the City Commission authorized negotiations with four(4) of the proposed development projects; and WHEREAS, As a result of said negotiations, on July 7, 1999, the Mayor and City Commission adopted Resolution No. 99-23236 approving the Agreement of Lease and the Development Agreement between the City of Miami Beach and Lincoln Plaza Partners LLC, for the development of a mix-use project, located at Michigan and Jefferson Avenues between Lincoln Lane and 17th Street (the "Land"); and WHEREAS, An Agreement of Lease was executed between the City of Miami Beach and Lincoln Plaza Partners LLC, dated as of September 1, 1999 ("Ground Lease"), in connection with the lease of the Land where Tenant agreed to develop a commercial project, consisting of an office building, a parking garage, and ground floor retail space (collectively the "Project"), and which Project is currently located at 1691 Michigan Avenue; and WHEREAS, On December 20, 2000, the Mayor and City commission adopted Resolution No. 2000-24220, modifying the terms of the Lease by waiving the provisions of Section 10.3(a) and amending Section 10.4, approving the sale and Assignment and Assumption of the Ground Lease from Lincoln Plaza Partners LLC to LNR Jefferson LLC before a certificate of occupancy had been obtained; and WHEREAS, On October 5, 2005, LNR Jefferson LLC changed its name to The Lincoln, LLC; and • WHEREAS, On or about July 18, 2006, The Lincoln LLC sold its interest in the Project and assigned its leasehold interest in the Land to Lincoln Miami Beach Investment LLC, a Delaware limited liability company, pursuant to that certain Assignment and Assumption of Ground Lease recorded in O.R. Book, 24738, Page 4073, of the Public Records of Miami-Dade County, Florida; and WHEREAS, On November 17, 2006, Lincoln Miami Beach Investment LLC changed its name to 01K Lincoln Miami Beach Investment LLC, and thereafter, on June 17, 2009, merged with 1691 Michigan Ave Investment LP, a Delaware limited liability partnership ("Tenant"); and WHEREAS, On February 12, 2014, the Mayor and City Commission approved Resolution No. 2014-28486 authorizing the Mayor and City Clerk to execute Amendment No. 1 to the Ground Lease by and between the City of Miami Beach and Tenant, modifying the Scope of Use under the Ground Lease by reducing the minimum number of parking spaces required for the Garage Facility, from 700 to 645 spaces, increasing the minimum number of parking spaces required to be maintained at all times for use by the general public from 100 to 155 parking spaces, and further increasing the monthly parking spaces for members of the general public from 50 to 75, in connection with the development of a miniature golf project, at the sixth floor of the garage with the subtenant, City Middle, LLC; and WHEREAS, City Middle, LLC has experienced delays in developing the miniature golf project and to date Amendment No. 1 has not been executed; and WHEREAS, Pursuant to Section 10.5 of the Ground Lease ("Required Notices"), a proposed transfer and/or sale of the Project requires written notice to the Owner, with the identity of the transferor, transferee, nature of the transaction, percentage of interest conveyed and such other information requested by Owner ("Notice of Sale"). On November 10, 2015, Tenant provided Owner with a Notice of Sale that Tenant intended to sell 100% of its leasehold interest in the Project ("Sale") as follows: Owner of Ground Lease: City of Miami Beach Seller: 1691 Michigan Ave Investment LP Proposed Purchaser: CLPF — Lincoln, LLC, a Delaware limited liability company Purchase Price: $109,250,000 cash transaction; and WHEREAS, pursuant to Section 26.2(c)(iii) of the Lease, the City has until January 9, 2016, in which to approve or disapprove of the Sale of the Project to the Proposed Purchaser; and WHEREAS, in accordance with Section 36.2 of the Lease, "Owner's Reciprocal Right of First Refusal", the City also has the right to elect, in writing, whether to consummate the Right of First Offer Transaction, at the same price and upon such other material terms set forth in the Offer Notice ("Offer"); the City has until December 25, 2015 to exercise this Right of First Refusal; and WHEREAS, after considering the revenue figures from surrounding City-owned and managed parking garages, which have a longstanding position of keeping the parking rates below market for the benefit of its residents and visitors (as compared to the Project garage, which is a privately managed garage), and estimated Project revenues, City Staff determined that the Project would run an annual deficit of approximately $925,043, without taking into consideration payment of principal, capital improvements, and other additional costs the Project; and WHEREAS, considering that the Offer materially exceeds the cost to construct a City-owned parking, office, and retail facility and that the Project will revert back to the City at the end of the Lease term, the Administration recommends that the City decline the Reciprocal Right of First Offer Transaction; and WHEREAS, the Administration further recommends that the City Commission approve the sale of the Project to the Proposed Purchaser, CLPF — Lincoln, LLC, subject,to City staff's successful completion of the City's Due Diligence, Tenant's payment of the City's Due Diligence costs, and execution of all required closing documents. NOW, THEREFORE, BE IT DULY RESOLVED THAT THE MAYOR AND CITY COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA, hereby authorize the City Manager to decline, in writing, the Owner's Reciprocal Right of First Refusal, as required pursuant to the terms of Section 36.2 of the Ground Lease; and further approve Tenant's sale of the Project to the Proposed Purchaser, CLPF — Lincoln, LLC, a Delaware limited liability company, subject to and conditioned upon the Administration's successful completion of its evaluation of the Proposed Purchaser in accordance with Article 10 of the Ground Lease (the "City's Due Diligence"), and payment to the City of its reasonable costs incurred in connection with the proposed sale including, without limitation, reimbursement of the City's Due Diligence costs; and further authorize the City Manager and City Clerk to execute any and all closing documents on behalf of the City. PASSED and ADOPTED this /3 day of -I l'Mkury 2015. ATTEST: rr'' Rafa I E. Granado, Cl :∎+"�'+:,% Philip a- , ;/OR ,r T:\AGENDA\2015\Decem►��'. I'\1,Fj9 k n11'1N Michigan Sale RESO 12 hoc . - ' APPROVED AS TO �;+ . 1 � FORM 8c LANGUAGE & FOR EXECUTION City Attorney i Da et COMMISSION ITEM SUMMARY Condensed Title: A Resolution Of The Mayor And City Commission, Authorizing The City Manager To Decline, The Owner's Reciprocal Right Of First Refusal, Pursuant To The Agreement Of Lease ("Ground Lease") Between The City ("Owner") And 1691 Michigan Ave Investments Lp ("Tenant"), Dated September 1, 1999, Involving The Property ("Project") Located At 1691 Michigan Avenue; And Further Approving Tenant's Sale Of The Project To CLPF — Lincoln, LLC Gp, A Subsidiary Of Clarion Partners ("Proposed Purchaser"), Subject To The Administration's Successful Completion Of Its Evaluation Of The Proposed Purchaser In Accordance With Article 10 Of The Lease ("City's Due Diligence"), And Payment To The City Of Its Reasonable Costs Incurred In Connection With The Proposed Sale; And Further Authorizing The City Manager And City Clerk To Execute Closing Documents On Behalf Of The City. Key Intended Outcome Supported: . N/A Supporting Data(Surveys, Environmental Scan,etc.): 2014 Statement of Operating Revenues and Expenses The Notice of Sale, including the Section 10.5 disclosures Item Summary/Recommendation: A proposed transfer and/or sale of the Project requires written notice to the Owner, with nature of the transaction and other information requested by Owner("Notice of Sale"). On November 10, 2015, Tenant provided Owner with a Notice of Sale that Tenant intended to sell 100% of its leasehold interest in the Project("Sale") as follows: Owner City of Miami Beach; Seller: 1691 Michigan Ave Investment LP; Proposed Purchaser: CLPF— Lincoln, LLC; Purchase Price: $109,250,000 cash transaction. Clarion Lion Properties Fund Holdings, LP ("Clarion"), parent company to CLPF—Lincoln, LLC,was started November 17th, 1999. Clarion with$7.8 billion in assets'engages in the business of acquiring, owning, holding for investment and investing in real estate assets. The City must approve or disapprove the proposed Sale by January 9, 2016. The Administration is in the process of finalizing its Due Diligence in connection with the proposed Sale. Additionally, the City has the right to elect, within 45 days after Owner's receipt of the Offer Notice(i.e. December 25, 2015), whether or not to consummate the Right of First Refusal Transaction, at the same price and other material terms set in the Offer Notice. The Project consists of a 6 story parking garage, having 729 parking spaces, approximately 120,000 square feet of Class A office space, and approximately 40,000 square feet of ground floor retail space, currently leased at near 90% occupancy. The Project collects net operating rents for parking spaces and leases, in the total sum of $313,138/month and $3,757,658/ year. The Garage Facility's net operating revenues is $1,143,280 for calendar year 2014 and the Retail and Office Space's net operating revenues is $2,599,352 for calendar year, as contained in the 2014 Statement of Operating Revenues and Expenses The City, via applicable City ordinances, has had a longstanding position of keeping the parking rates below market for the benefit of its residents and visitors and therefore cannot compete with the income stream of a privately operated garage. Assuming a debt service of $4,370,000 (estimated bond rate at 4% of the full purchase price), estimated revenues of $6,739,062, and estimated expenses of $3,294,105; the Project would run a deficit per year of $925,043; this does not take into consideration payment of principal, capital improvements, and other additional costs the Project will incur. The City receives Base Rent of$336,000 per year/$25,846.15 per month and is scheduled to increase on January 1, 2018 by the lesser of the 5 year cumulative CPI or twelve percent (12%). Additionally, the City receives 2.5% of annual gross revenue. The City received $185,094.85 for Percentage Rent for the 2014 calendar year,for a total rental income of$521,094.85. The Project will revert back to the City at the end of the ninety (90) year Term, the Administration is recommending that the City reject the Right of First Refusal and approve the Sale of the Project to the Proposed Purchaser. The Administration recommends that the Mayor and City Commission approve the Resolution authorizing the City Manager to decline the Owner's Reciprocal Right of First Refusal,; and further approving tenant's sale of the Project to the Proposed Purchaser, CLPF — Lincoln, LLC, subject to and conditioned upon the Administration's successful completion of its evaluation of the proposed purchaser (the"City's Due Diligence"), and payment to the City of its reasonable costs incurred in connection with the proposed sale including reimbursement of the City's Due Diligence costs; and further authorizing the City Manager and City Clerk to execute closing documents on behalf of the City. Advisory Board Recommendation: N/A Financial Information: Amount Account Source of Funds: 1 N/A Financial Impact Summary: The proposed will have does change the revenue schedule to the City. City Clerk's Office Legislative Tracking: Max Sklar, ext. 6116 Sign-Offs: Departmen, B. ec 1r Assistant Cit,4,anager City M;: 'r er MAS KGB//��i/ JL� ►, T:\AGENDA\2015\December\TCED\1691 Michi an11691 Michi an Sale SUM 11-20-15.docx CI 9 9 _ /V\I AN\I BEACH Agenda Item R7 I Date /-/3-1(.. MiAMI BEACH City of Miami Beach, 1700 Convention Center Drive, Miami Beach, Florida 33139,www.miamibeachfl.gov COMMISSION MEMORANDUM i TO: Mayor Philip. Levine and Members r the City C(,mmission FROM: Jimmy L. Morales, City Manager S '` DATE: December 9, 2015 SUBJECT: A RESOLUTION OF THE MAYOR AND CITY COMMISSION OF THE CITY OF MIAMI BEACH, FLORIDA AUTHORIZING THE CITY MANAGER TO DECLINE, IN WRITING, THE OWNER'S RECIPROCAL RIGHT OF FIRST REFUSAL, AS REQUIRED PURSUANT TO THE TERMS OF SECTION 36.2 OF THE AGREEMENT OF LEASE ("GROUND LEASE") BETWEEN THE CITY ("OWNER") AND 1691 MICHIGAN AVE INVESTMENTS LP ("TENANT"), DATED AS OF SEPTEMBER 1, 1999, INVOLVING THE IMPROVEMENTS TO THE PROPERTY ("PROJECT") LOCATED AT 1691 MICHIGAN AVENUE, MIAMI BEACH, FLORIDA; AND FURTHER APPROVING TENANT'S SALE OF THE PROJECT TO CLPF — LINCOLN, LLC GP, A SUBSIDIARY OF CLARION LION PROPERTIES FUND HOLDINGS, LP ("PROPOSED PURCHASER"), SUBJECT TO THE ADMINISTRATION'S SUCCESSFUL COMPLETION OF ITS EVALUATION OF THE PROPOSED PURCHASER IN ACCORDANCE WITH ARTICLE 10 OF THE LEASE ("CITY'S DUE DILIGENCE"), AND PAYMENT TO THE CITY OF ITS REASONABLE COSTS INCURRED IN CONNECTION WITH THE PROPOSED SALE INCLUDING, WITHOUT LIMITATION, REIMBURSEMENT OF THE CITY'S DUE DILIGENCE COSTS; AND FURTHER AUTHORIZING THE CITY MANAGER AND CITY CLERK TO EXECUTE ANY AND ALL CLOSING DOCUMENTS ON BEHALF OF THE CITY. ADMINISTRATION RECOMMENDATION Adopt the Resolution. BACKGROUND On January 5, 1998, the City issued RFP No. 20-97/98, seeking proposals for the development of Public-Private Parking facilities (the "RFP"). On April 6, 1998, proposals from five (5) different development teams were submitted and evaluated by an Evaluation Committee, and on July 15, 1998, the City Commission authorized negotiations with four (4) of the proposed development projects. As a result of said negotiations, on July 7, 1999, the Mayor and City Commission adopted Resolution No. 99-23236 approving the Agreement of Lease and the Development Agreement between the City of Miami Beach and Lincoln Plaza Partners LLC, for Development of a mix-use project located at Michigan and Jefferson Avenues between Lincoln Lane and 17th Street ("Land"). Commission Memo Sale of The Lincoln 1691 Michigan Avenue December 9, 2015 Page 2 of 4 On December 20, 2000, the Mayor and City commission adopted Resolution No. 2000-24220, modifying the terms of the Lease by waiving the provisions of Section 10.3(a) and amending Section 10.4, approving the sale and Assignment and Assumption of the Ground Lease from Lincoln Plaza Partners LLC to LNR Jefferson LLC before a certificate of occupancy had been obtained. On October 5, 2005, LNR Jefferson LLC changed its name to The Lincoln, LLC. On or about July 18, 2006, The Lincoln LLC sold its interest in the Project and assigned its leasehold interest in the Land to Lincoln Miami Beach Investment LLC, a Delaware limited liability company, pursuant to that certain Assignment and Assumption of Ground Lease recorded in O.R. Book, 24738, Page 4073, of the Public Records of Miami-Dade County, Florida. On November 17, 2006, Lincoln Miami Beach Investment LLC changed its name to 01K Lincoln Miami Beach Investment LLC, and thereafter, on June 17, 2009, merged with 1691 Michigan Ave Investment LP, a Delaware limited liability partnership ("Tenant"). On December 13, 2013, the Mayor and City Commission approved Resolution No. 2014-28486 authorizing the Mayor and City Clerk to execute Amendment No. 1 to Agreement of Lease ("Ground Lease") by and between the City of Miami Beach and 1691 Michigan Ave Investment LP ("Tenant"), dated as of September 1, 1999, involving the improvements to property located at 1663 Michigan Avenue, Miami Beach, Florida ("Garage Facility") and 1691 Michigan Avenue, Miami Beach, Florida ("Office Space") (collectively, the "Project"), modifying the Scope of Use under the Ground Lease by reducing the minimum number of parking spaces required for the Garage Facility, from 700 to 635 spaces, in order to accommodate the development of a Miniature Golf Project, at the sixth floor of the Garage Facility. City Middle, LLC has experienced delays in completing the project and on December 30, 2014, pursuant to House Bill 7207, requested an extension of DRB 22941 which was due to expire on September 5, 2014. The City of Miami Beach Planning Department granted the extension of DRB 22941 which now expires September 5, 2016. ANALYSIS Pursuant to Section 10.5 of the Ground Lease ("Required Notices"), a proposed transfer and/or sale of the Project requires written notice to the Owner, with the identity of the transferor, transferee, nature of the transaction, percentage of interest conveyed and such other information requested by Owner ("Notice of Sale"). On November 10, 2015, Tenant provided Owner with a Notice of Sale that Tenant intended to sell 100% of its leasehold interest in the Project ("Sale") as follows: Owner of Ground Lease: City of Miami Beach Seller: 1691 Michigan Ave Investment LP Proposed Purchaser: CLPF — Lincoln, LLC Purchase Price: $109,250,000 cash transaction Clarion Lion Properties Fund. LP ("Clarion"), a Delaware limited partnership, parent company to CLPF — Lincoln, LLC, was started November 17th, 1999. Clarion with $7.8 billion in assets engages in the business of acquiring, owning, holding for investment and investing in or engaging in activities related to investments in real estate assets. The Notice of Sale, including the Section 10.5 disclosures, and the Proposed Purchaser's financials, are attached hereto as Composite Exhibit "1". Commission Memo Sale of The Lincoln 1691 Michigan Avenue December 9, 2015 Page 3 of 4 The Lease further provides that the City, as part of its approval of the proposed Sale, may request additional information in connection therewith, and to evaluate the Proposed Purchaser of the Project (the "City's Due Diligence"). The City must approve or disapprove the proposed Sale by January 9, 2016. The Administration is in the process of finalizing its Due Diligence in connection with the proposed Sale. Additionally, in accordance with Section 36.2 of the Lease ("Owner's Reciprocal Right of First Refusal"), the City has the right to elect, in writing, within 45 days after Owner's receipt of the Refusal Notice (i.e. December 25, 2015), whether or not to consummate the Right of First Offer Transaction, at the same price and upon such other material terms set forth in the Offer Notice. The Project consists of a 6 story parking garage, having 729 parking spaces, approximately 120,000 square feet of Class A office space, and approximately 40,000 square feet of ground floor retail space, currently leased at near 90% occupancy. The Project collects net operating rents for parking spaces, leases, in the total sum of $313,138/month and $3,757,658/ year. The Garage Facility net operating revenues of $1,143,280 for calendar year 2014 and the Retail and Office Space net operating revenues of$2,599,352 for calendar year, as contained in the 2014 Statement of Operating Revenues and Expenses, attached hereto and made a part hereof as Exhibit "2". In determining whether or not to recommend exercising the Owner's Reciprocal Right of First Refusal, the Administration requested revenue and expense figures from City-owned and managed parking garages and prepared the following comparison: Net Operating Property #of Parking Sp. Revenue Expenses Income NOI per space 17th Garage 1,460 $ 4,282,321 $ 1,536,045 $ 2,746,275 $ 1,881 Sunset Harbour Gar. 435 $ 734,547 $ 390,591 $ 343,956 $ 791 Penn Garage 535 $ 840,586 $ 408,232 $ 432,354 $ 808 Avg per space $ 2,064 $ 904 $ 1,160 (See Note") Projected $ 2,014. $ 2,014 The Lincoln Garage 729 $ 1,504,875 $ 659,270 $ 845,605 The Lincoln Off.and Retail 160,000 sqft $ 5,234,187 $ 2,634,835 $ 2,599,352 Total $ 6,739,062 $ 3,294,105 $ 3,444,957 KPMG Audited Financial Statemets The Lincoln Garage 729 $ 2,203,615 $ 1,060,334 $ 1,143,281 $ 1,568 The Lincoln Off.and Retail 160,000 sqft $ 5,234,187 $ 2,634,835 $ 2,599,352 Total $ 7,437,802 $ 3,695,169 $ 3,742,633 *Note: The City Garages (17`" Garage, Sunset Harbour Garage, and Penn Garage are paid in full). If the City acquired the Lincoln Garage the average NOI per parking space of$1,160 would be reduced by debt service. The City, via applicable City ordinances, has had a longstanding position of keeping the parking rates below market for the benefit of its residents and visitors and therefore cannot compete with the income stream of a privately operated garage. Assuming a debt service of $4,370,000 (estimated bond rate at 4% of the full purchase price), estimated Revenues of $6,739,062, and estimated Expenses of $3,294,105; the Project would run a deficit per year of $925,043; this does not take into consideration payment of principal, capital improvements, and other additional costs the Project will incur. Pursuant to the Lease, the City currently receives Base Rent, in the total sum of $336,000 per year/$25,846.15 per month. The Base Rent is scheduled to increase on January 1, 2018 by the lesser of the cumulative CPI over the previous five year term or twelve percent (12%). Additionally, the City receives Percentage Rent, which is due within sixty (60) days from the end of each year, in the amount of 2.5% of the Project's annual gross revenue. The City received a total sum of Commission Memo Sale of The Lincoln 1691 Michigan Avenue December 9, 2015 Page 4 of 4 $185,094.85 for Percentage Rent for the 2014 calendar year, for a total rental income of $521,094.85. CONCLUSION Based upon the foregoing, and the fact that the Project will revert back to the City at the end of the ninety (90) year Term, The Administration therefore recommends that the Mayor and City Commission approve the Resolution authorizing the City Manager to decline, in writing, Owner's Reciprocal Right of First Refusal, as required pursuant to the terms of section 36.2 of the Ground Lease; and further approving tenant's sale of the Project to the Proposed Purchaser, CLPF — Lincoln, LLC, a subsidiary of Clarion, subject to and conditioned upon the Administration's successful completion of its evaluation of the proposed purchaser in accordance with article 10 of the Ground Lease (the "City's Due Diligence"), and payment to the City of its reasonable costs incurred in connection with the proposed sale including, without limitation, reimbursement of the City's Due Diligence costs; and further authorizing the City Manager and City Clerk to execute any and all closing documents on behalf of the City. JLM\K��;\MAS\ \RJG Attach -nts: "1" - Proposed Purchaser's financials "2" - Statement of Operating Revenues and Expenses for Tenant t:lagenda12015ldecembentced11691 michigan11691 michigan sale memo.docx EXHIBIT 1 FAILURE TO RESPOND TO THIS REQUEST WITHIN THE TIME PERIOD PROVIDED IN THE LEASE AGREEMENT BETWEEN CITY OF MIAMI BEACH, FLORIDA AND 1691 MICHIGAN AVE INVESTMENT LP SHALL CONSTITUTE AUTOMATIC APPROVAL OF THE MATTERS DESCRIBED HEREIN WITH RESPECT TO SECTION 36.2 OF SUCH LEASE AGREEMENT. November 9,2015 Sent Via UPS and Hand Delivery City of Miami Beach City Attorney 1700 Convention Center Drive Miami Beach,Florida 33139 City of Miami Beach City Attorney 1700 Convention Center Drive Miami Beach,Florida 33139 Bloom&Minsker Suite 700 1401 Brickell Avenue Miami,Florida 33131 Attention:Joel N.Minsker,P.A. Re: Lease Agreement (as amended and assigned, the "Lease") between CITY OF MIAMI BEACH, FLORIDA,a municipal corporation duly organized and existing under the laws of the State of Florida ("Landlord"), and 1691 Michigan Ave Investment LP,a Delaware limited partnership (successor in interest to Lincoln Plaza Partners, LLC) ("Tenant"), dated September 1, 1999, with respect to the property located at 1691 Michigan Avenue,Miami Beach,Florida(the"Premises");capitalized terms used but not otherwise defined herein have the meanings given such terms in the Lease. Dear Sir or Madam: Pursuant to Article 36.2(a) of the Lease, Tenant hereby notifies Landlord that Tenant desires to sell its leasehold interest in the Premises. This notice constitutes an Offer Notice described in Article 36.2(a)of the Lease. Pursuant to Article 36.2(b) of the Lease, Tenant will not consummate any offer from a third party to purchase the Premises until the earlier to occur of (i) the expiration of 45 days following Landlord's receipt of this Offer Notice, or (ii) receipt by Tenant of a notice by Owner declining to consummate the Right of First Offer Transaction. In the event that Landlord elects not to consummate the Right of First Offer Transaction,Tenant kindly requests that Landlord promptly provide a written statement to Tenant of such intention by countersigning in the applicable signature block below. Pursuant to Section 36.2(a)and Exhibit 36.2(a)of the Lease,the terms of this Offer Notice are as follows: 1. Purchase Price-$109,250,000.00 2. Closing Date—The closing of the purchase shall take place on a date designated by Tenant,but in any event not less than sixty (60) days nor more than ninety (90) days following the date such Tenant executes a purchase agreement with the purchaser. If Landlord declines to be the purchaser of this Right of First Offer Transaction, Tenant will likely consummate the sale to a third party at an earlier date. 3. Deed:Title—At the closing,Tenant shall convey to the Purchaser(i)all of Tenant's right,title and interest in and to the Premises by a special warranty deed and (ii) all of Tenant's right,title and interest in an to this Lease by an assignment of lease. The form of such deed and assignment of lease shall be mutually acceptable to Tenant and Owner but shall not in any event provide for any representations by Tenant other than a representation that Tenant has not theretofore transferred or assigned the items being transferred or conveyed thereby and representations and warranties customarily contained in a special warranty deed. Tenant's Interest in the Premises and the Lease shall be conveyed to Owner subject to all liens encumbrances and other matters then affecting the title thereto and any state of facts a survey may reveal (but in all cases subject to Tenant's obligations under Section 2.2 of the Lease). Tenant shall also execute all other documents customarily used in real estate transactions in Miami-Dade County,Florida. 4. Rent Proration—At the closing of the purchase, all Rental and/or Impositions shall be prorated through the date of closing and paid by the party entitled thereto. If Landlord declines to be the purchaser of this Right of First Offer Transaction,the expenses will be customarily prorated as in other real estate transactions in Miami-Dade County, Florida, including buyer receiving a credit with respect to Landlord's post-closing obligations under existing space leases for tenant inducement costs. 5. Expenses—Each party shall pay its own attorneys' fees. All title charges, recording fees, survey charges and other expenses incurred in connection with the purchase shall be paid by purchaser. Tenant shall pay all documentary stamp taxes and surtax payable in connection with the purchase. If Landlord declines to be the purchaser of this Right of First Offer Transaction, then in a sale transaction to a third party purchaser,Tenant shall pay transfer tax,documentary stamp tax,Miami- Dade County surtax, fees and premium for title insurance, the recording fees relating to any title clearing documents necessary to consummate the sale, Tenant's attorneys' fees, any fees and expenses required to be paid to Landlord for its consent and any brokerage commission due to the broker used in the transaction. If you have any questions or need additional information,feel free to contact us at I-IQ Capital Real Estate L.P. [Signature Page Attached] • • Sincerely, 1691 Michigan Ave Investment LP By: 1691 Michigan Ave Investment GP By. Name: Aft.el rc. & ee .c 4 h ty ,2G d iv a�t"h0 Title: cc: Andre Kinney Spencer McCann Dave Powell • WITH A COPIES TO: City of Miami Beach City Attorney 1700 Convention Center Drive Miami Beach,Florida 33139 City of Miami Beach City Attorney 1 700 Convention Center Drive Miami Beach,Florida 33139 Bloom&Minsker Suite 700 1401 Brickell Avenue Miami,Florida 33131 Attention:Joel N.Minsker,P.A. l The City of Miami Beach,Florida does hereby elect NOT to consummate the Right of First Offer Transaction set forth in this Offer Notice. CITY OF MIAMI BEACH,FLORIDA, a municipal corporation of the State of Florida By: Name: Title: EXIIM1T B PERMITTED BUYER FINANCIAL STATEMENTS FAILURE TO RESPOND TO THIS REQUEST WITHIN THE TIME PERIOD PROVIDED IN THE LEASE AGREEMENT BETWEEN CITY OF MIAMI BEACH, FLORIDA AND 1691 MICHIGAN AVE INVESTMENT LP SHALL CONSTITUTE AUTOMATIC APPROVAL OF THE MATTERS DESCRIBED HEREIN WITH RESPECT TO SECTION 10.3, 10.5 AND 10.6 OF SUCH LEASE AGREEMENT. November 10,2015 r) Sent Via UPS City of Miami Beach _ • City Manager 1700 Convention Center Drive -- Miami Beach,Florida 33139 City of Miami Beach City Attorney 1700 Convention Center Drive Miami Beach,Florida 33139 Bloom&Minsker Suite 700 1401 Brickell Avenue Miami,Florida 33131 Attention:Joel N.Minsker,P.A. Re: Lease Agreement (as previously assigned, the "Lease") between CITY OF MIAMI BEACH, FLORIDA, a municipal corporation duly organized and existing under the laws of the State of Florida ("Landlord"), and 1691 Michigan Ave Investment LP, a Delaware limited partnership (successor in interest to Lincoln Plaza Partners, LLC) ("Tenant"), dated September 1, 1999, with respect to the property located at 1691 Michigan Avenue, Miami Beach, Florida(the "Premises"); capitalized terms used but not otherwise defined herein have the meanings given such terms in the Lease. For reference a copy of the Offer Notice is attached hereto as Exhibit A. Dear Sir or Madam: If Landlord declines to accept that certain Offer Notice sent by Tenant on November 9, 2015 pursuant to Section 36.2(a) of the Lease, then Tenant hereby requests Landlord's consent to a proposed Sale of Tenant's interest in the Lease pursuant to Sections 10.3(c) and 10.5(a) of the Lease. Please note the following information about the potential third party purchaser of Tenant's interest in the Lease: (i) the. name of the proposed purchaser is CLPF — Lincoln, LLC, a Delaware limited liability company, and the proposed purchaser's address is c/o Clarion Partners, LLC, 1440 New York Avenue NW, Suite 200, Washington, D.C. 20005, (ii)the Tenant's name is 1691 Michigan Ave Investment, LP,a Delaware limited partnership, and Tenant's address is c/o American Fund US Investments LP, do HQ Capital Real Estate L.P., 114 West 47th Street, 23rd Floor, New York, New York 10036-1508, and (iii)the contemplated Sale is for one hundred percent(100%)of the leasehold interest under the Lease. } • • The proposed purchaser is a subsidiary of Clarion Partners,a real estate investment management company with approximately $36.8 billion in total assets under management (for more information, please see www.clarionvartners.com). The proposed purchaser hereby certifies that it is a Permitted Buyer pursuant to Section 10.3(c) of the Lease. Pursuant to Section 10.3(c)(A) of the Lease, attached please find the financial statements of the proposed purchaser attached as Exhibit B (the "Financial Confidential Information"). Please note, to facilitate Landlord's evaluation of the proposed purchaser, Clarion Partners is willing to disclose to Landlord the Financial Confidential Information; provided, however, by accepting such Financial Confidential Information,Landlord agrees:(i)except as required by applicable law,regulation or legal process,to maintain in confidence and not disclose the Financial Confidential Information,or any part thereof, to any third party other than to Landlord's representatives who have a need to know such information (including, without limitation, its directors, employees, financial advisors, attorneys and accountants) (collectively, "Representatives") it being understood such Representatives shall be informed by Landlord of the confidential nature of such information and shall be directed by Landlord to treat such information confidentially, (ii)to take the same measures to maintain the confidentiality of the Financial Confidential Information as Landlord does with respect to its own proprietary and confidential information; and(iii)not to use any Financial Confidential Information for any purpose other than to evaluate whether or not to consent to the proposed Sale of Tenant's interest in the Lease. If the proposed Sale is not consummated,or any time upon request of Clarion Partners for any reason,Landlord will return to Clarion Partners or destroy all written Financial Confidential Information(except as may be required for regulatory purposes). Pursuant to Section 10.6(b) of the Lease, attached as Exhibit C hereto please find a proposed form of Assignment and Assumption of Ground Lease (the "Assumption of Lease"). Please confirm the Assumption of Lease is acceptable for the consummation of the Sale to the proposed purchaser. In the event that Landlord consents to the proposed Sale of Tenant's interest in the Lease as described above and approves the Assumption of Lease attached hereto, Tenant kindly requests that Landlord promptly provide a written statement to Tenant of such consent and approval by countersigning in the applicable signature block below. If you have any questions or need additional information,feel free to contact us at HQ Capital Real Estate L.P. [Srgnatro�e Page Attached] e Sincerely, 1691 Michigan Ave Investment LP By: 1691 igan Ave Inv eat((ir By: Name:, /4-Pt. r t 1 . i410 er Title: r� cc: Andre Kinney Spencer McCann Dave Powell WITH A COPIES TO: City of Miami Beach CLPF—Lincoln,LLC City Manager do Clarion Partners,LLC 1700 Convention Center Drive 1440 New York Avenue NW Miami Beach,Florida 33139 Suite 200 Washington,DC 20005 Attention: Barron Williams City of Miami Beach Mayer Brown LLP City Attorney 214 North Tryon Street 1700 Convention Center Drive Suite 3800 Miami Beach,Florida 33139 Charlotte,NC 28202 Attention: David B.H.Saye Bloom&Minsker Suite 700 1401 Brickell Avenue Miami,Florida 33131 Attention:Joel N.Minsker,P.A. The undersigned hereby certifies to Landlord that it is a Permitted Buyer pursuant to Section 10.3(c)of the Lease. CLPF—LINCOLN,LLC, a Delaware limited liability company Name: Barron Williams Title: Director • The City of Miami Beach,Florida does hereby consent to the proposed Sale of Tenant's interest in the Lease as described above and approves the form of Assumption of Lease attached hereto. CITY OF MIAMI BEACH,FLORIDA, a municipal corporation of the State of Florida By: Name: Title: EXHIBIT A OFFER NOTICE -• -- . c. . , _ ..., . , . ___ . , --: , CLARION PAP INEP 'S - . , 7 -,...., , - -\.___ • . . . .. . . ., ., , 1.011 ::. .. .,, : ,.,.. -- ,,,ii ). : i , , ; . , , , , ,..,. , , , ,:.... .. ... ; , IP i . fp , , , • , ,.., . . - . 1 -,.; ri '; ' , • F 7 I ; '' ? if 7 i■ 7 : . ll • li' fj. - 2 ' 7' • 1 1 / r i 1• I r I '' ' ' i--i l'i' • ‘'i : / i , . , ,A„N N U A L REPORT 2014, 1 , 1 / / /fi I / t ; i i 1. . , 1 / .,„ ., • . i . 1 • , . , ". I -; , • ,-. ill 1 . t. , - - • . ' r, 0:.. ' ' ,''' • • , i I 1 i 1 1 . : "'? ' ' 't- ..- -• ■ , , I 1 il 1 I ' e. 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',' ,,,,%, ,s,' . ,.;:,,,-„7%,j.,4,,,,,,,, , • • .,• .-:'*•k,"1';'•`,,'.<*nta,.„,..-!.]•:'''.•.;,',4•''''':'''''A. ''''''''‘' WVItAgi Affi'•-"; '-'''' '.'. ••• '' ' •*•'•• 111M1 4'.41£0474.f•A'^';'"W'S•F.,;,,,..,•:',,,'.';';;•.1".•••,..':' ''''4•''''''''''•I'''''' :,','-;.•:,•„,, .lii]4 ;;O*Pfaii,'.."..,-,:: '•: 4' .'''' - •5 ----.-'-,.•- :- .-,:•-VX-It .-.4.'"' ''''''''''''•\''•‘.'• ::''''41.V.-:' ...eite'' ''.•i'q..:•'-''''''''''• l''' '• ' WiTglie.Nit, .- --,_.-,, ,-;.ii,.„:.;,:•,„::: - -.. . • ..,--,,,..--...•.:.,...,:',...,---....:••-,_--,;....,,,,s:•,,,.-1„,,. : 1,,.„ ,4,„ .1:4', . 0...064;.;i:" . 0 .;...,:.,,,,,i'‘.,•:.:.,,...•....0...ti,nto, ...;,.....,f., --,,,,,---,-....• • Letter to Shareholders The Lion Properties Fund delivered strong performance in 2014 with a total return for the year of 13.16%. Accelerated leasing activity and value gains across most of the Fund's portfolio drove performance. The overall quality of the Fund's portfolio, focus on :,' .. Y`: high-growth markets that are leading the improving U.S. economy, bias towards urban and transit-oriented investments, and " ` . 1 maintained discipline in acquiring assets with accretive yields are -. key contributors to results. The Fund's one-year total return exceeded our original expectations of 10%-11%for the year. Income for 2014 was 4.78%while appreciation was 8.09%,again broad-based across the Fund's Ralph J.Belford.Ili portfolio.The Fund outperformed the ODCE benchmark over 2014 by 78 bps,largely driven by value increases from office,industrial and retail assets.Over a trailing three-year basis,the Fund's total annualized return has been 12.28%,slightly ahead of ODCE by 4 bps.The Fund's 5-year return is substantially ahead of the ODCE benchmark(+114 bps)due in large part to strong gains from West Coast and Houston office assets,and strong recent gains at industrial and retail assets. Total assets increased from$7.2 billion to$7.9 billion during the year,and the portfolio remains broadly diversified over markets,property types and individual assets.The Fund accepted$412.0 million of new contributions during the year,based on the strength of the real estate market and Fund returns,and paid out redemptions totaling$382.3 million.The Fund declared cash distributions totaling$212.0 million resulting in a one-year dividend yield of 4.15%. The Fund saw continued strong improvement in operating fundamentals.Leasing activity was very positive during 2014,with over 5 million square feet of leasing completed.Overall occupancy increased from 93.1%to 94.2%.This has been extremely helpful for the portfolio,but has created some volatility in net operating income(NOI)growth,as new leases at higher rents require associated downtime and free rent. In general,we are seeing solid leasing demand,high occupancy levels and the ability to increase rents,We expect healthy income growth over the next few years from the commercial property sectors,and continued moderate growth from the apartment sector,which began to normalize in 2013.We continue to see rental rate increases across most markets and expect this to trend into 2015,driving operating income growth and value at our properties. The Fund made thirteen new investments totaling$947.7 million in 2014,and sold eight investments totaling$495.8 million across all property types.The Fund adhered closely to its investment strategy,acquiring office properties in the San Francisco Bay Area and Austin;urban and transit- oriented apartment assets in the New York metro area and Denver;industrial buildings in strategic secondary markets(Raleigh and Indianapolis);and a new Whole Foods-anchored retail center in Austin,Texas.The Fund's most significant investments in 2014 were a new outlet center and a new Whole Foods-anchored power center,adjacent to each other in West Palm Beach,Florida.This allowed the Fund to significantly increase its retail exposure,with newly developed,high-quality assets having the potential for accretive yields. Continued strong capital markets conditions in 2014 allowed the Fund to opportunistically prune the portfolio and continue re-balancing toward preferred markets and property types.The Fund sold the Lion ES hotel portfolio,significantly reducing its weighting to the hotel sector.The Fund also sold the Specialty Labs Office Building.a single-tenant office building north of Los Angeles,for asset/location considerations.All but one of the remaining sales served to reduce non-strategic properties or exit non-strategic markets. C '.r. 'I(?i.; ; r i;•f CJ;;.(` I.. "(:f.=:, r h,.,l;.. 3 • Leverage began 2014 at 27.6%,within our target range of 20-30%,and stayed in tight range,ending the year at 27.9%.The Fund had$490.0 million of debt maturities over 2014 which were replaced with two new financings: $300.0 million of fund level notes with maturities ranging from 7-12 years;as well as a new$185.0 million mortgage loan secured by fifteen industrial assets,with a term of 7 years.At the end of the year,the Fund also drew on its line of credit(LOC)with the closing of the Palm Beach transactions.The new financings reduced the Fund's overall interest cost quite significantly in 2014,starting the year at 5.7%and ending the year at 4.7%(including the LOC). This represents an annual savings of approximately$10 million in interest cost. As we look to 2015,improving economic data,evidenced in the second half of last year,continues to point to a broadening economic expansion and a strengthening labor market.In particular,consumer spending,business investment,the housing rebound,lower fuel costs and shrinking budget deficits are all expected to drive U.S. economic growth going forward.Coupled with continuing low levels of new supply,this leads us to expect further strengthening of commercial real estate fundamentals,with low vacancies and higher rent growth over the next twelve months.Capital flows to real estate and transaction volume are expected to remain strong.Risks to the near-term outlook exist in connection with a continued slowdown in global growth and transitioning global energy markets. The Fund's strategic plan for 2015 includes increasing exposure to markets and sectors we believe will show superior growth or to have relative value,while continuing to prune assets that are in less desirable or strategic markets.New York,Seattle,San Francisco and Boston are top picks among major markets,while we view Dallas/Ft Worth.Austin,Denver,Southeast Florida,Phoenix,Salt Lake City,Portland and Raleigh/Durham as showing increasingly attractive growth among secondary markets.We will remain focused on assets located in urban, transit-oriented areas,and continue to be disciplined in regard to pricing. On behalf of Clarion Partners and the Lion Properties Fund team,I would like to thank you for your continued support of the Fund. Ralph J.Belford.Ill • Portfolio Manager (212)883-2535 Jeb.Belford @clarionpartners.com > r k rs r r t�6~ £ t . f •^ °r• �. 4 r / '� 4 ,i:' A y Y // �fe�,4:;.:11;;'''''S.'''',11*,''.,'`.:;'.6 �A' = a .1/ / / --:-..' / / ....4- ... '...4' ....q" -Sao 3 � + �.p/ 4 :f,.;'...;,..... ie : / ps k x..:�t:,.$ al r " gg � h: :Y k �' �dy ,�C `�}VY / ,yX Y pt F h } s d , d F " / :-.-- .: if .l'....:.. . .1....:.........'''A:' -.i* ; � + ' - jj . . .... , .....„-...., ....„.,.t.(- ir-114..:-t,, ,, .--. ' f < ' t,�. •M�`" f o• i• R� may.""n / £ - 7 ^,eke e 4 y�. '' i z x y,u H>asam� e 3: z /' �, "'` �ki t a r i fE $ a P w .Jky,.t q" g y 4' y\ S 'yb.:r 'ikwp .. - .,.gyp wT,,, f �£ FY < ,*h.°S ruE�' i"�ro�°° Ef erg, , i' ...4t,:-.4.,',....".4.7,...T.,e,t4,7'''. 4s, s Yfp of , �+ � Ad �' ..• os.•.. '�•" .1 . b ., E « ,,, t r r: 1000 JErrERSO1 ;HOB KEN.NEW JERSEY ,.. . . .. Fund Overview 04.2% Portfolio Occupancy KEY STATISTICS' AS kii DECEMBER EffIgEkS1):1014), par 27.91 _ OF EC $7.925 Million Cash Ratio . Total Asset Value $5,398 million Leverage Rabb S57 Million Net Asset Value $1*164.68 Average ha er L1% Per Share Value 137 Number of Shareholders 221 221 Number of Investments 33 Number of Markets ) Ot ,.. r (.,. , ,, ' -Vt,z.,414,,.4*,1 , ,, ", s,;,,),,,-,-„„) lt:'.1•'PI' , . 4,- i r, -;•''?,, - tov„ _r ,... , . I )--•-„:r' ..e,0-, • Office ' : ,.,...,.. • Retail () • Industrial • Apartment --- .....,_ ,.. • - • Hotel at- Other ., Past performance is results please see Notes on page 35 for additional disclosure irlformetiOn- not indicative of future re ------ '''l ,'"P-:,.,:'.i l. l..' ..',• . ,,, , . ,. a . Fund Performance ...._ ,FUND PERFORMANCE VERSUS NFI--ODCE 18% 14.9% 13.8% 12.4% 12.3% 122%. 12% ,...,., 7.t3% 759h :: ii 4014 1-V•ar 3.-Year &Near: 10-Year Since Inception al Lion Properties Fund ■NA-ODCE:Equal weight index. ,SINCE: Lit3N PROPERTIES F�tJkal 1 YEA ...!' .::{ 3 YEAR -YEAR {` <..10 YEAR INCEPT ON Income Return 4.7896 5.0:3%. 5.69%; 5.52% 643% Appreciation Return 8,09% 6:99%' 8.83% 0.00% 0.63% Total Return Before Fees 13.16% 12.28% 14.89% 5,5296 6.99% Total ileturnAfter Fees 12.18% 11.30% 13.88% 4.5696 6.11% 2014 Continued a trend of strong performance for the Lion Properties Fund;.with its fifth consecutive calendar year of double digit returns.The Fund'produced:a 13.16%total return for the year,comprised of:a 4.78%income return:and 6.09%from appreciation.T.he appreciation:return was composed of 7.59%in property-level gains,while debt mark.- tO-Market contributed 48 basis points. The Fund's 2014 income return was 4.78%vs• 5.07%for the()D.cE.The.Fund's income return was moderately • impacted this year by capital programs taking place,at a handful Of its apartment and_hotel properties(reducing N.O1),rent concessiions associated with several major leases that have boosted value(6.00 North Michigan Avenue and Arboretum Gateway-for example),and interest cost on the Fund's:debt..00 the:other hand,Fund appreciation was 8:09%vs.ODCE's.703%.The Fund had strong value gains across most of its portfolio,with office,industrial.and. retail assets leading the gains.Office properties increased by 11.1%,with growth led by properties located in top office markets such as the San Francisco Bay`Area,Houston,Southern,California,New York,and Boston.The:Fund's industrial portfolio experienced broad based.value.growth of 8.4%with significant increases at properties where major new leases we're signed.Retail value growth of.8.0%was primarily driven by 600 North':Michigan Avenue•in Chicago.Apartment values increased a moderate 3.8%,as the Fund's Washington DG apartments again tempered growth,:decreasing in value by 1.3%during the year.Excluding Washington DC apartments,this sector would have been up 6.8%.:Hotel vaalues'increased by 6.5%,predominately due to capital spent on renovation programs currently taking place;-at two of the Fund's four remaining hotel assets. On a 3-year basis,the Fund's total return outperformed the ODCE benchmark by 4 bps.Superior property-level performance and significant value gains at:major assets during the last couple years have countered the impactof the Furnd.'s hotel and Washington:DC weightings over the 3-year time frame. The Fund's 5-year return is substantially ahead of:the ODCE index(+114 bps)due in large part to strong gains in the office portfolio,particularly in the West Coast and_Houston.strong recent.gains<at industrial:assets:(particularly Southern California)and at:retail assets.Apartment performance was strong early in the g-year•period,but:has lagged in the-last:3 years(with'Washington DC-area apartments the major factor).The single:largest asset contributor to autperformance has been 600 North Michigan.Avenue,a prime urban retail asset in Chicago.. >P&st parfottrrance is not mdidative:of future results.Please:see Notes on page 3S for additional disclosure information. t i S lC..f4 is€("i,N.PPO:pEi TIE 5 c'O ;!%D.7 Investment Acti• vity ACQUISITIONS The Fund.made thirteen new investrnents'in 2014,totaling$947.7 million.The,`Fund adhered closely to its stated' investment strategy throughout the year;increasing its retail weighting significantly while also adding to its industrial overweight..The Fund acquired urban and transit-oriented apartment assets in the New York metro area and Denver; The Fund added office.properties:in the San>Francisco Bay.Area and three smaller office:assets.within the high-growth Texas markets of Austin and San Antonio:.Geographically,the Fund succeeded in increasing exposure:to several of its target major markets(New York,:San Francisco,Southeast Florida),and also:to top secondary,`high growth markets like Austin,Denver and Raleigh/Durham.The Fund remained.discipli:ned on pricing,with average stabilized-cap rates and unleverect.IRRS at what we believe are the top end of the market for core transactions. The larges.t new investments were Palm Beach Outlets and Marketplace at the Outlets which served to.increase the Fund's overall retail weighting.The properties are adjacent to each-other to forma critical mass of leading retail brands. at a-highly infill,former mall site on I-95 within Palm Beach County,one of the most affluent areas in the U.S.The :properties were purchased in December fora total value of$371.4 million.The investments are.currently structured and :being held as mezzanine loans:however:both will convert to equity during 2015.The Fund.also purchased Whole Foods at the Domain,a newly-developed grocery center`in Austin,Texas, The Fund.added five office properties during the'year,most notably the:$107.0 million acquisition of 60 Spear.a Class A creative office building in San Francisco's South Financial District,The Fund also increased its exposure in Silicon Valley with the purchase of 2901 Patrick Henry in Santa Clara.California.Additionally,Mira Vista and The Overlook were acquired In'the high-growth,tech-focused market of Austin.University:Park Tech Ili.&IV werie,purchased:in Sart Antonio at a high going-in yield,.and complement the Fund's existing industrial assets in the submarket,University Park Tech I&II,which:are Iodated adjacent to the property. During the year the Fund acquired three apartment assets,The Station at Riverfront Park in Denver,Colorado,and Parkway Lofts and Pririthouse Lofts in the New York metro area.The Station at Riverfront Park is situated in 1.:600.:a short distance from Denver's Union Station,.a high-profile:urban redevelopment project-and transportation hub. Parkway lofts,located in Bloomfield,NJ,and Printhouse Lofts,located in Williamsburg,Brooklyn,are both brand new luxury apartment properties located within walking distance to mass transit offering short commutes,to Manhattan.. :Lastly,the-Fund acquired a$115.0 million industrial asset,Research Tri,Center,'a teribuildingi.industriai ten-building park located in the tepidly growing,supply constrained market of Raleigh//Durham:as well a°s Plainfield'ParkII,a development project in the Indianapolis market. PURCHASE PROPERTY > GLOSE SHARE CAP PR x ED METRCf IrIARKI:T Mira Vista Office Austin 05/01/14 $38.8 5.6%. 7:3% The overtook Officer Austin. 05/01/14 $126 6.4% 8.1% university Park Tech 111&IV office: :San Antonio 05/01/t.4 $26.$. 8.9% 8.8% Whole Foods at Domain Ratan Austin 05/08/14 $34.1 4.9% 6.4% Plainfield par4 ll' Industrial Indianapolis fib/19/14 $14.92 6:8%Z 8:6% 2901 Patrick Henry:Drive. Office Santa Clara 06/24/14 $26:0 6.9% 7.9% Research.Tri-Center Industrial Raleigh 08/06/14 $115.0 6.5% 7.7% The Station at Riverfront:: Apartment Denver 08/07/14 $666 5.6%'' 7.0% 60 Spear• 'Office San Francisco 08/19/14 '$107.0 5.2%' 6.9% Parkway Lofts: Apartment New"York 10/30/14 :$104.0 6,3%' 8.094 Printhouse Lofts Apartment New•York 11/06/14 330.5', 4.5% 6.2% Marketplace'at The Outietsg Retail West Palm Beach . 12/17/14 $116.7 5.5%; 6.59E Palm Beach:Dutletss Retail West Paim.Beach 12/17/1.4 $254.1 5,4% 8.446 Total $947.7 68% 7,6% "Projected IfRRs:are derived from Clarion Partners'underwriting protections.and extend 10 to 13 years depending on each investment's forecasted stabilized reversion Year 'Purchase.pricerepresentect by total committed development cost.Land cost at acquisition was$1,900.000: *stabilized cap rate(development property); "Stabilized cap rate(strateg,c:le:ase-up property) 5Palm.Beach Outlets and Marketplace at the Outlets;are loans:carried-at-cost values of 5112.054,250 and$99.175:675:respectively,as of December 2014.The purchase price above:+s represented by total cs omitted amount which.*Ili be paid when the loans conviert to equity. Past performance is-not indicative 1ot:tire results.Please see Notes on Page 33 for additional disclosure information, 8 C,I r 14.1 , :: 1,COIN PRO Ff. 'i !>•;, 's ;,1 s t,? ;. 1>°.O.,^I 4jE;t>Ct N.'.7 G`•i 4 DISPOSITIONS 'The:FA4nd had another active disposition:year.taking the opportunity to execute strategic sales and prune the portfolio of weaker assets as demand in the market was strong.The Fund closed on sales totaling$495.8 million in eight transactions across all five property types: The most significant disposition of the year was the sale of the Lion ES.hotel portfolio.The portfolio was old for A .gross price of.$800.0 million,resulting-in total gross proceeds of to the Fund:$300:0 million(LPF was a 37.5% owner).The sale significantly reduced the Fund's hotel exposure,as of December:31;2014. The Fund sold:Specialty Labs Office Building;a single-tenant office building north of Los Angeles,.for esset/locatian considerations.The transaction'closed in December for$96 0.million.The Fund also sold two small medical office buildings during the year fora total of$22.7 million:Gvirinne:tt Medical located outside Atlanta for 11.1 m Ilion;artd Vero Medical.$04es,located in Vero Beach.Florida,for$11.6 million. The Fundcontinues to prune smaller non-strategic assets across its>retail,apartment and industrial portfolios:. Pleasant.Shops,a lackluster neighborhood retail center iocated:outside Boston.for a total of$23.4 million Banyan GrOve.at Towne Square,an older apartment Community in Virginia Beach.which sold for$41.0 million;and two smaller Phoenix industrial buildings..Fifth Street Industrial and Geneva Industrial.sold for$9.0 million and$3.7 million,respectively, LAST SALE y R ►PPRAISAL '_ RICE a 1pROPERTY METl CLOSE AT HARE Ys Al SH l EALI PROPE1 TYt NAME.:P4,.:-.!:N.:;ONEEVItion PE MARKET (DATE aNtILLI S) $MILLI z .• Fifth Street.industrial Industrial Phoenix 04/14/14 $9.5 $9.0 8.7% Pleasant'Shops Retail Boston 07/24/14 $22.9 $23.4 ill.6% Lion.ES Hotels Hotel Various 08/12/14 $298.3 $300.0 (05%) Gwinnettt Medical Office Atlanta 08/13/14 •$10.6 $11.1 :(13.4%) Banyan-Grove at Towne Square Apartment. Vtrpin}a Beach 09/04/14 $44.0 $418 6.0% Geneva Industriet Industrial Phoenix 110/03/14 $4.4 $3 7 6.2% Specialty Labs Office Building Office Santa'Clarita 12/12/14 $98.4 $96.0 15.8% .w. •Vero Medical Suites Office Vero Beach 12/18/14 $11.1 $11.6 4.1% dotal $499.3 $493.8 3,7% Past performance is not indicative.cf future results.Please see Notes on.:page 35 for additional disclosure information, �y �f e. � FI €( 1...“4 3. �:� ii gj _..#�' Si;9 Property Type Diversification PROPERTY TYPE DIVERSIFICATION AS OF DECEMBER 31, 2014 to 40 39.o'1b. _. 31.9% 30.5% 25.3% 20 17.8% 19.296 le 1% 12:291: to 3.5% 2 99b in 1. 0.2%- o_ Office Apartment Industrial Retell Hotel Other ■ Lion Properties Fund NCREIF Fund Index(NFi-ooce) Office-The Fund has a long-term underweight bias to the office sector,based in part on the sector's:historical underperformance:compared to the index,often with more volatility and greater capital requirements:We rernair cautious on the appetite of tenants,especially in traditional sectors like law,banking and insurance,to add new space. However,office properties tend to outperform as recovery periods continue,generating significant,rent growth. Office demand has been recovering nicely in major Markets as companies grow and office fundamentals gained in strength over 2014.This is expected to:continue over 2015-2016 with the market continuing to experience low new construction generally.The Fund's present strategy. is to increase its near-term weighting to office but still maintain its::overall long-term underweight bias to the sector. Apartment-The Fund re.mains:overweight the apartment sector,consistent with its long-term bias,as apartments are one of the two long-term best performing property sectors in the index.The Fund's:present strategy is to modestly move exposure to an even-weight stance,based on a more mixed near-term picture for the sector,On the positive side, demographics,cautious demand for home:purchases and tight credit standards continueto push people into the renter pool,especially towards u rban and transit-oriented properties.On the negative side,new supply has returned to the tong-term national average and is'-exceeding it in a handful of individual markets.Rent growth has rrioderated,and rent and Value growth in:thhe other major sectors are expected to exceed apartments in the near-term. Industrial-On a longer-term basis,the Fund maintains an even-weight bias to the sector,given its lower weight in the index'.In=the near term►,however,our.view'remains particularly bullish,and the:Fund will continue its overweight to industrial real`.estate based on strong fundamentals.:The sector.was hit hard in the downturn and rents on average•are still 6.49E below Peak,indicating the recovery has still been relatively:moderate to date.E-commerce has also been a major boon to:the sector,:driving`new demand for'big-box fulfillment and distribution centers.Leasing activity nationally is ramping,with occupancy levels reaching stabilized levels in many markets,increasingly giving landlords the upper hand in lease negotiations.We expect these factors will lead to strong rent growth in the coming years. Retail-Retail:properties have a track record of strong performance over the long-term compared to other property types and the sector warrants an overweight bias.The. succeeded in increasing its retail exposure in late 2014, but is still modestly underweight the sector.The Fund*focused on four specific format types.The first is-high- street-urban retail,which is destination affluent retail in major cities;Tenant demand for these areas is robust,for both sales and branding purposes.The second is grocery-anchored retail;necessity retail like grocery.remains a strong performing category,particularly With a top grocer brand in affluent neighborhoods.The third are outlet centers as this category has performed very well in recent years and represents a prime growth area for the retailers. themselves.Last are Class:A:malls(although extremely challenging:to acquire)given their historic track record of producing very strong returns. Hotel-The Fund currently has a weighting of 3.5%to hotels and expects this will be reduced to 0-1%over the medium term.Hotels are capital intensive and are relatively volatile compared to other property sectors.The market also generally•prices'hotel assets for value-add to opportunistic returns,and generally with higher leverage levels. The Fund does not view hotels as a core component of its strategy going forward: Past performance isnot indicative Of future results.Please.see Notes.on Pane 35.for additional disclosure information 10 .../ono,.i : .>. i ..';::3' h;it t W-10. Fai`.td;JAL t.i :..'C . 2014 MARKET ALLOCATION LPF WEI.GI TING NPC of?CE FPD MAJ R ME'T'RO MARKET 12/31/14 : 12/ /14 12/31/l4 Boston 5.2% 6,8x; 6.6% New York'Metro 13:3% 14.656 14.2% Washington DC 16.7% 8.45E 7.9% South Florida 5:1% 4,5% 4.8% . . Chicago 6.6% 7:3% 7.+156 Houston 6.4% 3.6% 4.4% Seattle 2.8% 3.9% 4.0% San Francisco Bay Area 10.6:% 9.2% 9.4% Southern California 15.4% 16.6% 14.6% Rest of•Country 18.0% 25.1%• 26.7% Boston-The Fund continues to favor Boston,where it is slightly underweight,given it has a:strong technology industry base,diverse;economic drivers and a world class education system,Boston has also seen robust.growth froth. healthcare and biotechnology. New York The Fund is just moderately underweight the New York metro area as investment activity during:2014 increased the Furd's:allocation.Within New York,however,the Fund is underweight office and'overweight apartments: We believe New York.:will be an outperforming:market over the medium.term,.driven by its high per capita income and internal immigration,;strong housing market,position as the financial capital of the world,and highly productive workforce and dynamic industry base.Office assets in Manhattan,industrial assets in northern New Jersey,and retail assets within the:city and boroughs will be particular targets. Washington DC-The Fund continues to have a significant overweight to the Washington•DC metro area,although well down from its pre-2©13 weight.While Washington DC has performed well over the longer term;it has been a poor performer over the last 5 years..We believe that the metro will continue to underperform'over the near-term given continued;.concerns over federal .employment growth and potential apartment overbuilding.This continues to represent:a significant risk factor for the Fund and we continue to'seek to de-emphasize Washington:DC exposure through near-term asset sales,particularly apartments: South Florida-The Fund has recently increased its exposure to South Florida given its strong population and job growth prospects.Further,its ties to:.Latin America and international trade,and economic drivers such as healthcare and tourism make it an increasingly attractive area.The Fund will seek to moderately increase its overweight exposure to this market. Chicago—The Fund has had a consistent underweight bias to Chicago and the Midwest in general,Its relatively even weight stance to Chicago is only due:to the large size of 600 North Michigan Avenue,which has been a top performer for the Fund,The Fund does not envision:a modification to this stance. Houston-The Fund is moderately overweight the market and still views Houston as one of the top U.S markets despite recent declines in energy pricing.Houston has become far more economically diversifled,and we believe that portions of the energy sector Land other sectors)may benefit from lower energy input costs and increased consumption.Nonetheless,the market will bear watching closely and will temporarily not be a top target for new investments.The Fund's primary holdings in Houston are in the office sector and the assets are well-positioned to withstand current volatility in the energy industry,with 90%of the Houston office portfolio on long-term leases to large,quality tenants with sizable balance sheets: Seattle-Clarion continues to:favor Seattle,which has a very.strong technology industry base.Seattle draws jobs and population growth for its lifestyle.The Fund would like to add to all property sectors in the market. Pass perfolrrrance is not indicative of future results,Please see.Notes on Page 35 for additional.d.isctosure rnfprreetion. = * • . . San Francisco Bay Area -The Fund is modestly overweight the•San Francisco/Bay Area.where the technology sector continues to be a major driver,and the city(and South Financial District and South of Market in particular)continues to be at the hub of recent and expected future growth.The area also attracts a diverse economic base and draws affluent residents for its quality of lifestyle.LPF favors investments in the CBD(particularly South of Market),Silicon Valley and in strong suburban areas.The Fund will seek to maintain its modest overweight to the San Francisco area but will seek to reduce its office overweight and increase Other property sectors. Southern California-The Fund's Southern California exposure is relatively even weight to IPD and ODCE.LPF favors select strong submarkets in Southern California,while being more neutral on the overall region.Los Angeles and the Inland Empire continue to form one of the strongest industrial markets in the nation.while West LA.Santa Monica. Playa Vista,Pasadena and parts of San Diego are examples of areas favorable for office,retail and residential investment. Top Secondary Markets-Aside from the major markets/areas described above.Clarion believes the following secondary metros have strong growth prospects over the next three or more years:Austin(tremendous job and population growth thriving technology industry),Denver(energy,lifestyle),Phoenix/Scottsdale(population growth, attractive alternative to Southern California,major intend trade hub),Raleigh(technology/biotech),Salt Lake City (population growth,well educated workforce,tow business costs.growing tech center),Dallas/Ft Worth(job growth. diverse economy,trade),and Portland(diverse economy,highly skilled workforce). -,,,,, , ,...„,t.‘! , 40 sts , ... " IP. * - • ,,,„,,,, ,..,„„, °— -- ----' :7 .•i 0'-''''% tarti.; 4?I, i . T IC * ' . iia •.- i I • Vital, gt ii vow ,ws„, V , .11 f ' 4 •....4% - Apia__ k WEST HOLLYWOOD GATEWAY LOS ANGEL ES CALIFORNIA Past perfortronce is not exitcative of future resuits NOMA see Notes on Page 35 for acichoonal discIosure etformatton --_,..—.—.... — 12 ' 1 :,;,,, (04 . ;-,.,;'; : . ',1: ,.. -t.,....: ,iNtwAsi ;,“-PC.,P . Property Operations . . . , Overail portfolio occupancy(excluding hdtels)increased from 93.1%to 94.2%during 2014.The largest,gain was in the. Industrial sector.which increased from'91.5%to 94.8%based on strong leasing throughout the year.Overall;187 leases were executed.at the Fund's commercial properties.representing approximately 5 million square feet of space. The Fund's hotel portfolio averaged occupancy of 76.6%on a trailing-twelve month basis. Same-property Niel was up 1.9%in 2014,below prior years as well as below eXpectations for the year,although'a small number of unusual factors account for much of theyariance.The office portfolio led with a 4.9%same-property increase,based on rent gains associated with leases:signed at various assets,including Chevy Chase Pavilion following its renovation in 2013.Apartment assets delivered NOI growth of-3.0%,reflecting overall more moderate rent growth in that sector compared to the years immediately after the economic downturn.Industrial NOI was up 2.7%,reflecting leasing activity in 2014 that will:significantly boost same property NOI in 2015 and X016,given overall strong fundamentals in that sector.Within the retail portfolio,Ni31 decreased 4.2%in 2014 die to the.new Under Armour lease at 600 North Hichigan Avenue,as this resulted m build-out time and free rent during the year.Retail NOI will have a very strong rebound in 2018 and 2016 as new lease revenue kicks in.Hotel net operating profit<NOP):was down 10.6%, largely as a result of:renovations at several remaining hotel arssets.Hotel sector results were also skewed by the sale of the Lion_ES hotel portfolio in 2014..as the Lion ES hotel portfolio was:on pace to deliver projected 12%year-over-year NOP growth:`Due to its sale,however;it is no longerincluded in the same-property analysis.Adjusting for,both the Lion ES sale and 600 North Michigan would have resulted in same-property NOI growth of 4.2%for 2014.across the portfolio;Partly as a result of strong 2014 leasing activity,our projections"show same-property NOI growth of6.4%in 20.15 and.9.7%in 2016'. SAME-PROPERTY NOI GROWTH (2411-2016)' 3012 2013 2014 2015P 2016P; CURRENT:;: PROPERTY TYPE v.2011 > . v:2:012 v 2013. v.2014 v,2015P C'CCUP NC�i!' Industrial 1.1% 629 2.7% 8.8% 10.7% 94.8% Office 3.4% 60% 4.9% 0.6% 9.2%_ 94.2% Apartment _ 5.6% 2.39 3.0% 5.8% 43%. 94.48 Re:tall 3:6% 6.4% (4.2%) 16.7% 7.81E 93.0 Hotel 9.696 '7.6% (10.6%) 12.2%• 17.7% 76.6% Weighted Average 4.2% 5.3% 1.9% 6.4% 9.7% 94.2% ;Adjusted Weighted Averages 4.2% 1 Analysis;set includes properties,heid in a r-to yea -yiaai analysis and may vary ovefi periptiS as properties are licOoired'and sold 2 Excludes 600 North Michigan:Avenue and adjusts for the sale of Lion ES Hotels. Tenant Exposure-The Fund has favorable tenant diversity,with over 818..commercial tenants,none of which represent greater than 1.5%of Fund revenue:The portfolio consists of predominantly stabilized assets with limited vacancy exposure.and a lease expiration profile spread relatively evenly over the next 10 years. LEASE ROLLOVER SCHEDULE '" DECEMBER 31,X2014 J.EA"SE R OvgR F TOT RE E QUARE F T Office 94.2% 74% 12.39 14.0% ;63% 12.6% .47.7% Retail 4 93.0% 10.1% 10.7% 12.3% 44% 9.9% 52.4% Industrial 94.8% 14.3% 6.8% 10.9% 16.9%. 10:0% 41.1% Apartment 94.4% N/A N/A N/A N/A N/A N/A Hotel. 76.6% N/A N/A N/A N/A N/A N/A Total 94.2% 12.2% 8.5% 11.7% ;13.0% 10.5% 44.1% Past performance is not indicative of future resuits..Pleassee Notes on'Page 35:foredditional:disclosure information, c( r i- t 'i e`Ro, t:: !r r. I...J.i 13 • Property Diversification BY GROSS REAL ESTATE VALUE PROPERTY TYPE (%) REGIONAL.DIVISION (%) a Office 31.9% I Northeast 191% 9IAPertment 30.5% I Mideast 20.4% iridustrlal 17.8% is Pacific 30,096 Retail 161% I Mountain 5.7% a Hotel 3,5% I Southeast 5.6% Land 0.2% •Southwest 11.3% East No Central 7.9% West No Central 0.0% LIFECYCLE (%) STRUCTURE (%) a Operating 94.8% is Wholly Owned 88.8% I Development 3,7% 1 Joint Venture 11.2% Leasing 1.3% Predeveloprnent 0.2% CORE 7 VALUE-ADD (%) Core 93.7% •Value-Add 6.3% 14 4 f ,••( st REP041 „ • Value-Add Activities . „ .- Value-Add Activities The-',Fundt value-add exposure is currently at 6,3%of its assets(inclusive of capital committed to the value-add programs),nearer the lower end of the pund's:.$1645%:tairget'range The Fund started 2014 with five development assets(adding one during the.year),.four lease-up,attetS:(defined,at a property that is less than.60%. leased)and two land parcels.The three apartment developments are now nearing toMpletion,with Balboa Park in San Diego!and Moda at North Bay Village in Miami in the preleasing phase and set to commence operating in 1Q15.The Acadia at Metropolitan Park:in:Washington:0C is on schedule to be Completed in 3015.All are on budget and market conditions remain positive for each.The Fund's two industrial developments.triade substantial progress during the year. Mile High Building 3 in Denver was completed in 4Q14 and is currently 72%leased with two leases out for signature for the remainder of the space.Plainfield Park II in Indianapolis is 50%preleased and on pace for its scheduled completion in February 2015.The108,000,toliare foot..VeritesOffite Building build-to-suit Office expansion in Metiston.was'also oompleted„•withthe-tenant taking occupancy and rent commencing in fourth quarter.With each of the Fund's development projects other delivering or stabilizing in over the next 15 months,the Fund is actively looking in 2015 for replacement value-add investments. Most of the lease-up assets were leased,during 2014,including Redlands:Business Center(to Amazon),Turnbull Canyon Distribution Center,Patterson Pass Business Park and 409.4,of 3245 Meridian Parkway industrial).The Fund's current lease-up projects are: 10 Business Center.a 146.623 square feet warehouse building in Phoenix.where the former single-tenant vacated in September 2014;the remaining 50%of 524$Meridian Parkway;and the newly acquired Parkway Lofts;presently 54%leased.During 2015,,the Fund plans to develop its remaining land parcel in the Mile.Highoitribution Center in Denver.The Fund will continue to market for sale its small land parcel in Tampa. DEVELOPMENT PIPELINE APPRAISED REMAINING ALL-IN STABILIZED PROPERTY METRO VALUE COST BASIS NOl DELIVERY PROPERTY TYPE MARKET Cs MILLIONS) (5 MILLIONS) ($MILLIONS) (S MlLLI0NS) 'DATE Balboa Park Apartment 'San Diego 38.0 5.5 43.5. 2.2 1015 Moda at North Bay village Apartment Miami 76.8 11:5 :03;3 5.7 2Q15 The Acadia ApartMent. Washington DC 140.0 39.0 178.0 9.9 30115 plaintield,Parkil Industrial Indianapolis 12.6 3.8 16.4 1.1 1Q15 Total $267.4 S50.13 $327.2 $19.0 At current market rents(un-trended from today) LEASING ASSETS APPRAISED REMAINING• . ::•:. ,. ALL-4IN 1'i.t:4tAttiZIZEq.:Pkiti:ML PROPERTY METRO VALUE COST BASIS NOl 12/31/14 PROPERTY TYPE MARKET (S MILLIONS) (S MILLIONS) (S MILLIONS) (5 MILLIoNS)OCCUPANCY Parkway Lofts Apartment Nevi:York 104.6 0.8 105,4 5.9 5411 3245 Meridian Parkway Industrial SE Florida 21.1 .0.7 .21-8, 50%. Wett10.8titineas Center Industrial Phoenix 7.4 0.5 7.8 0.5 0% Total $133.1 0.0 $113.0 $7.8 The Fund has also undertaken renovation projects at several apartment properties to upgrade common areas and unit interior.finishet.This activity is not included in the Fund's value-add bucket. PROPERTIES IN RENOVATION APPRAISED REMAINING ALL-IN STABILIZED PROPERTY METRO VALUE COST BASIS NOl PROPERTY TYPE MARKET (S MILLIONS) (S MILLIONS) (S MILLIONS) (S MILLIONS) Katandin Woods -Apartment Boston 34.9 0.4 36.4 1.8 Westbrooke Place Apartment Washington DC, 102.0 1.4 106.2 4.6 Broadway Knolls Apartment New York city e2.1 0.4 84.8 4.0 Lantana Ridge Apartment Austin 51.0 51.2 2.7 Columbia Town Center Apartment. Baltimore 135.0 6.6 147.2 7.9 Grand on Memorial Apartment Houston 39.4 1.5 42.3 2.2 Total $444.4 $10.3 $468.2 $23.3 Past performance is not indicative of future results,Please see Notes on Page 35 for additional disclosure information; 1.1011 .P R P f: r r) 15 • Capitalization The Fund has an NAY of$5.4 billion et 12/31/14.The current Fund leverage ratio of,2 996 Is slightly up from 276%at • year-end 2013.. he Fund's balance sheet currently includes approximately$2.2 billion of:financi'ng at.-par value,split between property-level'mortgages($715 Million),fund level notes($1;250:million).and a line of credit balance($205 millio ),The overall weighted average'interest rate for the Fund is•currently approximately 4.7%.with a 4-year weighted average maturity.. LOAN PROFILE • • MOUNT n VERAGE ti T SHA 1= A� RAGE REiN1AINING TERM :MILLtI ... tllsri 'r�...: (11RS) ::Secured:Property Mortgages 715 4.3: Unsecured-Fund Notes 1.250 5.3% 3.9 'Fixed 1,841 5.3% 3 :Flpating 124 1.8%. 61. `Total excluding Lint of Credit 1,965 54.1% 4.1 Line of Credit eras 1 Total'Debt(Par Valu .2,170 4.7% 4.1 Total Debt(FMV) 2,x115 4.7% 4.7. ANNUAL DEBT MATURITIES($ MILLIONS)' 600 • 501.1 4 327 • Iii 23E.4 550 Intarelt ttme 2015 2016 2017 2016 2019 2020 2021:"2022 2023 2024 2025 2026 5.4% 5:7% 5.5% 5.8% 5:5% 3.1%: 4.7% 4.59 •Property Mortgages II Fund Notes The Fund completed its repayment of 2014 maturities totaling approximately$490 rrtillio,and replaced the financing with$300 million of new unsecured notes and a$185 million mortgage loan secured by a pool of fifteen industrial• assets.The blended rate for all of:the new financing is 3.7`%.The Fund will continue to replace near-term maturities and take advantage o.f historically low interest;rates to reduce debt costs and boost income returns with apprimately$290 million of maturities set to expire in 2015: Property-L.evel,Mortgages The Fund's property:level mortgages are:predominantlly associated with its apartment and `industrial portfolios and certain JVinvestments.Maturitiesfor property-level debt are concentrated in 2019 and 2021. The$350 million in.2019 maturities consist of twelve loans,nine of which ar?e:apartment property loans originated in 2009,with.a cumulative balance of$303 million.The average LTV is 36 6 with an average interest-rate-Of 5.fi96,v ail above current market rates.These loans carry very significant pre-payment penalties,generally prohibiting an earlier retirement or refinance.The aggregate.negative debt mark-to-market associated with the apartment loans is$14 million. ',Amounts represent the principal balance at the Fund`s:ownership share and exclude the impact of debt marls to marrket.Amounts:also exclude the Fund's' 11041.0f Credit;information is as'of December 31,2014 and is subiect to'Change*:any time. :Peat performance is not indicative pf future results.Please see Notes on Page 35 faraddetrpnal disclosure tnfortnatian.: 1'6 t°1. it.:ti ,c j Uzi _": t i ;:t;tt[y ANNUAL • k:PORT 2f 1; In.:.July 2014,the Fund closed iori a$185 million mortgage loan.secured by a pool of fifteen industrial assets.This loan is con prissed of a$135 million fixed mortgage with an interest rate of 3.59%and a maturity date of 7/1/21 and a$50 million floating mortgage with an interest rate of one-month LIBOR pips a spread of 1.7%and a maturity:date of 7/1/21..At 12/31/14 the floating:rate'mortgage interest`was.1;9%.25%of the fixed rate mortgage can be prepaid at par after 7/1/15(after one year)and the entire fixed rate mortgage;can tie prepaid at Par one year before maturity.The floating rate:.mortgage can be prepaid at:par beginning on 7/1/15. The Fund is expected to.close:on financing for the acquisition of the Palm Beach Outlets property in the first half of 2015.This mortgage is expected to be in thee amount of$165 million,with the:Fund's share.being 9094.:or `$148.5 riillion. Fund Level Notes-The Fund inat$950 million in Fund'level notes maturing.between 2015 and 2019,. bete notes carry inflexible and expensive prepayment options,prohibitive of retiring the.clebt in favor of more attractive current financing.The average rate on these notes.is 5.6%.In total these notes result in an aggregate of$27 million In negative debt mark:-to-market(MTM).in 2014,the Fund took out an additional$300 million`in Fund level notes maturing between 2021 and 2026.The average rates on these new notes ere 4.1%. Debt Mark-to-Market-The interest rates.:associated:with most of the Fund's debt are above current market cost resulting in a cumulative debt MTM of approximately$45 million(0.8%of Fund NAv).Debt MTM had a positive impact on returns in 2014 though historically it has been a:significant drag on returns. Starting in:the fo.urth quarter of 2014,the Fund outsourced the:valuatiOn Of its debt to Chatham Financial. The outsourcing will ensure transparency and independence in_the Fund's debt valuation and financial reporting "processes.The Fund also modified its methodology(after the Fund's Advisory Council approval.)to be consistent With:a Methodology developed by Chatham Financial. The new methodology should result in less volatility in the Fund's debt MTM going forward.As more funds in general adopt this approach,we envision better consistency within the 00CE with regard to debt valuations. Line of Credit-The Fund maintains a line of credit to facilitate uneven flows of capital resulting frorri investor contributions/redemptions,new:acquisitions and dispositions.In the fourth quarter of 2014.the Fund exercised the accordion feature increasing the commitment by$100 million:to a.total of$350 million,As of December 31, 2014;the amount outstanding;was$205 million.We are in the process of extending the line given the upcoming` maturity in June 2016. Derivatives The Fund has no derivatives as of 12/31/14. Forward Strategy- The Fund is focused:on continuing to lower its cost of borrowing.The Fund is•addressing the $293 million of financings that mature'in the second half of 2015.The.Fund will begin the marketing,process for a $150 to 200 million loan secured by a pool of mixed`.property type collateral,+Given the low interest rate. environment,the Fund will look to lock the interest rate as soon as possible while drawing the debt in conjunction with the second half 2.015 maturities.In'addition,the Fund will look to issue approximately$200 million of unsecured notes during 2015,and,.as..noted previously,the Fund will be closing on$14.8.5 million mortgage debt associated with the acquisition of Palm Beach Outlets.. The Fund's:target leverage ratio'Is to be between 20-30%LTV.and generally to be within 300 bps of the ODCE :average;currently 22.6%.The Fund expects to remain in the 26-2896 range for 2015 to address the 2015 maturities and take advantage of the low interest rate environment.'longer term,the Fund will seek to replace existing debt structures,which.ar.`e generally inflexible and carry large.prepayment penalties;With a mix of debt that lowers:borrowing costs,extends the average maturity,provides asset sale flexibility,and attempts'to: diminish:prepayment costs and MTM fluctuations. .Past:performance is not indicative of future.results.Please see Notes on page 35 foe additiorial disclosure information. ON !lt<PERT! .. f:1 'U. 17. ... . 11144.01 *. --..., - _, '4,...' •G. , ii, ,,l. I i''''' ''' I: ,.. . 4 i F: , , 1.4,4 a , 1 ii ' ' ,<-..,44 ... 1 ' '. '. , 44 1 i . 1 , 1 1,,,, 11,, .,, , 1 „- . Ili. Cie, 1.. ,i.-. -. L.,,, „..,„; i .‘, 4,., ., I II li , t, '... 1 it '' , • . 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', II II I ..I ' . r ''.! 1' ' • r I , i 'f o ' i .W• tc • .,• , i a .44. 1, . 4 j„1/ • ' ? . . . , '• , / '-',,,ill/!i, '..,#" ,i V. f•' .• r ,,e• . - , '''''f: A,,,-,,.. _ 4 • i ,0' ' ' )'.:1;71$,'pl,..., „ :11f-ttw,,,,,...„1„ Aiiii;,-; .•.-,.i , ,, ' -' ' ,r-,01111111 111.libilik-''',..2 ; . . .,, • 4t , ' • ' ', '1 t. ,0.....- , , __ „- '. , i rii.', 41 *.,.,. 4---. -..1„:, s -' - 1-01! - -- ' V...,. 60 SPEAR.,SAN FRANCISCO.CALIFORNIA 18 National Market Update Economic Outlook In 2014,the U.S.economy grew at a 2.4%annual rate,in-line with consensus expectations.A rise in personal consumption and private inventory investment offset a drag from the decline in net trade exports of goods and services and government expenditures.The forward momentum of economic growth continued,with a stronger U.S.fiscal position and financial system. Looking forward in 2015.we expect full-year real gross domestic product(GDP)to increase by 2.8%to 3.3%.Inflation and growth dynamics now appear to be more favorable for the economic outlook in the U.S.than in the Eurozone.Key growth drivers are lower fuel prices,accelerating consumer spending,the strengthening public sector,well-capitalized corporations,and a recovering housing market. Potential risks to the near-term outlook may be connected to weaker global growth,geopolitical risks, and transitioning oil markets. In 2014,the U.S.labor market expanded at the fastest pace since 1999.Three million jobs were created,and the average monthly job gain reached 246,000;this was a significant improvement when compared to 186,000 in 2012 and 194,000 in 2013.In 04,total U.S.employment grew by 289,000 jobs per month on average.The unemployment rate declined to a six-year low of 5.6%,the lowest level since 2008.With sustained employment gains,the Fed completed its stated incremental wind-down of quantitative easing in October 2014 and may begin to normalize interest rates in the second half of 2015 or in 2016.The rate of unemployment and inflation will be integral to future monetary policy. Stronger labor markets combined with higher overall household wealth have boosted consumer confidence.Low debt service burdens,record high stock prices,home price appreciation,and lower gasoline prices are significant. tailwinds for consumer spending. In 04,total U.S.retail sales increased at a moderate pace,up 3.7%over the year and 0.1%over Q3,given the lowest price of crude oil in six-years.In 2014,inflationary pressures remained muted;the consumer price index(CPI)rose by 0.7%and the core CPI(without food and energy)increased by 1.6%year-over-year.The U.S.dollar surged against most currencies,including large gains against the euro,the yen and the pound sterling. In 2014,the strength of the housing sector gained momentum.Single-family housing starts rose to their highest level since 2007,and are a key driver of overall economic growth. In 04, new residential construction starts increased by 4.8%year-over-year;single-family starts increased by 6.8%,significantly outpacing multifamily starts,up by 1.3%. In the year ending in November 2014,the S&P/Case Shiller 20-City Composite Price Index gained 4.3%across all cities.Annual home price gains continued to decelerate across the country in most cities, indicating a more gradual pace of recovery,yet eight cities still saw prices rise faster than earlier in 2014. Existing home sales still lag relative to prior peak,especially amongst first-time homebuyers.Over the next few years,as demand for all housing-related activities increases,the segment is likely to contribute more to GDP growth.In aggregate, housing accounts for approximately 17%of the U.S.economy. • 20 C. f'�...`Il? d ( L (: '(:�',f' . °!::'�_ ��.1� di:�', (iz.PO iT �i!.i • Capital Markets Trends The commercial real estate asset class represents a growing share of the global alternative investment management market.Global capital flows into alternatives have doubled since 2005 and are now at record highs.During Q4,the average yield on 10-Year U.S.Treasuries ranged from 2.1%to 2.5%,the average contract interest rate for fixed commercial mortgage loans declined to 4.0%,and the-30-year fixed residential mortgage rate declined 30 basis points to 3.9%. Improved credit availability across public and private capital sources has escalated domestic and offshore institutional capital flows into U.S.commercial real estate to unprecedented levels.In 2014,investment sales momentum continued, with national transaction volume across the five major property sectors totaling$423.8 billion.up 17.0%year-over-year and on par with the 2006 level.Global capital flows into U.S.real estate rose 37:9%.Pricing and financing for core real estate assets in top-tier markets remained highly competitive,causing yields and cap rates to tighten further.Some institutional investor acquisition strategies have shifted further up the risk curve to value-add strategies,such as redevelopment of well-located B-assets and mezzanine financing on premier assets in gateway markets and secondary/tertiary markets,which target higher returns. Liquidity abounds in the senior and subordinate debt markets,with the overall cost of capital near historic lows. Non-bank lenders (life insurance companies,mortgage REITs,and private debt funds)now account for a larger share of outstanding mortgage debt. In 2014,U.S.Commercial Mortgage-Backed Securities(CMBS)issuance totaled$90.5 Killion,less than half the peak of$225.2 billion in 2007,while Life Insurance Company volume rose by 24.8%to$80.0 billion.New regulations associated with the Dodd-Frank Act and Basel III reforms will continue to further constrain first mortgage(i.e.senior) lending capacity and impact the underwriting terms of commercial bank originators, limiting LTV r atios and high-leverage leverage construction loans.Commercial real estate investment strategies are trending towards long-term fixed-rate debt and short-term leases to capture near-term growth more quickly. In 2014,the rebound in commercial real estate asset values accelerated across broader markets.Institutional-quality commercial real estate investments today can offer higher risk-adjusted returns relative to traditional investments and continue to provide yields well above the rate of inflation. In 2014,the NCREIF Property Index(NPI)reported an annual total return of 11.8%.underperforming the S&P 500 annual return of 13.7%,and outperforming the Barclays Aggregate Bond Index annual return of 6.0%. U.S. Real Estate Market Fundamentals INDUSTRIAL In 2014,the industrial sector outperformed across key real estate metrics in most markets nationwide. In 04,the national industrial availability rate declined by 30 bps to 10.3%,the lowest level since 02 2008.The recovery has now stretched through eighteen consecutive quarters,and the current availability rate is 420 bps below the cyclical high. Over the quarter,net absorption reached 64.4 million sf,significantly outpacing new construction,which totaled 32.7 million sf.Markets that saw the greatest reduction in availability rate from 04 2013 to 04 2014 were Sacramento(-320 bps),Atlanta(-300 bps),Fort Lauderdale(-240 bps),Oakland(-230 bps),and Denver(-170 bps). The industrial market is uniquely positioned to profit from broadening U.S.economic growth.In 2014,strong demand prevailed across most markets,with rising industrial production,global trade,e-commerce,exports,and housing starts. Leasing velocity is highest for Class-A big-box warehouses over 350,000 sf(in particular those over 1 million sf)and small-to-mid-sized distribution facilities near highly populated metropolitan areas.New facilities with high-automation in proximity to the consumer continue to be a top priority of Third-Party-Logistics(3PL)businesses,competing for fast and cost-efficient e-retail delivery.Logistics traffic at strategic regional transportation hubs and East and Gulf Coast ports tied to the Panama Canal expansion(scheduled for completion in 2016)is likely to continue to shift new demand and shipping routes.Overall,we believe that demand for warehouse space will remain strong over the next five years, resulting in an ongoing decline in availability and rise in rents. Industrial inventory and new supply are highly concentrated in the top distribution markets.Six major corridors are home to the nation's mega population centers-Los Angeles/Inland Empire,Dallas/Fort Worth,Chicago,New Jersey, Philadelphia and Atlanta.Although new construction is escalating,in particular in the Class-A segment, it does not appear to be exceeding current tenant requirements,as demand outpaces available supply in the larger size warehouse segment.Value-add and development activity is growing more quickly across established and emerging national distribution markets.We expect deliveries to remain relatively moderate through 2015 year-end but accelerate from 2016 to 2017.with overall delivery of new warehouse space averaging 189 million sf annually from 2015 to 2018,still below the long-term average. C, 3.k a;:! , ? . ..'> riE:: FUND 21 In 2014,industrial transaction volume totaled$54.2.billion,up 12.5%over 2013.Trades of individual assets accelerated. Sales of warehouse and flex property totaled$36.5 billion and$17.7 billion.respectively.Secondary Markets outpaced Primary Markets,totaling$32.5 billion and$21.7 billion,respectively.In 2014,the NPI industrial sub-index posted an annual total return of 13.4%,the best-performing sector in the overall NPI. APARTMENT In 2014,multifamily sector fundamentals remained robust,with overall demand exceeding expectations and rent growth re-accelerating.In Q4,the national vacancy rate remained at 4.2%,down just 10 bps year-over-year,and 380 bps below the cyclical peak of 8.0%at year-end 2009.Net absorption reached 45,027 units.outpacing completions of 39,436 units. In 04,effective rents increased by 0.6%over Q3 and 3.6%year-over-year.The steady increase in effective rents for 24 straight quarters to levels near or exceeding historical peaks in many markets indicates that many landlords continue to be able to raise rents with new completions.Markets that saw the greatest reduction in vacancy rate from Q4 2013 to Q4 2014 were Fort Worth(-90 bps).Sacramento(-80 bps),Philadelphia(-60 bps), Phoenix(-50 bps).and Atlanta(-40 bps). Multifamily sector demand continues to thrive,while the home purchase market remains relatively weak.The displacement of the single-family housing market has persisted to the benefit of apartments.Household formation is now on the rebound;yet slow wage growth,tight credit,and elevated student loan debt levels remain real challenges to home ownership,in particular,for first-time buyers.Household creation among renters continues to outpace that of owner-occupiers,driven by the continuing maturation of echo boomers entering the urban workforce and downsizing by retirees.Demand is highest in,or in close proximity to,major employment hubs,and many rental households pay a premium for access to modern amenities,public transit,walkability,top grocery stores,and culture. Favorable demographics and an improving economy,suggest the strong possibility of continued growth in rental housing demand over the next several years. Although the recent spike in rents in several top markets combined with low vacancy rates have accelerated the pace of construction nationally,oversupply is not expected to pose a serious risk.The few markets that report rising new supply levels also expect stronger rental demand.Looking ahead,we expect average new deliveries above the long- term average,supported by a generational wave of demographic demand.Overall,rents are expected to moderate over the next several years.especially in the absence of stronger wage growth. In 2014,multifamily transaction volume reached$112.0 billion,up 9.0%year-over-year and exceeding the 2007 level. Mid-and high-rise properties increased by 9.2%to$70.5 billion,while garden-style sales rose 8.5%to$41.5 billion.A migration of capital into smaller markets continued;volume in Primary Markets actually declined slightly,while it rose in Secondary Markets.In 2014,the multifamily sub-index of the NPI posted an annual total return of 10.3%,the lowest-returning sector. OFFICE In 2014,the recovery of the office sector accelerated.with broad-based office-using employment growth across most industries.In Q4 2014,the national vacancy rate decreased by 20 bps to 13.9%,still 140 bps above the pre- recession low.The national vacancy rate for Central Business District(CBD)markets decreased by 20 bps to 11.1%, while the suburban vacancy rate decreased by 20 bps to 15.5%.Net absorption significantly rebounded to 15.2 million sf,outpacing new construction of 8.5 million sf. Markets that saw the greatest reduction in vacancy rate from Q4 2013 to Q4 2014 were Salt Lake City(-280 bps),Austin(-270 bps),Raleigh(-270 bps),Stamford(-220 bps),and Tampa(-220 bps). In 2014,most U.S.office markets recorded higher demand for space and positive net absorption.as corporate confidence and expansionary activity grew.Overall,total net absorption across the country reached its highest level since 2007.Leasing in the Finance,Insurance,and Real Estate(FIRE)industries rebounded more significantly, absorbing a higher share of total space than in recent years:while Technology,Advertising.Media,and Information (TAMI),energy,and health care industries continued to drive much of the tenant leasing activity in many markets. New office buildings equipped with modern IT infrastructure and contemporary designs in top locations(near prime transit and residential.retail,and hotel properties)generally trade at a premium.More major employers are relocating or opening offices in lower-cost metros in the South,Southwest,and Southeast(such as,Dallas,Denver,Austin, Phoenix,and Fort Lauderdale/Miami).Assuming ongoing growth in employment and capital investment,office demand is expected to continue to expand over the next few years,further reducing vacancy levels, Although office fundamentals have improved significantly,available inventory is still at relatively high levels and achievable rents are generally too low in most markets to attract new development.Nevertheless,construction volumes are picking up in top-performing markets;over the next several years.new construction and redevelopment are likely to be concentrated in select markets,including Houston,San Francisco,Seattle and New York.Looking ahead,we expect new deliveries to average 37.3 million sf annually from 2015 to 2018,well below the long-term average of 44.9 million sf. • • In 2014.office transaction volume totaled$118.6 billion,up 14.6%year-over-year.with CBD markets increasing by 18.3% and suburban markets by 11.0%.Primary Markets accounted for 62.1%of the total investment sales.The bulk of trades were single asset deals,and the largest office portfolios were mainly concentrated in a few low risk core markets. Capital remains highly concentrated in Primary Markets and the migration to top Secondary Markets slowed relative to 2013.In 2014,the office sub-index of the NPI posted a total return of 11.5%,the third best performing sector. RETAIL In 2014,the recovery of neighborhood and community shopping center fundamentals continued slowly across most segments.In 04 2014,the retail sector vacancy rate for neighborhood and community shopping centers declined by 10 bps to 10.2%.In 04,effective rents increased by 0.5%over 03 and 2.0%year-over-year.Regional malls continued to outperform most neighborhood and community centers in occupancy,with a vacancy level of 8.0%,up 10 bps year- over-year. Landlords now see larger store vacancies as opportunities to secure superior tenants at higher rents. Vacancy rates at many top malls remained well below pre-recession levels. Markets that saw the greatest reduction in vacancy rate from 04 2013 to 04 2014 were West Palm Beach(-160 bps),Orlando(-80 bps),San Jose(-80 bps), Raleigh(-70 bps)and Atlanta(-60 bps). Overall,improved consumer confidence and household net worth benefited profit margins across the retail sector,yet weak income growth has constrained total spending.Going forward,if significantly lower fuel prices persist, discretionary spending is expected to accelerate,especially for low-income consumers.For many top retailers, employing omni-channel strategies has been a winning strategy to capitalize on the complimentary nature of e-commerce and bricks-and-mortar retail.In 2014,total U.S.retail sales increased by 3.7%:while holiday sales increased by 4.0%,an improvement over the 3.1%posted in 2013.Leasing trends across most retail categories and markets continued to favor dense,urban markets,and e-commerce-resistant formats.Grocery-anchored centers, transportation-oriented sites,high-street districts,walkable shopping centers and malls,and major suburban thoroughfares with critical mass are likely to be top performing segments. New supply and redevelopment of neighborhood and community shopping centers remains at very low levels.More recent completions are modeled after the newer retail subtypes(lifestyle centers,town centers,power centers,and outlet centers).Value-add strategies are most likely to be implemented in coastal markets with larger populations and more affluent households.Securing strong anchor tenants is a requirement to attract top in-line tenants and financing for new projects.Given recovering vacancy levels,we expect construction to remain well-below the long-term average of 44.8 million sf per year over the next few years,with new deliveries averaging only 17.2 million sf annually from 2015 to 2018.Continued improvement in overall retail demand will depend largely on discretionary income growth and financial market stability. In 2014,retail transaction volume reached$82.6 billion,up 31.3%over 2013.Individual property trades remained strong, significantly ahead of portfolio and entity level deals.As trades in Secondary Markets rebounded strongly,sales within the strip center segment accelerated by 35.2%.Malls and anchored retail represented the highest share of total capital investment.In 2014,the retail sub-index of the NPI posted a total return of 13.1%,the second-highest returning sector. <;` 23 HOTEL In 2014, the U.S.hotel sector recovery accelerated above consensus expectations,reporting strong increases in all key performance metrics.Overall,occupancy increased by 3.6%to 64.4%,while the average daily rate(ADR)rose by 4.6% to$115.32,and revenue per available room(RevPAR)climbed by 8,3%to$74.3 year-over-year.Top markets ranked by RevPAR growth were Nashville(+19.0%), Denver(+16.2%)and Atlanta(+13,1%). Over the past year,national demand rose by 4.5%,while supply was up 0.9%.Corporate profits and consumer spending reached record highs,and more frequent business and leisure travel by millennials and retired baby boomers is likely to continue to drive demand growth across the entire hospitality industry.Leisure travel and group bookings rebounded more broadly,which has improved airport hotel and resort occupancies.Flight reservations nicked up over the year,yet rates have not seen notable improvement.Nevertheless,gathering economic momentum supports our expectation of notable gains in value and ADR hotel performance in 2014 and subsequent years.We expect RevPAR growth to reach 7.0%to 8.0%in 2015. All chain-scale segments(luxury to low-end)are in full recovery.Many are now expanding by entering new markets and rebranding.As of December 2014,there were 3,443 U.S.hotels(412.878 rooms)in construction,final planning,or planning stages,a 14.3%increase over the prior year.Markets with the highest increase in rooms under construction were San Diego(170.3%), Houston(166.0%),Dallas(122.3%).Seattle(82.4%),and Miami(73.4%).We expect growth in hotel supply to remain below the long-term average for the next three years with hotel owners and operators increasingly focused on maximizing revenue through value-add,capital improvement programs at hotels in top locations. In 2014, the hotel capital markets were active with both private and public lenders increasingly comfortable financing prime hotel assets in gateway cities and top tourist destinations.The price per key has surpassed prior peak levels in top markets.In 2014.hotel transaction volume totaled$34.6 billion,up 26.7%year-over-year,with Q4 having the highest quarterly volume since 2007.Portfolio and entity-level sales were up 32%in 2014.Full-service hotels(up 15.3% year-over-year)accounted for a larger share of total capital investment than the limited-service sector(up 55.0%).In 2014,the hotel sub-index for the NPI posted an annual total return of 11.1%,the second lowest returning sector.We note that the NPI has only 165 hotel assets,which may not be a representative sample of the lodging industry,or high-end hotel properties. , '•• , .• ., • ..............._... .....,....,..........„............,...„........,...„,..........„..,..............._........„.„..,......... ........................„..........., ..,_....„„_____,...........„..,...„. .... ..................................................„..........-- 1 „.................... ........... 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I ' .' 1 ' ' ' '- ' :,..„,..,, ,•,...,. ;:i'• . ,... ...,,,. :,,,L,„totlop.,mM,VaiMin ,,,, :-.: .''',X;Ki:,F,'..*1:7:P:',:::::i#::!':::::1].!:i•i::,:,. ..: ::',:,::.-':-..-..:,..„,.- 7 T,.,,,,,' ..• — ,*i,..,4rim>3;,4'";,--7.',:. :''.:Wfig*.iktbVdigttif*Zi"'i:64iiiigMgieSg40;pdixaiVitdr ..-- . .....,_.„.... ..----- '• i!;-477j2kienVentftig.S014110.10illitraggilielME.71tig40:127517-474''''''''' .„,_..„_„-..---- .!#.;Z:S:Nt.A1,1aKilSjik::Nlggflik'kgplgrga,C: -1, :,;-',"''-- . __--,,r:?''"' .,.,.-:::::4.:-L.-4,...„.„--, - -.•.„:4454v..0- x-77 W1-1Qk,:f.FOQD$AT T.,ftE DOMAIN„AUST1N,IgXA...,S, ,----,,, ,014 -F-:::,4.1 >;-..":P T . e:-'•1.I,P .,:-: , ,. —4-,S:rdT", n 15 x Properties APARTMENT REAL ESTATE VINTAGE VALUE PROPERTY NAME LOCATION YEAR OWNERSHIP% SIZE OCCUPANCY .AT SHARE($) The Gramercy at Metropolitan Park Arlington,VA 2007 98.4% 399 89.4% 185,923,080 Eastchester Heights Bronx,NY 2007 90.0% 1.416 95.8% 145.800.000 T -� The Acadia at 2012 Metropolitan Park Arlington.VA 201 100.0%Y- 411 0.0% 140.000.000 V � Columbia Town Center � Columbia,MD 2004 100.0% 531 94.4% 135,000,000 The Millennium at Metropolitan Park Arlington,VA 2010 98.7% 300 95.3% 132.628.208 1000 Jefferson Hoboken.NJ 2008 100.0% 217 93.5% 129,500,000 The Metropolitan at Reston Town Center Reston,VA 2006 100.0% 289 95.8% 121.000.000 Avignon Townhomes Redmond,WA 2000 100.0% 272 92.6% 110,000.000 Parkway Lofts Bloomfield.NJ 2014 100.0% 361 52.9% 104.598.484 Infinity Harbor Point Stamford,CT 2013 100.0% 242 97.1% 104,300,000 Westbrooke Place Washington,DC 2000 100.0% 201 92.5% 102.000.000 Railway Plaza Naperville,IL 2006 100.0% 417 95.4% 91,200,000 Desert Club Apartments Phoenix,AZ 2004 100.0% 497 96.0% 83.100.000 Broadway Knolls Holbrook,NY 2007 100.0% 284 97.2% 82.100.000 Mode at North Bay Village North Bay Village,FL 2012 100.0% 285 0.0% 76.800.000 The Station at Riverfront Park Denver,CO 2014 100.0% 273 93.0% 67.800.000 Missions at Chino Hills Chino Hills.CA 2006 100.0% 240 92.5% 60.800,000 Montclair Residences Montclair,NJ 2012 100.0% 163 92.6% 59.900.000 Lantana Ridge Austin.TX 2011 100.0% 354 90.7% 51.000,000 Village on the Green Rancho Cucamonga,CA 2011 100.0% 264 95.8% 48.600.000 - Oak View at Sonoma Hills Rohnert Park,CA 2011 - 100.0% 207 98.6% 44,700.000 44 Berry Street Brooklyn,NY 2011 100.0% 42 90.5% u 43.700.000 - Grand on Memorial Houston,TX 2013 100.0% 228 86.0% 39,400,000 Remington at Ladera Ranch Ladera Ranch,CA 2006 100.0% 154 94.2% 36,800.000 Balboa Park San Diego.CA 2012 94.2% 100 0.0% 35,921,486 Katandin Woods Lexington,MA 2006 100.0% 128 97.7% 34,900,000 Printhouse Lofts Brooklyn.NY 2014 100.0% 36 100.0% 30,631.985 Platinum Southside' Austin.TX 2010 100.0% 195 96.4% 30,250,000 Buena Vida at Town Center Rancho Santa,CA 2011 100.0% 115 93.9% 25,100,000 Rochester Apartments Los Angeles,CA 2006 90.0% 60 98.3% 21,960,000 Total Apartment $2,375,413,244 'Sold subsequent to year-end, 26 ,I :Ic..•. 1 .... . ,i , -,:t. f,.. . . . . . .. Properties RETAIL REAL ESTATE VINTAGE VALUE PROPERTY NAME LOCATION YEAR OWNERSHIP% SIZE OCCUPANCY AT SHARE Cs) 600 North Michigan Avenue Chicago.IL 2003 100.0% 211,616 92.6% 315,000.000 West Hollywood Gateway Los Angeles,CA 2004 100.0% 248,067 96.5% 118,000.000 Palm Beach Outlets' West Palm Beach,FL 2014 100.0% 460,025 99.2% 112,054;250 Marketplace at the Outlets' West Palm Beach,FL 2014 100.0% 294,849 97.0% 99.175.875 Chevy Chase-Retail Washington,DC 2005 100.0% 148,107 77.3% 93,400.000 Promenade at Sacramento Gateway Sacramento,CA 2006 100.0% 344.891 88.6% 86,900,000 Village Shopping Center Boulder,CO 2007 80.0% 219.934 98.2% 51,440.000 Dunkirk Gateway Dunkirk.MD _A 2006 100.0% 133,291 98.0% 43.200,000 Park Place Shopping Center Tukwila,WA 2003 100.0% 153.879 100.0% 42,300.000 Free State Shopping Center Bowie,MD 2007 70.0% 277,577 85.0% 39.564,000 Millennium Park Livonia,MI 2005 70.0% 272,568 100.0% 35.140,001 Whole Foods at the Domain Austin,TX 2014 100.0% 59,546 100.0% 34,400,000 Water Tower Shoppes Celebration,FL 2012 100.0% 120,089 88.4% 30,800,000 Victory Station Savannah.GA 2013 100.0% 64,171 100.0% 26,100,000 Oriole Plaza Delray Beach.FL 2005 70.0% 155,752 93.9% 20,230.000 Barcroft Plaza Falls Church,VA 2006 70.0% 98;109 79.1% 19.950.000 Campus Plaza Bridgewater.MA '2004 68.5% 115,591 100.0% 19.421.791 ^Greenlawn Plaza Huntington,NY 2006 67.0% 102,416 95.0% 17,727.599 Atlantic Plaza North Reading,MA 2004 70.0% '123.615 70.2% 14,770.000 Martin Square Stuart,FL 2005 70.0% 331,105 99.2% 14,350,000 Plaza Del Mercado Silver Spring,MD 2004 70.0%• 95,139 60.2% 13,090,000 Total Retail $1,247,013,516 Structured as a loan with an option to convert to equity. ! ..`._, •, . ..'i': 'r` . ;=,:, i r I.w:r, 27 . o il • Properties OFFICE REAL VINTAGE ESTATE VALUE PROPERTY NAME LOCATION YEAR OWNERSHIP% SIZE OCCUPANCY AT SHARE($) 100 Fifth Avenue New York.NY 2013 100.0'X. 277,412 98.0% 258.000,000 Sand Hill Commons' Menlo Park.CA 2006 100.0%____ _ 133,124 99.9% 240.000,000 475 Brannan Street W San Francisco,CA 2012 100.0% _ __ 243,233 100.0% 196.000,000 y Arboretum Gateway Santa Monica,CA 2004 100.0% 201,006 100.0% 184,000,000 Veritas Office Building Houston,TX 2004 100.0% 425,927 100.0% 167.900.000 Waterway Plaza I&II The Woodlands,TX 2013 100.0% 366.074 96.6% 150,800.000 - 101 Arch Street Boston.MA 2005 100.0% 406,631 94.6% 143,000.000 10 Brookline Place Brookline,MA 2013 100.0% 173,439 100.0% 126.000.000 60 Spear San Francisco,CA 2014 100,0% 157,400 77.1% 111.000.000 3150 Fairview Park Falls Church.VA 2011 100.0% 252,613 100.0% 90.000.000 Chevy Chase-Office Washington,DC 2005 100.0% 204,621 99.1% 87,300,000 350 Rhode Island San Francisco.CA 2005 100.0% 124.980 100.0% 71.200,000 One Liberty Square Boston,MA 2013 100.0% 157,563 93.2% 65,000,000 Ten West Corporate Center Two Houston,TX 2011 100.0% 250,260 100.0% 62,900,000 Central Park Burbank,CA 2007 48.8% 254,763 90.3% 60.024.000 One Del Mar San Diego,CA 2007 100.0% 114,166 91.8% 58.500,000 Mira Vista Austin,TX 2014 100.0% 121,147 100.0% 41.400,000 11 East 44th Street New York,NY 2007 49.0% 133,602 100.0% 38.555.130 El Dorado Medical Tucson,AZ 2006 100.0% 186,281 63.7% 38.300,000 Legacy Medical Village Piano,TX 2011 100.0% 94.359 100.0% 35,600,000 University Park Tech III&IV San Antonio.TX 2014 100.0% 165,007 100.0% 31.100,000 Progressive Insurance Rancho Cordova,CA 2004 100.0% 158,582 81.6% 29,300,000 Argues Business Park Sunnyvale,CA 2013 100.0% 93.385 100.0% 28,400,000 2901 Patrick Henry Drive Santa Clara.CA 2014 100.0% 82.278 100.0% 27.900,000 Ricoh Building Malvern.PA 2003 100,0% 106,855 100.0% 25,400.000 Valley Parkway Medical Escondido.CA 2007 100.0% 70.058 73.1% 23,400.000 ___ Wood Hollow Office Park Novato,CA 2003 100.0% 121,670 61.1% 22.700.000 1475 Dunwoody Drive West Chester,PA 2004 100.0% 126.444 100.0% 21,300.000 Conroe Medical Conroe,TX 2007 100.0% 68,832 84.0% 17,600,000 The Overlook Austin.TX 2014 100.0% 50,725 100.0% 15,800,000 Hillcrest Medical San Diego,CA 2007 100.0% 31.605 60.4% 9,900.000 Total Office $2,478,279,130 '49%interest sold subsequent to year-end. 28 .< . .,. Properties INDUSTRIAL REAL ESTATE VINTAGE VALUE PROPERTY NAME LOCATION YEAR OWNERSHIP% SIZE OCCUPANCY AT SHARE($) Research Tri-Center Durham,NC 2014 100.0% 1,534,024 90.4% 117.500,000 Redlands Business Center Redlands.CA 2013 100.0% 704,115 100.0% 65.500.000 Pioneer 360 Arlington,TX 2009 100.0% 1,163.465 90.3% 60,000.000 16850 Heacock Street Moreno Valley,CA 2011 100.0% 756.340 100.0% 57,200,000 Mile High Distribution Center Denver,CO 2007 100.0% 763.633 100.0% 56.800,000 Knott Distribution Center Buena Park,CA 2002 100.0% 399,473 100.0% 53,500,000 Carmel Mountain San Diego.CA 2005 100.0% 329.306 100.0% 50.500,000 Pacific Coast Park II Fife,WA 2006 100.0% 501.250 99.9% 42,700.000 Durango Commerce Center Phoenix,AZ 2008 100.0% 669,266 90.7% _40,700.000 Sycamore Collection Riverside.CA 2006 100,0% 442.000 100.0% 39,500,000 Siempre Viva Business Park San Diego.CA 2007 100.0% 473.899 85.4% 38,400,000 Chantilly Distribution Center Chantilly.VA 2006 100.0% 350,943 100.0% 37,400,000 Miraloma Distribution Center Anaheim,CA 2005 100.0% 319,174 100.0% 37,400,000 Eden Rock 10 Hayward,CA 2005 100.0% 327,715 100.0% 34.700,000 Beltway Northwest Houston,TX 2007 100.0% 299,025 92,4% 34,300,000 University Park Tech I&II San Antonio,TX 2007 100,0% 190.762 100.0% 33,200,000 Valencia Commerceplex. Valencia,CA 2005 100.0% 317,905 100.0% 32,000,000 Whittier Industrial Whittier,CA 2005 100.0% 290,430 100,0% 30,800.000 7400 Hazard Westminster,CA 2013 100.0% 258,506 100.0% 29,300,000 Patterson Pass Business Park Tracy,CA 2011 100.0% 404,400 100.0% 25,500,000 _ ' Cotton Center Phoenix,AZ 2005 100.0% 225,435 83.3% 24,200,000 3225 Meridian Parkway Weston.FL 2004 100.0% 201,845 100.0% 23,400,000 Guhn Road Distribution Center Houston,TX 2012 100,0% 253,838 100.0% 21,600,000 3245 Meridian Parkway Weston,FL 2004 100.0% 230,600 50.5% 21,100,000 Seattle Distribution Center Seattle,WA 2004 100,0% 174,478 96.5% 20,000.000 Crossroads Corporate Center Salt Lake City,UT 2011 100.0% 295,800 79.0% 19.200,000 Mile High 3 Denver,CO 2014 100.0% 255,767 -71.8% 19,100.000 Waters Ridge Distribution Center Lewisville,TX 2011 100.0% 367,744 100.0% 18,400,000 (:: .. , ! 29 . . . Properties INDUSTRIAL (continued) REAL ESTATE PROPERTY NAME LOCATION VINTAGE YEAR OWNERSHIP% SIZE OCCUPANCY VALUE AT SHARE($) ASP Valencia Santa Clarita.CA 2005 100.0% 173,678 100.0% 17.600,000 __ Business Interiors Irving,TX 2005 100.0% 309,774 100.0% 16,900,000 Turnbull Canyon Distribution Center City of Industry,CA 2002 1000% 190,900 100.0% 16,700,000 . _ Race Road Hanover,MD 2010 100.0% 98,855 100.0% 16,200,000 1025 Airport 100 Way Hanover.MD 2011 100.0% 134,000 100.0% 16,100,000 . .._ South River Road South Brunswick,NJ 2006 100.0% 208,899 100.0% 15,700,000 Plainfield Park Plainfield,IN 2011 1000% 346,800 100.0% 15,500,000 Chino International Chino,CA 2006 100.0% 184,289 100.0% 15,500,000 Capital Park South Distribution Center Grove City.OH 2011 100.0% 378.283 100.0% 14.600,000 La Palma Distribution Center Anaheim,CA 2006 100.0% 127,122 100.0% 14,300,000 Sun Valley Industrial Sun Valley,CA 2005 100.0% 103.985 100.0% 13,200.000 Tr:County Distribution Center Schertz,TX 2011 100.0% 244,800 100.0% 13,200,000 Plainfield Park II Plainfield,IN 2014 100.0% 352,000 0,0% 12,600.000 Dulles Woods III Sterling,VA 2006 100.0% 102,427 100.0% 12.400,000 Kyrene Commons Tempe,AZ 2011 100.0% 156,410 1000% 12,200,000 21st Street Business Center Tempe,AZ 2002 100.0% 162,000 100.0% 11,900,000 Northport Fremont,CA 2005 100.0% 103,414 100.0% 11,400,000 140 North Mitchell Court Addison,IL 2004 100.0% 128,640 1000% 11,200,000 West Chester Commerce Park West Chester,OH 2011 100.0% 205,920 100,0% 9.800.000 Princeton Distribution Center Cincinnati,OH 2011 100.0% 91,800 100.0% 8.100,000 West 10 Business Center Phoenix,AZ 2002 . 100.0% 146,623 0.0% . 7,390.000 Salt Lake Industrial Distribution Center Salt Lake City,UT 2011 100,0% 100800 100,0% 6,500.000,, 900 Corporate Grove Drive Buffalo Grove.IL 2005 100.0% 68.943 100,0% 5,500.000 Total Industrial $1,378,390,000 ,-.•: .,s; - . , . i; !. : .,•I . • Properties HOTEL. LOCATION VINTAGE REAL YEAR OWNERSHIP% SIZE OCCUPANCY ESTATE VALUE PROPERTY NAME AT SHARE($) Chevy Chase-Hotel Washington.DC 2005 100.0% 198 75.9% 73.500.000 Alexandria Monaco Alexandria,VA 2006 100.0% 241 81.8% 94,900,000 Hotel Allegro Chicago.IL 2007 100.0% 483 73.8% 90,900,000 Morrison House Alexandria,VA 2006 100.0% 45 81.4% 11.700,000 Total Hotel $271,000,000 LAND VINTAGE. REAL LOCATION YEAR OWNERSHIP% SIZE OCCUPANCY ESTATE VALUE PROPERTY NAME AT SHARE($) Harvest Creek Brandon,FL 2007 100.0% 0 0.0% 10,500,000 Mile High 4 Denver,CO 2007 100.0% 0 0.0% 2,100,000 Total Land $12,600,000 TOTAL PORTFOLIO $7,762,695,890 •r.; 4',.. t;"vi. 31 . kid / , r / .4 4.%,e'.'"°.'. ` ''---7. y 1_. ._.d.:.. ` J r r/ry.rl' �% � 'V ', ,e +a.... ,tw : "7 .7_ _ "r ` i , t . TT. c '7. is f ,,,„ % R. Vie'y ..,;°, ".f+' .R^ '• S� . .. S s. 3 sdl'�£ � Ar : _ . r � *�,,, ,moo Jam, ;"q*,-',,.::. `ti.'h` - ,3n R.�. ,:.,. ,`. 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FLORIDA , ---- ...,_ C.::.A.;',k!c.:31Q LION•.1.,.P.:Cfr:',I.,,.[ZI IF .17.t1;:k-12) 31 . . . • . Commitment to Sustainabillty Clarion Partners seeks exceptional investment returns.by responsibly irivesting and managing high performance,high quality,environmentally responsible,healthy,and productive places to live,work,shap and stay that are benefidal to Our local communities„ In May 2013,Clarion Partners signed the,United Nations backed Principles for Responsible Investment,strengthening our commitment to incorporating environmental,social,and governance issues into our investment decisions.Clarion is also an active corporate member of the US.Green Building Council and the Urban Land Institute's Sustainable Building Council, Across the Firm we are committed to exploring and implementing sustainable development and operational guidelines for our investments. We have registered all applicable office buildings under the EPA Energy Star program and are also pursuing LEED(Leadership in Energy&Environmental Design)certification wherever cost-effective. We regularly assess opportunities to integrate energy efficiency improvernents through our capital projects and in new develOpMents.These projects include skylights and daylighting.:Teflective white rObfing,energy efficient lighting,water efficient irrigation iystems,low E glass,shade features recyclable materials and shop assembled subsystems that reduce on site waste(i.e.,precast panels).low-volatile organic compound emitting materials, motion and occupancy lighting Sensors,and electric vehicle charging stations. Clarion also works closely with tenants on implementing efficiency capital projects while educating them on how to operate more efficiently and cost effectively.This not only lowers costs but enhances the tenant/landlord relationship building loyalty to the Firm's projects over time. Fourth Quarter Sustainability Highlight KATAHDIN WOODS, LEXINGTON, MA PROPERTY HIGHLIGHTS - . *., •'' ;IS - 128 unit*antel apartment complex located in the Boston metropolitan area . -• )1'14'' .._,,,..„..„,,,,._,.,*, ., . ..., .:),, Seven building community originally constructed in1989 The Property is located in a highly desirable Massachusetts school district ' --, •,,...,. ,,,.„ ' . .. - -t. ts: t .. 1 ' in close proximity to Ideal employment centers and amenities ; - ',.. *-.z..`z, V,„,... .;. ' ., ii,r-- ,,.. Average unit size of 964 square feet — -1-.. %. 4' ,E'..-?..--i: ..• 98%occupied SUSTAINABILITY HIGHLIGHTS,-- , •, . ., -„ ;. , r, , •-"'----- ---..„,---,..',4 The Property completed installation of solar panels on 5 buildings in 2014 . -- Expected simple payback of 4.2 years and a return on cost of 17% ,.....*04 lillii lift ; : - ; 1 '•rt"Ms 11-7 .4Ippli !I,,•;11,;. :II: ; itj,:j":,:1=71 141 IL. Resulted in$30,000 in utility savings,plus the ability to sell ',,„-*ry.- - • -- intet-:••::,,::•Alliii 4— approximately$30,000 in solar renewable energy certificates -.4. Ar - -...-.....— i ,• , , Federal government program subsidy provided a 36%tax credit for the project Errtrrtl- 4,-- __,641147itly ..".--" 41011,‘ 04.7' 0 LI- 0 Principles for 6 .. I #14, .... G Eill Responsible -:-' ' .4:04' 4 ENERGY STAR E Investment us ac, 4140 U 34 :"' .-,., ;*,;. .; :-.,,,.. .> :. l',"::- ,-. :: ..:,;, J.:!.-,•.....,‘.,. '.> i'f.),'' :,,,.',..; , .. . . Notes . • - • • - 1-Investment in the Fund entails significant risks that investors 9. The Cash Ratio is calculated:as:the sum.ofell Fund-level should consider before making a decision to invest An cash,wholly owned property cash,and the Funds investor should only invest in the Fund as part.CI an overall proportionate share of joint venture Cash divided by the investment strategy and only if the investor IS able to FUndt consolidated wholly owned total assets and withstand total toss of investment.Investments in the Fund proportionate share Of joint venture total asSett,Restricted can only be made pursuant to the Fundt offering cash balances are excluded from the calculatiOn. documents and private placement memorandum,-which: 10 The Leverage Ratio it calctilated at the tUrn of the fair investors are adVised to read carefully and pay.special market value.esapplicable,a all Fund-ievei debt,wholly attention to the risk.factors set forth therein. owned property debt and the Fund?a,oroportionate share • 2'.Returns are presented beginning April.1.2000,the Funds of joint venture debt divided by the Fundt consolidated inception date, wholly owned total assets and proportionate share of joint 3.Returns.:are.presented on a gross and net basis;and there is venture total assets no guarantee that the Fund will realize its Investment 11.Annual time weighted returns are calculated by linking objettiVet or that investors will receive.a return of their quarterly-returns;using the formula belOw'.: caPital.Both gross and net returns assume intOrne. • reinvestment and take into account transaction costs.Net of :ll.:-i";:!::j:::,i::':::1:::;jil:::lriVeStMeht;i.ntiOrn0i,:llAp.:.PitelatiPriiOeP.rlt.i0tltiOk.':g:kH:: fee returns reflect asset management tees.The FOnd's base 1,:i.:i:i:;:::::::,i1.11i1::talliNININWel.0.004**(0.904001,1010.111.1:006:11.4.! management fees are charged as a.percentage of net asset: :towoostot Asie.**Ioeigitemolotiooloomootrot*:: :y value ranging from effective rates of 0.85%to 1.25%per i .: . : tiriiii4iiightatt!1:9StrilAtiiiiiS!g:!:]c.:%::.E:in:F:::::::!:Ft.::::i.::::!-::::::g...:1,.:1:' annum except for certain internal investOrs and investors whose interest exceeds$100 MilliOn,in whith case fees may . be negotiated with the Fund.Management fees are billed by For annual returns the sum of the return components may Clarion Partners outside of the Fund and do not impact not equal the total gross return due to time weighting(i:e. NAY. chain-linking)of quarterly returns. , .. 4.,The Fund's total appreciation return consists of two 12.Clarion.Partners is a registered investment advisor under components:.propertylevel appreciation and the impact of the Investment Advisers Act of 1940. debt marked to market For the year ended December 31. 13,The information contained in this report has been obtained. 2014,the total annual appreciation return was 8.09% or derived from independent third party sources believed comprised of'a 7.59WprOperty-level appreciation return and to be reliable.This report contains forward looking al)AB%debt mark to market return stateMentt relating to the plans,objectiVes.opportunities, . 5,Fund returns are calculated on an investment level basis and future performance and business of the Fund and the include leverage,cash balances and interest income from future performance of the U.S,market generally.These Short-term cash investments,Fund returns are generally forward looking statements include statements regarding comparecitothe'NCREIF Fund Index Open End Diversified the turrenteXpettationt.estirriatet,Orcijettion$,OpiniOnt Core Equity:(NFI-ODCE)equal weight.The NF.10.DCE is a and beliefs of the Fund as well as the-assuMptiOns:On. fund level time weighted return index and includes property Which those statements are based.Words such As investments at ownership share cash balances,and leverage "believes.'"expects,""antiCipates,"intends.'Vans:, (i.e„.'returnS.reflect the actual asset ownership positions and "estimates "projects,"..should"and objective and financing strategy of the funds included in the index).NFI- variations of such words:and:similar words alsoideritify ODCE returns are presented before fees and are for fbrivard,loOking:Statementt.Such statements are forWard:- illustrative purposes only Investors cannot invest in an inde* looking in nature and involve a number-of known and unknown riSks.uncertainties and other factors.and 6.Real ettate asset values are established by independent accordingly actual results may differ materially from those appraisals each quarter and the values presented herein are reflected or contemplated in such forward looking based on the December 31,.201:4 appraitals.Gross real estate statements No assurance can be given that the Fundt value is the appraised real estate value of all assets.For real investment.obiettives will be achieved or that investors will estate owned in joint ventures,assets are carried at the receive a return of their capital.Investors are cautioned not Fund's.ownership share except for consolidated joint to place undue reliance on any statements ventures which are carried at 100%.Net asset value is the or iexamples included in this report rand thould bear in mind equity value of the Fund.which equals total assets less total that past performance is not necessarily indicative of future liabilitiet,as defined by Generally Accepted Accounting results.None of the FUnd,Clarion or any of their affiliates or Principles(GAAP). principals nor any other individual or entity assumes any 7.Portfolio occupancy excludes hotels,properties in initial obligation to update any forward looking statements as a :lease:up.aridproperties undergoing significant renovation. result of new information;subsequent events or any Other :.Hotel occupancy it depicted on a.rolling twelve month basis; circumstances..Such statements speak only as of the date all other property types present.occuoancy as of quarter that they are originally made. end and are calculated on:a percentage of leased square- 14,This:report.including all exhibits=and appendices,has foot basiS. been prepared and presented in compliance with the Real S.Total Asset Value is the Pones consolidated wholly owned Estate Information Standards(REIS),as determined by total assets and proportionate share of joint venture total Clarion Partners. assets, . ... .. !: 0:.::,:::!:.4 : ,r,..1 ,;,,.;;:c•F,,.1:P.'i :'•!* El:PM 35 • 4 ,• , •-• „ ..4.\. . ., ,, . • Y4. . • it: . •.. . .• .. ..7.--....;.■" -' 1 . ., 1":,' . 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'< i r v".-.,7I.•.,t.I'P.-i4- .. AN Lt-• C 36 •„ -4 Pr-LA 14A' i'''' a • Report of Independent Auditors THE INVESTORS CLARION LION PROPERTIES FUND, LP CLARION LION PROPERTIES FUND HOLDINGS REIT, LLC CLARION LION PROPERTIES FUND HOLDINGS, L.P. We have audited the accompanying combined financial statements of the entities listed in Note 1(the Fund).which comprise the combined statements of assets,liabilities and equity,including the schedules of investments,as of December 31.2014 and 2013,and the related combined statements of operations,changes in equity and cash flows for the years then ended,and the related notes to the combined financial statements. MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S,generally accepted accounting principles;this includes the design,implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement,whether due to fraud or error. AUDITOR'S RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audits.We did not audit the financial statements of Federal/Lion Venture LP(Federal/Lion Joint Venture).a limited partnership in which the Fund has a 70%interest.In the combined financial statements,the Fund's investment in Federal/Lion Joint Venture. exclusive of unrealized depreciation,is stated at$108.4 million and$106.9 million as of December 31,2014 and 2013, respectively,and the Fund's equity in the net income of Federal/Lion Joint Venture is stated at$6.4 million and$6.7 million,for the years then ended.In addition,we did not audit the financial statements of Ramco/Lion Joint Venture L.P.(Ramco/Lion Joint Venture),a limited partnership in which the Fund has a 70%interest.In the combined financial statements,the Fund's investment in Ramco/Lion Joint Venture,exclusive of unrealized depreciation,is stated at$52.1 million as of December 31,2013.and the Fund's equity in the net income of Ramco/Lion Joint Venture is stated at$5.9 million for the year then ended.Those statements were audited by other auditors whose reports have been furnished to us,and our opinion,insofar as it relates to the amounts included for Federal/Lion Joint Venture and Ramco/Lion Joint Venture,is based solely on the reports of the other auditors.We conducted our audits in accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.The procedures selected depend on the auditor's judgment,including the assessment of the risks of material misstatement of the financial statements,whether due to fraud or error.In making those risk assessments,the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.Accordingly,we express no such opinion.An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management,as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion,based on our audits and the reports of the other auditors,the financial statements referred to above present fairly,in all material respects, the combined financial position of the entities listed in Note 1 at December 31, 2014 and 2013.and the combined results of their operations,changes in their equity and their cash flows for the years then ended,in conformity with U.S.generally accepted accounting principles. tuditLLP New York,New York March 3,2015 "• 37 • Financial Statements Clarion Lion Properties Fund Combined Statements of Assets, Liabilities and Equity (In Thousands) DECEMBER 31 • 2014 2013 ASSETS _ ......_. Real estate investments,at fair value(cost:$6,230,601 in 2014 and$5,592,768 in 2013) $ 7,044,970 $6,039,244 Investment in non-consolidated joint ventures and other investments,at fair value(cost:$652,457 in 2014 and $577,371 in 2013) 640,713 510,934 Cash and cash equivalents 70,966 244,096 Rents and other receivables,net of allowance for doubtful accounts of$782 in 2014 and$1,974 in 2013 17,853 16,386 Notes receivable,at fair value(cost:$17.373 in 2014 and$9,984 in 2013) 17,373 9,984 Prepaid expenses and other assets 12,029 10,910 Restricted cash 18,238 20,640 Total assets $ 7,822,142 $6852,194 LIABILITIES AND EQUITY Liabilities: Mortgage notes payable,at fair value $ 634,906 $ 661,400 Senior notes payable,at fair value 1,277,165 999,587 Accounts payable and accrued expenses 274,230 274,220 Credit facility 205,000 - Other liabilities 29,557 58,616 Total liabilities 2,420,858 1,993,823 Equity: Clarion Lion Properties Fund partners'equity 5,398,416 4,851,149 • •- • Non-controlling interests 2,868 7,222 Total equity 5,401,284 4,858,371 Total liabilities and equity $ 7,822,142 $6,852,194 See accompanying notes. 38 :7 - • • : : . . • Financial Statements Clarion Lion Properties Fund Combined Schedules of Investments (In Thousands) • DECEMBER 31 ' 2014 , 2013 FAIR FAIR MARKET MARKET Real Estate Investments COST' VALUE COST' VALUE East ......_ Industrie .._ _____............._ ,... . ................... . .. . . 1025 Airport 100 Way-Hanover,MD $ 14,485 $ 16,100 $ 14.484 $ 15,500 .._....... .. . . Chantilly Distribution Center-Chantilly,VA 36,493 37,400 36.371 35,100, Dulles Woods III-Sterling,VA 12,596 12,400 12,496 11.200 .....__ Race Road-Hanover,MD 13,346 16,200 13.406 15.700 -...... Research Tri-Center-Durham,NC 117,572 117,500 - South River Road-South Brunswick,NJ 13,238 15,700 13,193 13,500 Total Industrial $ 207,730 $ 215,300 $ 89.950 $ 91.000 Office: 10 Brookline Place-Brookline.MA $ 121,293 $ 126,000 $121.172 $121.172 100 Fifth Avenue-New York.NY 235,172 258,000 233.285 '242.000 101 Arch Street-Boston.MA 147,881 143,000 144,468 129.000 1475 Dunwoody Drive-West Chester,PA 31,076 21,300 31.075 20.400 3150 Fairview Park-Falls Church,VA 90,530 90,000 90.530 104.000 Chevy Chase-Washington,DC 108,729 87,300 105.657 79.800 - . One Liberty Square-Boston,MA 54,896 65,000 54,350 55.800 Ricoh Building-Malvern,PA 31,385 25,400 30.403 23.500 Total Office $ 820,962 $ 816,000 $ 810.940 $ 775.672 Residential.: ..,....._ m _ 1000 Jefferson-Hoboken,NJ $ 119,504 $ 129,500 $ 118.768 $ 123.000 .... _ 44 Berry Street-Brooklyn,NY 27,688 43,700 27,644 41,500 Banyan Grove at Towne Square-Virginia Beach,VA - - 42.946 44.000 - . Broadway Knolls-Holbrook,NY 72,966 82,100 72.499 78.900 .._ Columbia Town Center-Columbia,MD 109,950 135,000 107.694 133.000 Infinity Harbor Point-Stamford,CT 99,549 104,300 99.284 102.800 Katandin Woods.-Lexington,MA 34,004 34,900 32,573 33,100 „ ..,.. Montclair Residences-Montclair,NJ 53,397 59,900 53,234 57,300 ..... Parkway Lofts-Bloomfield,NJ 104,598 104,598 - _....._ _ Printhouse Lofts-Brooklyn,NY 30,632 30,632 - ---The Acadia at Metropolitan Park-Arlington,VA 118,408 140,000 64,727 72,100 The Gramercy at Metropolitan Park-Arlington,VA 202,578 189,000 201,969 193,000 _ .. ...._. „:. < ^; : ,,, ! , - , . . '.- : , . Financial Statements . Clarion Lion Properties Fund Combined Schedules of Investments (continued) (In Thousands) DECEMBER 31 2014 2013 FAIR FAIR MARKET MARKET Real Estate Investments COST' VALUE COST' VALUE--- East(continued) ____ Residential(continued): _____ __---' ---- -- The Metropolitan at Reston Town Center-Reston,VA w 121,932 $ 121,000 $ 121.565 $ 124.000 The Millennium atme^onoo,anpa,x-�rxno�on.vA x��eoo �oomm 1�y�a3 140.300 _��. Westbrooke 48,717 �oxmo *7.118 98.400 Total Residential $1,263,849 w1.*09,630 $1.109.6*4 x1.241.400 *em� Chevy Chase-Wa mnoto".oc m 110,605 $ 93,400 $ 107,145 $ 93,500 Dunkirk Gateway-Dunkirk, 41,502 43,200 41,379 40.200 Total Retail $ 162,107 $ 136,600 $ 148,524 $ 133,700 Hotel Chevy Chase-Washington,DC $ 90,391 $ 73,500 $ 79,938 $ 64.000 Alexandria 111,999 94,900 110,440 94.500 Morrison House-Alexandria,VA 17,962 11,700 17,801 12.900 __- Total Hotel $ 220,352 $ 180100 $ 208,179 $ 171.400 Midwest mumc'*a/ 140 North $ 13,652 $ 11,200 $ 13,652 $ 12.700 _----- yoo Corporate Grove Drive-Buffalo Grove,/L 6,429 5,500 6,182 4.900 Capital Park South Distribution Center-Grove City,ov 13,1214,600 w 14,600 13.123 13.600 Plainfield pam-P/vmnwm./w 12,696 15,500 12,692 14.000 Plainfield Park x-p/amne/u./w 11,105 12,600 __- Princeton Distribution 7,671 8,100 7,671 7,700 West Chester mmme�Park-West Chester,OH 8,437 9,800 8,437 9,100 _-_ Total Industrial $ 73,114 $ 77,300 $ 61,75 $ 52,000 Residential' Railway Plaza-Naperville,IL $ 75,472 $ 91.200 $ 75.178 $ 83.500_ . , . Financial Statements . .. Clarion Lion Properties Fund Combined Schedules of Investments (continued) on Thousands) DECEMBER 31 2014 2013 FAIR FAIR MARKET MARKET Real Estate Investments COST' VALUE COST' VALUE Midwest(continued) Retail 600 North Michigan Avenue-Chicago.IL $ 128,055 $ 315,000 $ 124,523 $ 271.000 Hotel Hotel Allegro-Chicago,IL $ 121,299 $ 90,900 $ 113,451 $ 83,100 South industrial. 3225 Meridian Parkway-Weston,FL $ 23,174 $ 23,400 $ 23,100 $ 21,900 3245 Meridian Parkway-Weston,FL 16,099 21,100 16,016 19,000 Beltway Northwest-Houston,TX 22,025 34,300 21.422 31,900 Business Interiors-Irving,TX 14,850 16,900 14.742 14.600 Guhn Road Distribution Center-Houston,TX 18,811 21,600 18.811 20.500 Pioneer 360-Arlington,TX 54,895 60,000 54.261 56.250 Tri County Distribution Center-Schertz,TX 10,999 13,200 10,906 12.100 University Park Tech I&II-San Antonio,TX 30,724 33,200 30.349 32,200 Waters Ridge Distribution Center-Lewisville,TX 15,414 18,400 14,736 16,900 Total Industrial $ 206,991 $ 242,100 $ 204.343 $ 225,350 QUice: Conroe Medical-Conroe,TX $. 19,569 $ 17,600 $ 18.850 $ 17,200 Gwinnett Medical-Lawrenceville.GA - - 18.202 10,500 Legacy Medical Village-Piano,TX 32,573 35,600 32.384 33.500 Mira Vista-Austin,TX 40,784 41,400 - - Ten West Corporate Center Two-Houston,TX 45,379 62,900 45.362 59.000 The Overlook-Austin,TX -- � 13,296 15,800 - - University Park Tech III&IV-San Antonio,TX 26,885 31,100 - - Veritas Office Building-Houston,TX 105,199 167,900 75.185 126.700 Vero Medical Suites-Vero Beach,FL - - 11.523 10,900 Waterway Plaza I&II-The Woodlands.TX 125,962 150,800 125,108 128,200 Total Office $ 409,647 $ 523,100 $ 326.614 $ 386.000 Residential: Lantana Ridge-Austin,TX 45,612 51,000 42.585 48.750 Platinum Southside-Austin,TX 21,462 30,250 21.398 29,500 Grand on Memorial-Houston,TX 34,964 39,400 33,024 33.024 Moda at North Bay Village-North Bay Village.FL 65,680 76.800 31.177 37.500 Total Residential $ 167,718 $ 197,450 $ 128,184 $ 148.774 :k. , i.. . i }' ! 41 . . . Financial Statements Clarion Lion Properties Fund Combined Schedules of Investments (continued) On Thousands) DECEMBER 31 2014 2013 FAIR FAIR MARKET MARKET Real Estate Investments COST' VALUE COST' VALUE South(continued) ___._....... Retail. Victory Station-Savannah,GA $ 24,264 $ 26,100 $ 24,183 $24,183 Water Tower Shoppes-Celebration.FL 24,456 30,800 24,418 28.400 .... Whole Foods at the Domain-Austin.TX 34,251 34,400 - - a., Total Retail $ 82,971 $ 91,300 $ 48,601 $ 52.583 Land: Harvest Creek-Brandon,FL $ 10,000 $ 10,500 $ 10.000 S 10.500 __ ...., West /n du treat 16850 Heacock Street-Moreno Valley,CA $ 46,707 $ 57,200 $ 46.707 $ 55,600 21st Street Business Center-Tempe,AZ 10,556 11,900 10.195 9.000 7400 Hazard-Westminster,CA 26,624 29,300 26,595 27.000 ASP Valencia-Santa Clarita,CA 16,484 17,600 16,440 16,800 Carmel Mountain-San Diego,CA 64,135 50,500 63,914 48.500 Chino International-Chino,CA 17,995 15,500 17,996 14,800 Cotton Center-Phoenix,AZ 28,893 24,200 28,746 26,000 Crossroads Corporate Center-Salt Lake City,UT 16,274 19.200 15,962 16,700 Durango Commerce Center-Phoenix,AZ 51,859 40,700 51,178 37.500 Eden Rock 10-Hayward,CA 25,805 34,700 23.309 26,800 Fifth Street Industrial-Phoenix,AZ - - 7,833 9,500 Geneva Industrial-Tempe,AZ - - 4.609 4.400 Knott Distribution Center-Buena Park,CA 25,441 53,500 24,836 51,300 Kyrene Commons-Tempe.AZ 9,479 12,200 9.103 10.300 * _ _ La Palma Distribution Center-Anaheim,CA 12,541 14,300 12.541 14.000 Mile High 3-Denver,CO 12,194 19,100 - - Mile High Distribution Center-Denver,CO 47,656 56,800 47,472 53.600 Miraloma Distribution Center-Anaheim.CA 30,803 37,400 30,803 35.300 Northport-Fremont,CA 14,033 11,400 14.033 11.600 Pacific Coast Park II-Fife,WA 36,613 42,700 36,620 39,900 Patterson Pass Business Park-Tracy,CA 19,689 25,500 19.141 20.000 Redlands Distribution Center-Redlands,CA 48,743 65,500 44,319 49,400 Salt Lake Industrial Distribution Center-Salt Lake City,UT 5,071 6,500 5,096 5.800 Seattle Distribution Center-Seattle,WA 16,632 20,000 16.684 18.100 Siempre Viva Business Park-San Diego,CA 53,725 38,400 53.590 38.200 Sun Valley Industrial-Sun Valley,CA 10,917 13,200 10,917 12.900 Sycamore Collection-Riverside,CA 34,177 39,500 34,074 36.300 .. _ Turnbull Canyon Distribution Center-City of Industry,CA 11,320 16,700 10.985 15.200 Valencia Commerceplex-Valencia,CA 37,842 32,000 37.522 29.000 West 10 Business Center-Phoenix,AZ 6,968 7,390 6,916 6,200 42 . ,^• i,:.-•, : :(":, i"::,.;,-: :::: t : •: ,".'.:N.-^; ,::::Pr:':': . . . . _ Financial Statements . •• • • Clarion Lion Properties Fund Combined Schedules of Investments(continued) (In Thousands) DECEMBER 31 2014 ' 2013 FAIR FAIR MARKET MARKET Real Estate Investments COST, VALUE COST VALUE West(continued) Industrial(continued): Whittier Industrial-Whittier,CA S 22,950 S 30,800 $ 40.027 $ 43.300 Total Industrial $ 762,126 $ 843,690 $ 768,163 $ 783,000 Office: 60 Spear-San Francisco,CA $ 107,061 $ 111,000 $ - $ - .350 Rhode Island-San Francisco.CA 42,713 71,200 42.642 65,100 475 Brannan Street-San Francisco,CA 150,120 196,000 148,861 169,000 ..__. 2901 Patrick Henry Drive-Santa Clara,CA 26,082 27,900 - __.. Arboretum Gateway-Santa Monica,CA 101,162 184,000 95.694 158,000 Argues Business Park-Sunnyvale,CA 27,344 28,400 27.265 27.265 El Dorado Medical-Tucson,AZ 43,338 38,300 43,298 40,200 Hillcrest Medical-San Diego,CA 13,918 9,900 13,837 9.600 One Del Mar-San Diego,CA 66,230 58,500 65.820 53.800 Progressive Insurance-Rancho Cordova,CA 41,466 29,300 41,466 29,500 Sand Hill Commons-Menlo Park,CA 147,535 240,000 145,178 196,000 Specialty Labs Office Building-Santa Clarita.CA - - 65.432 90,000 Valley Parkway Medical-Escondido,CA 30,771 23,400 30.214 23,600 Wood Hollow Office Park-Novato,CA 49,734 22,700 49,731 21.300 Total Office $ 847,474 $1,040,600 $ 769.438 $ 883.365 Residential: Avignon Townhomes-Redmond,WA $ 54,607 $ 110,000 $ 54,395 $ 94,500 Balboa Park-San Diego,CA 31,654 38,000 17,354 21,900 Buena Vida at Town Center-Rancho Santa Margarita,CA 22,170 25,100 22,077 22,600 Desert Club Apartments-Phoenix,AZ 67,744 83,100 66,802 80,400 Missions at Chino Hills-Chino Hills,CA 74,317 60,800 74,100 59.100 Oak View at Sonoma Hills-Rohnert Park,CA 37,122 44,700 36,957 40.000 Remington at Ladera Ranch-Ladera Ranch.CA 33,963 36,800 33,918 35,200 The Station at Riverfront Park-Denver,CO 67,147 67,800 - - Village on the Green-Rancho Cucamonga,CA 43,753 48,600 43,504 47,600 _ . ..... Total Residential $ 432,477 $ 514,900 $ 349,107 $ 401,300 Retail- Park Place Shopping Center-Tukwila,WA $ 45,811 $ 42,300 $ 45,811 $ 40,700 _. _ ..,. . Promenade at Sacramento Gateway-Sacramento.CA 122,310 86,900 122.229 84.900 West Hollywood Gateway-Los Angeles,CA 78,602 118,000 78.132 110,000 __..._ - -- Total Retail $ 246,723 $ 247,200 $ 246.172 $ 235,600 1 and Mile High 4-Denver.CO $ 1,534 $ 2,100 $ - $ - Total Real Estate Investments $6,230,601 $7,044,970 $5,592,768 $6.039,244 Total Real Estate Investments as a Percentage of Total Assets 90.06% 88.14% Financial Statements Clarion Lion Properties Fund Combined Schedules of Investments (continued) (In Thousands) DECEMBER 31 2014 2013 FAIR FAIR MARKET MARKET COST' VALUE COST' VALUE Investment in Non-Consolidated Joint Ventures and Other Investments Lion ES $ 4,909 $ 4,909 $ 174.805 $ 136,547 Central Park 40,442 40,250 39.277 37,245 11 East 44th 23,230 20,886 22,374 17,939 Federal 108,405 101,906 106,938 101,002 Marketplace at the Outlets2 99,176 99,176 - - Palm Beach Outlets' 112,054 112,054 - - Panattoni - - 3,948 3,583 Ramco 53,012 48,942 52.098 45,607 Selby 6,107 11,435 6.029 10.873 Taconic 150,379 149,569 143.686 137,391 Village 54,743 51,586 28,216 20,747 Total Investment In Non-Consolidated Joint Ventures and Other Investments $ 652,457 $ 640,713 $ 577.371 $ 510,934 Total Investment in Non-Consolidated Joint Ventures and Other Investments as a Percentage of Total Assets 8.19% 7.46% Total Real Estate and Non-Consolidated Joint Venture Investments and Other Investments $6,883,058 $7,685,683 $6.170,139 $6.550,178 2lnvestments at cost represent purchase price and subsequent capital additions for real estate investments.Investments at cost in non-consolidated joint ventures represent the Funds contributions.distributions and allocated shares of equity income(loss)from such joint ventures. 'Loan receivable classified as other investments. See accompanying notes. 4L.:L . :. Financial Statements Clarion Lion Properties Fund Combined Schedules of Investments (continued) (In Thousands) INVESTMENTS PERCENTAGE INVESTMENTS PERCENTAGE DECEMBER 31,2014 AT COST 1 OF PORTFOLIO AT FMV OF PORTFOLIO GeographIc2 East - 42.8% $3,030,553 39.4% Midwest 417,540 6.1 588,991 7.7 South 1,123,933 16.3 1,311,865 17.1 __. West 2,393,982 34.8 2,754,274 35.8 Total $6,883,058 100.0% $7,685,683 100.0% Property Type2 industrial $1,249,960 18.1% $1,378,390 17.8% Office 2,141,755 31.1 2,440,836 31.8 Residential 2,096,002 30.5 2,374,184 30.9 Retail 1.037,247 15.1 1,203,764 15.7 Hotel 346,560 5.0 275,909 3.6 Other' 11,534 0.2 12,600 0.2 Total $6,883,058 100.0% $7,685,683 100.0% • INVESTMENTS PERCENTAGE INVESTMENTS PERCENTAGE . DECEMBER 31,2013 AT COST' OF PORTFOLIO AT FMV OF PORTFOLIO Geographic' East $2.660,407 43.1% $2.685.139 41.1% Midwest 414.007 6.7 526,887 8.0 South 800.892 13.0 892.527 13.6 West 2.294.833 37.2 2,445,625 37.3 Total $6,170,139 100.0% $6.550.178 100.0% Property Type' Industrial $1,124,212 18.2% $1,161,350 17.7% Office _ 1.968.643 32.0 2,100,221 32.1 Residential 1,811,828 29.4 2,023,238 30.9 Retail 755.073 12.2 860,239 13.1 Hotel 496,435 8.0 391,047 6.0 Other, 13.948 0.2 14.083 0.2 Total $6,170,139 100.0% $6.550,178 100.0% JInvestments at cost represent purchase price and subsequent capital additions for real estate investments. Investments at cost in non-consolidated joint ventures represent the Fund's contributions,distributions and allocated shares of equity income(loss)from such joint ventures.Investments at cost in other investments represent the outstanding principal on the Funds loan receivables. 'Includes equity investment in non-consolidated joint ventures and other investments. 4Other Includes land. See accompanying notes. • :• ,.• Financial Statements Clarion Lion Properties Fund Combined Statements of Operations (In Thousands) YEAR ENDED DECEMBER 31 • 2014 2013 Revenues Rental revenue $437,369 $ 399.901 Hotel revenue __ 69,120 71.996 Interest,income 1,078 656 Other revenue 20,255 17.322 Total revenues 527,822 489,875 Expenses Real estate operating expenses 76,371 '69.372 Real estate taxes and insurance 68,272 62.098 Hotel expenses 55,287 56.695 Other expenses 13,643 12.300 Total expenses 213,573 200,465 Net operating income 314,249 289.410 Equity income from non-consolidated joint ventures 31,044 35,643 Interest expense and other financing costs (101,072) (92.944) Net investment income 244,221 232.109 Loss on sale of real estate investments (1,873) (11,225) Loss on.sale of non-consolidated joint venture investments (18,872) (7.761) Unrealized appreciation on real estate investments 383,299 362.821 Unrealized appreciation(depreciation)on non-consolidated joint venture investments 20,070 (16.532) Unrealized appreciation on mortgage and senior notes payable 25,195 26,790 Income from.operations 652,040 586,202 Portion attributable to non-controlling interests 4,359 (4.076) Net income attributable to Clarion Lion Properties Fund $656,399 $ 582.126 See accompanying notes. Clarion Lion Properties Fund Combined Statements of Changes in Equity (In Thousands) CLARION LION NON-CONTROLLING. YEARS ENDED DECEMBER 31,2014 AND 2013 PROPERTIES FUND INTERESTS TOTAL Total equity at December 31.2012 $ 4,378.683 $ 7,745 $ 4,386,428 Capital contributions 658.172 62 658.234 Distributions and redemptions (767.832) (4.661) (772.493) Net income 582,126 4,076 586.202 Total equity at December 31,2013 4,851,149 7.222 4,858.371 Capital contributions 485,126 61 485,187 Distributions and redemptions (594,258) (56) (594,314) Net income(loss) 656,399 (4,359) 652,040 • Total equity at December 31,2014 $ 5,396,416 $ 2,868 $ 5,401,284 See accompanying notes. 46 r+ ;; ... .... i.:?; :} !. ,`. I I 2,;. Financial Statements Clarion Lion Properties Fund Combined Statements of Cash Flows (In Thousands) YEAR ENDED DECEMBER 31 2014 , 2013 Operating activities Income from operations $652,040 $586.202 Adjustments to reconcile income from operations to net cash provided by operating activities: Equity income from non-consolidated joint ventures (31,044) (35.643) Unrealized appreciation on real estate investments (383,299) (362,821) , — Unrealized(appreciation)depreciation on non-consolidated joint venture investments (20,070) 16.532 Unrealized appreciation on mortgage and senior notes payable (25,195) (26.790) Loss on sale of real estate investments 1,873 11,225 Loss on sale of non-consolidated joint venture investments 18,872 7.761 Distribution of earnings from non-consolidated joint ventures 18,585 19,619 Change in operating assets and liabilities: Increase in rents and other receivables,net of allowance for doubtful accounts (517) (431) (Increase)decrease in prepaid expenses and other assets (1,119) 6.095 Decrease(increase)in restricted cash 2,402 (3.430) Increase(decrease)in accounts payable and accrued expenses 10,614 (2,073) (Decrease)increase in other liabilities (1,349) 32.598 Net cash provided by operating activities 241,793 248,844 Investing activities Issuance of notes receivable (7,389) (393) Proceeds from sale of real estate investments,net 181,930 531.601 Proceeds from sale of non-consolidated joint venture investments,net 134,923 170.444 Purchase of real estate investments (520,396) (784.574) Purchase of other investments (211,230) Capital expenditures (216,373) (97.430) Contributions to non-consolidated joint ventures (43,460) (2.612) Net cash used in investing activities (681,995) (182.964) See accompanying notes. Financial Statements Clarion Lion Properties Fund Combined Statements of Cash Flows (continued) (In Thousands) YEAR ENDED DECEMBER 31 2014 2013 Financing activities .......____ Principal proceeds on mortgage and senior notes payable 485,000 - Principal payments on mortgage and senior notes payable (258,273) (22.349) Proceeds from credit facility 205,000 Contributions—non-controlling interests 61 62 Distributions—non-controlling interests (56) Capital contributions 457,321 658.172 Distributions and redemptions (621,981) (620,094) Net cash provided by financing activities 267,072 15.791 (Decrease)increase in cash (173,130) 81.671 Cash and cash equivalents at the beginning of the year 244,096 162,425 Cash and cash equivalents at end of the year $ 70,966 $244.096 Non-cash investing and financing activities Distributions and redemptions payable $ 184,313 $212.036 Capital contributions received in advance S. 5,320 $ 33,125 Consolidation of non-consolidated joint venture real estate to wholly owned real estate S. (2,790) $ - Consolidation of non-consolidated joint venture rents and other investments to wholly owned rents and other receivables $ (950) $ - Consolidation of joint venture other liabilities to wholly owned other liabilities $ 95 $ - Conversion of note receivable to additional interest in consolidated joint venture - $ 4,661 Assumption of mortgage notes payable $ 49,552 $ Accrued capital expenditures $ 36.829 $ 19,710 Supplemental disclosure Cash paid for interest $ 96,863 $ 93,076 See accompanying notes. 4$ `, • ; Notes to combined Financial Statements December 31,2014 the financial statements,and the reported amounts of revenues and expenses during the reporting period.Actual 1.BUSINESS AND ORGANIZATION results could differ from those estimates. ING/Clarion Fund,LLC was formed on November 17,1999,with RENTAL OPERATIONS Nationale-Nederlanden Intervest II B.V.(NNI)as the sole The real estate investments earn rental income from member. Effective April 1,2000,(the Commencement Date). commercial tenants under leasing arrangements that are ING/Clarion Fund,LLC changed its name to Clarion Lion accounted for as operating leases.These leases generally Properties Fund,LLC(the LLC). Pursuant to the Limited provide for minimum rents and escalation charges to tenants Partnership Agreement(the Agreement)dated October 1,2011, for their pro rata share of real estate taxes and operating the LLC converted into a Delaware limited partnership named expenses.Rental income,including fixed rents that vary over Clarion Lion Properties Fund.LP(the LP).On November 30. the term of the lease,is recorded as earned under the terms of 2011,all remaining interests of NNI were purchased by existing the related agreements and not on a straight-line basis,since limited partners of the LP. the impact of increases in fixed rents is considered in determining the estimated current value of the properties. Limited partners generally subscribe for interests in the LP by contributing capital directly to the LP. Investors,in limited Revenue from rental of residential units is recognized as circumstances,may also invest through other legal entities, earned over the terms of the leases,which are generally one including Clarion Lion Properties Fund Holdings REIT,LLC(the year. CLPF REIT)and Clarion Lion Properties Fund Holdings,L.P. (the Operating Partnership). HOTEL OPERATIONS Hotel room revenue and other hotel revenues are recognized Clarion Lion Properties Fund represents the combined when earned. interests of investors in the LP,the CLPF REIT and the Operating Partnership(collectively or individually.Clarion Lion INCOME TAXES Properties Fund or the Fund),The Fund engages in the The CLPF REIT has made an election to be taxed as a real business of acquiring,owning.holding for investment and estate investment trust(REIT)under Sections 856 through investing in or engaging in activities related to investments in 860 of the Internal Revenue Code of 1986,as amended.In real estate assets. general,a corporation that distributes at least 90%of its REIT Profits and losses are allocated among the investors in taxable income to its members in any taxable year,and complies with certain other requirements(i.e.,sources of its accordance with their respective percentage interests in the revenues)is not subject to federal income taxation to the Fund.Net operating cash flow of the Fund may be distributed extent of the income which it distributes.If it fails to qualify as to the investors in accordance with their respective percentage a REIT in any taxable year,it will be subject to federal income interests in the Fund,at the discretion of Clarion Partners LPF tax at regular corporate rates on its taxable income. Even if it GP,LLC,a Delaware limited liability company and the general qualifies for taxation as a REIT,it may be subject to certain partner of the LP(the General Partner)and Clarion Partners. state and local taxes on its income and property and to federal LLC,a New York limited liability company.the sole member of income and excise taxes on its undistributed income,as noted the General Partner and the manager of the LP(Clarion or above.The CLPF REIT met the qualifications for REIT status Manager). for the years ended December 31,2014 and 2013.Additionally, CLPF REIT distributed'100%of taxable income in both years. The term of the Fund is indefinite and may be terminated upon and as a result did not owe any federal income tax or the occurrence of certain events as defined in the Agreement. undistributed earnings excise tax.Accordingly,no provision has The Fund has 221 investors as of December 31.2014. been made for federal income taxes for the years ended December 31,2014 and 2013. 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund also has a number of taxable REIT subsidiaries(TRS). BASIS OF PRESENTATION The Fund,CLPF REIT and TRS incurred federal and state taxes The accompanying combined financial statements have been in the aggregate of approximately$1.4 million for the years prepared in accordance with the FASB Accounting Standards ended December 31,2014 and 2013.Such amounts are Codification(ASC),the authoritative reference for U.S, included in other expenses in the accompanying combined generally accepted accounting principles(GAAP)and include statements of operations. Under ASC 740-10.Income Taxes, the accounts of each of the wholly owned title holding deferred tax assets and liabilities are recognized for temporary companies owning real estate investments and majority owned differences between the carrying amounts of assets and or controlled real estate entities.All significant intercompany liabilities for financial statement reporting purposes and the balances and transactions are eliminated in consolidation. amounts used for income tax purposes.A valuation allowance is recognized if it is more-likely-than-not that some portion of INVESTMENTS IN JOINT VENTURES the deferred asset will not be realized.At December 31,2014, The Fund accounts for its investments in joint ventures where the deferred tax liability was approximately$0.3 million. it does not have a controlling interest under the equity method If applicable,the Fund will recognize interest and penalties of accounting.Accordingly,the Fund reports its share of net related to the underpayment of income taxes as a component income(losses)from its investment in non-consolidated joint of income tax expense.The Fund is not currently under ventures in the accompanying combined financial statements. examination by a taxing authority.The statute of limitations for examination for the Fund's major tax jurisdictions remains open USE OF ESTIMATES for tax years 2011 through 2014. The preparation of financial statements in conformity with accounting principles generally accepted in the United States ASC 740-10 also provides guidance for how uncertain tax • requires management to make estimates and assumptions positions should be recognized,measured,presented and that affect the reported amounts of assets and liabilities and disclosed in the financial statements. disclosure of contingent assets and liabilities at the date of Notes to Combined Financial Statements The Fund has elected the fair value option for all of its the fair value of the underlying real estate and any related mortgage and senior notes payable to better align the mortgage loans payable using the same techniques as measurement attributes of both the assets and liabilities while described within this Note,updated and approved by providing investors with a more meaningful indication of the management on a quarterly basis.Any other factors,such as fair value of the Fund's net asset value. ownership percentage.ownership rights,buy/sell agreements, The following is a description of the valuation techniques used distribution provisions,and capital call obligations are also for assets and liabilities measured at fair value: considered.Upon the disposition of all investments in joint ventures by an investee entity,the Fund will continue to state REAL ESTATE INVESTMENTS its equity in the remaining net assets of the investee entity during the wind down period,if any that occurs prior to the The values of real estate investments have been prepared giving dissolution of the investee entity.The Fund's investments in consideration to the income.cost and sales comparison non-consolidated joint ventures are generally classified within approaches of estimating property value.The income approach Level 3 of the valuation hierarchy. estimates an income stream for a property(typically 10 years) and discounts this income plus a reversion(presumed sale)into NOTES RECEIVABLE AND OTHER INVESTMENTS a present value at a risk adjusted rate.Yield rates and growth The fair value of notes receivable and other investments held assumptions utilized in this approach are derived from market by the Fund have been determined by giving consideration to transactions as well as other financial and industry data.The the value of the underlying collateral and interest rate.which cost approach estimates the replacement cost of the building are updated quarterly by personnel responsible for the less physical depreciation plus the land value.Generally,this management of each investment and reviewed by senior approach provides a check on the value derived using the management at each reporting period.The fair value of the income approach.The sales comparison approach compares notes approximates the principal amount outstanding plus recent transactions to the appraised property.Adjustments are accrued interest.The Fund's notes receivable are classified made for dissimilarities which typically provide a range of value. within Level 3 of the valuation hierarchy. The income approach and,in limited situations,the sales comparison approach were used to value approximately 100% MORTGAGE AND SENIOR NOTES PAYABLE of the Fund's real estate investments for the years ended At December 31,2013,the fair values of mortgage and senior December 31,2014 and 2013.The discount rate and the exit notes payable are determined by discounting the future capitalization rate are significant inputs to these valuations. contractual cash flows to the present value using a current These rates are based on the location,type and nature of each market interest rate,which is updated quarterly by personnel property,and current and anticipated market conditions. responsible for the management of each investment and Many factors are also considered in the determination of fair reviewed by senior management at each reporting period.The value including,but not limited to,the operating cash flows and market rate is determined by giving consideration to one or financial performance of the properties,property types and more of the following criteria as appropriate:(i)interest rates geographic locations.the physical condition of the asset. for loans of comparable quality and maturity.(ii)the value of prevailing market capitalization rates,prevailing market discount the underlying collateral,and(iii)the prevailing state of the rates,general economic conditions,economic conditions debt markets.The Fund's mortgage and senior notes payable specific to the market in which the assets are located,and any are generally classified within Level 3 of the valuation hierarchy. specific rights or terms associated with the investment.Because The significant unobservable inputs used in the fair value of the inherent uncertainties of valuation.the values reflected in measurement of the Fund's mortgage notes payable are the the combined financial statements may materially differ from selection of certain credit spreads and the loan to value ratios. the values that would be determined by negotiations held The significant unobservable inputs used in the fair value between parties in a sale transaction. measurement of the Fund's senior notes payable are the For each calendar year,the Fund follows a valuation policy selection of certain credit spreads. whereby investment values are determined quarterly by one In the fourth quarter of 2014.the Fund outsourced its debt self-contained appraisal report and three limited restricted valuations to an independent third party service provider and appraisals.in accordance with the Uniform Standards of also modified its debt valuation methodology.The modified Professional Appraisal Practice(USPAP).The limited restricted method,which is consistent with ASC 820.focuses on appraisals include less documentation.but nevertheless meet transactions between market participants using an investor's the minimum requirements of the Appraisal Standards Board cost of equity capital based on current market conditions, and the Appraisal Foundation and are considered appraisals. In At December 31,2014,the fair values of mortgage and senior these appraisals,a full discounted cash flow analysis,which is notes payable are determined by discounting the difference the basis of an income approach,is the primary focus. For new between the contractual loan payments and estimated market Fund acquisitions.a self-contained appraisal report will be loan payments at an equity discount rate based on asset completed to determine the fair market value at the end of the appraisals that reflect how a typical third-party investor would first full calendar quarter following the acquisition. value the cash flows.Market loan payments are derived from Since appraisals consider the estimated effect of physical overall market lending rates,debt origination and assumption depreciation,historical cost depreciation and amortization on transactions in the market,and property specific factors, real estate related assets have been excluded from net including loan to value and cap rate changes.The Fund's investment income. mortgage and senior notes payable are generally classified During 2014 and 2013,all appraisals for the Fund were within Level 3 of the valuation hierarchy.The significant prepared by independent external appraisers.The external unobservable inputs used in the fair value measurement of the p Fund's mortgage notes payable are the selection of certain appraisals are reviewed by an external appraisal management credit spreads and the loan to value ratios.The significant firm and reviewed and approved by senior management unobservable inputs used in the fair value measurement of the quarterly.All appraisal reports and appraisal reviews comply Fund's senior notes payable are the selection of certain credit with the currently published USPAP,as promulgated by the spreads. Appraisal Foundation.The Fund's real estate investments are generally classified within Level 3 of the valuation hierarchy. OTHER Other assets and liabilities are valued at cost or face amount, INVESTMENTS IN NON-CONSOLIDATED JOINT VENTURES since these are the amounts at which they are anticipated to be Investments in non-consolidated joint ventures are stated at realized or liquidated. the fair value of the Fund's ownership interest in the underlying entities.The Fund's ownership interests are valued based on 51 Notes to Combined Financial Statements ASC 740-10 requires the evaluation of tax positions taken or In February 2015,the FASB issued Accounting Standards expected to be taken in the course of preparing the Fund's tax Update No 2015-02(ASU 2015-02),Consolidations(Topic 870) returns to determine whether the tax positions are more-likely- -Amendments to the Consolidation Analysis,which makes than-not of being sustained upon examination by the amendments to the current consolidation guidance,including applicable tax authority,based on the technical merits of the introducing a separate consolidation analysis specific to limited tax position,and then recognizing the tax benefit that is more- partnerships and other similar entities.Under this analysis, likely-than-not to be realized.Tax positions not deemed to limited partnerships and other similar entities will be considered meet the more-likely-than-not threshold would be recorded as a variable-interest entity unless the limited partners hold a tax expense in the current reporting period.Management substantive kick-out rights or participating rights.ASU 2015-02 believes any such position would be immaterial to the is effective for annual periods ending on or after December 15, combined financial statements. 2016.Early adoption is permitted.Management is currently evaluating the impact of adopting this new accounting CASH AND CASH EQUIVALENTS standards update on the Fund's combined financial statements. For purposes of reporting cash flows.cash and cash equivalents 4.FAIR VALUE MEASUREMENTS include cash on-hand,demand deposits,and certain investments ASC 820-10,Fair Value Measurements and Disclosures,clarifies with maturities of three months or less when purchased. the definition of fair value for financial reporting,establishes a RESTRICTED CASH framework for measuring fair value,and expands disclosures At December 31,2014 and 2013,restricted cash consisted of about fair value measurements.ASC 820-10 emphasizes that escrows for tenant security deposits,as well as real estate tax, fair value is a market-based measurement,not an entity- insurance,loan,and capital escrows. specific measurement.Therefore,a fair value measurement should be determined based on the assumptions that market CONCENTRATION OF CREDIT RISK participants would use in pricing an asset or liability. Financial instruments that potentially subject the Fund to The statement establishes a hierarchy for inputs used in concentrations of credit risk consist primarily of cash and cash measuring fair value that maximizes the use of observable equivalents in excess of amounts insured by the Federal Deposit inputs and minimizes the use of unobservable inputs by Insurance Corporation(FDIC).The Fund places its cash and requiring that the most observable input be used when cash equivalents with high quality financial institutions. available.Observable inputs are inputs that the market participants would use in pricing the asset or liability based on ACQUISITION.DEVELOPMENT AND CONSTRUCTION market data obtained from sources independent of the Fund. (ADC)ARRANGEMENTS Unobservable inputs are inputs that reflect the Fund's The Fund evaluates loans receivable where the Fund assumptions about the assumptions market participants would participates in the residual profits through loan provisions or use in pricing the asset or liability developed based on the best other contracts to ascertain whether the Fund has the same information available in the circumstances.The hierarchy is risks and rewards as an owner or a joint venture partner. Where measured in three levels based on the reliability of inputs: the Fund concludes that such arrangements are more appropriately treated as an investment in real estate,the Fund Level 1—Valuation based on quoted prices in active markets for reflects such loan receivable as an other investment in the identical assets or liabilities that the Fund has the ability to combined statements of assets,liabilities and equity. access.Valuation adjustment and block discounts are not applied to Level 1 instruments. RECLASSIFICATION OF PRIOR YEAR PRESENTATION Level2—Valuations based on quoted prices in less active, Certain December 31.2013 amounts in the combined statements dealer or broker markets.Fair values are primarily obtained of cash flows have been reclassified to conform to the from third party pricing services for identical or comparable December 31,2014 presentation.Such reclassifications have no assets or liabilities. effect on previously reported net income or partners'equity. Level 3—Valuations derived from other valuation methodologies, 3.RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS including pricing models,discounted cash flow models and similar techniques,and not based on market,exchange.dealer,or In June 2013,the FASB issued amended guidance that clarifies broker-traded transactions.Level 3 valuations incorporate certain the scope,measurement and disclosure requirements for assumptions and projections that are not observable in the investment companies under US GAAP.The amended guidance market and require significant professional judgment in requires an entity to have certain fundamental characteristics determining the fair value assigned to such assets or liabilities. and to consider other typical characteristics to qualify as an investment company.The amended guidance requires an In instances where the determination of the fair value investment company to measure non-controlling ownership measurement is based on inputs from different levels of the interests in other investment companies at fair value rather than fair value hierarchy,the level in the fair value hierarchy within using the equity method of accounting.The guidance also which the entire fair value measurement falls is based on the requires new disclosures about an entity's status or changes in lowest level input that is significant to the fair value status as investment company and application of the guidance measurement in its entirety. in ASC 946,Financial Services-Investment Companies,as well ASC 825,Financial Instruments, provides entities with a one- as information about financial support provided or time irrevocable option to fair value eligible assets and contractually required to be provided by an investment liabilities and requires both qualitative and quantitative company to any of its investees.The amended guidance was disclosures to those for which an election is made,Unrealized effective for annual periods beginning after December 15.2013. gains and losses on items for which the fair value option has Management evaluated the guidance in ASC 946 and been elected are reported in earnings. determined the Fund continues to qualify as an investment company. 50 C...T..,:{.id '"..' - .'r,: }. : ..'s t:;: ,, Ji? Ji i ,.N. Notes to Combined Financial Statements The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the year ended December 31,2014: (In Thousands) LEVEL 1: LEVEL 2: QUOTED PRICES IN SIGNIFICANT LEVEL 3: . ACTIVE MARKETS OTHER SIGNIFICANT FOR IDENTICAL OBSERVABLE UNOBSERVABLE DESCRIPTION ASSETS INPUTS INPUTS TOTAL Real estate investments $ - $ - $7,044,970 $7,044,970 Investment in nor-consolidated joint ventures and other investments - - 640,713 640,713 Notes receivable -�� - - 17,373 17,373 Total investments and notes receivable $ - $ - $7,703,056 $7,703,056 Mortgage notes payable $ - $ - $ 634,906 $ 634,906 Senior notes payable - - 1,277,165 1,277,165 Total mortgage and senior notes payable $ - $ - $1,912,071 $1,912,071 The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs(Level 3)during the year ended December 31.2014: (In Thousands) INVESTMENT TOTAL IN NON- TOTAL LEVEL 3 CONSOLIDATED LEVEL 3 MORTGAGE JOINT VENTURES INVESTMENTS MORTGAGE SENIOR AND SENIOR REAL ESTATE AND OTHER NOTES AND NOTES NOTES NOTES NOTES INVESTMENTS INVESTMENTS RECEIVABLE RECEIVABLE PAYABLE PAYABLE PAYABLE Beginning balance- January 1.2014 $6,039,244 $510,934 $9,984 $6,560,162 $661,400 $999,587 $1,660,987 Total realized and unrealized gains and losses included in net income 381,426 1,198 - 382,624 (2,773) (22,422) (25,195) Purchases,sales,issuances, and settlements: Purchases 520,396 211,230 - 731,626 - - - Sales (181,930) (134,923) - (316,853) - - - Issuances - - 7,389 7,389 185,000 300,000 485,000 Settlements - - - - (258,273) - (258,273) Capital expenditures 233,492 - - 233,492 - - -- Consolidation of non- consolidated joint venture property to whopiy owned property 2,790 (3,645) - (855) - - - Non-consolidated joint venture contributions - 43,460 - 43,460 - - - Non-consolidated joint venture distributions - (18,585) - (18,585) - - - Assumption of mortgage note payable 49,552 - - 49,552 49,552 - 49,552 Equity income from non- consolidated joint ventures included in net income - 31,044 - 31,044 - - - Ending balance- December 31,2014 $7,044,970 $640,713 $17,373 $7,703,056 $634,906 $1,277,165 $1,912,071 52 • .. . - . .. . . • Notes to combined Financial Statements . . Total unrealized gains of$383.299 for 2014 included above are the accompanying combined statements of operations.Total attributable to real estate investments held at December 31, realized losses of$18,872 for 2014 included above are 2014.and are included in unrealized appreciation on real estate attributed to non-consolidated joint venture investments sold investments in the accompanying combined statements of during the year ended December 31,2014 and are included in operations.Total realized losses of$1.873 for 2014 included loss on sale of non-consolidated joint venture investments. above are attributable to real estate investments sold during Included as part of total realized losses recognized is the the year ended December 31,2014 and are included in loss on reversal of cumulative unrealized losses as of December 31, sale of real estate investments in the accompanying combined 2013 of$34,217. statements of operations.Included as part of total realized Total unrealized gains of$2,773 and$22,422 for 2014 losses recognized is the reversal of cumulative unrealized gains included above are attributable to mortgage and senior as of December 31,2013 of$15,405. notes payable,respectively,held at December 31,2014,and Total unrealized gains of$20,070 for 2014 included above are are included in unrealized appreciation on mortgage and attributable to non-consolidated joint venture investments held senior notes payable in the accompanying combined at December 31.2014.and are included in unrealized statements of operations. appreciation on non-consolidated joint venture investments in The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair value measurements used at December 31,2014: (In Thousands) REAL ESTATE INVESTMENTS FAIR VALUE VALUATION TECHNIQUES) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Discounted cash flows Discount rate 6.0055-8.50%(7.15%) Industrial $1,378,390 Direct capitalization analysis Exit capitalization rate 5.5091-8.00%(6.37%) Discounted cash flows Discount rate 6.2555-9.00%(7.09%) Office 2,379,700 Direct capitalization analysts Exit capitalization rate 5.50%-8.00%(6.30%) Discounted cash flows Discount rate 6.25%-7.75%(6.79%) Residential 2,213,180 Direct capitalization analysis Exit capitalization rate 4.75%-6.00%(5.43%) Discounted cash flows Discount rate 5.75%-7.50%(6.74%) Retail 790,100 Direct capitalization analysis Exit capitalization rate 5.00%-6.50%(5.76%) Discounted cash flows Discount rate 9.14%-9.50%(9.37%) Hotel 271,000 Direct capitalization analysis Exit capitalization rate 7.5036-8.0015(7.78%) Land 12,600 Sales comparison approach Price per square foot $3.00-$5.18 per square foot Total Real Estate Investments $7,044,970 53 • • • Notes to combined Financial Statements • The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair value measurements used at December 31,2014: (In Thousands) INVESTMENT IN NON-CONSOLIDATED JOINT VENTURES FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Of/ice: Discounted cash flows Discount rate 6.25%-7.00%(6.71%) Properties $ 98,579 Direct capitalization analysis Exit capitalization rate 5.25%-6.25%(5.86%) Credit spreads 1.45%-4.95%(2.99%) Mortgage notes payable 41,755 Net present value Loan to value ratio 39.02%-47.54%(42.76%) Other' 4,312 Total Office $ 61,136 Residential: Discounted cash flows Discount rate 6.50%-7.75%(7.59%) Properties $167,761 Direct capitalization analysis Exit capitalization rate 5.00%-5.75%(5.65%) Credit spreads 2.20%(2.20%) Mortgage notes payable 10,782 Net present value Loan to value ratio 49.10%(49.10%) Other' 4,026 Total Residential $161,005 Retail Discounted cash flows Discount rate 7.00%-10.7596(7.89%) Properties $245,683 Direct capitalization analysis Exit capitalization rate 6.50%-9.25%(7.16%) Credit spreads 4.24%-4.72%(4.40%) Mortgage notes payable 45,411 Net present value Loan to value ratio 52.14%-59.955(54.13%) Other' 2,161 _ Total Retail $202,433 Hotel. Other $ 4,909 Total Hotel $ 4,909 Total Investment in Non- Consolidated Joint Ventures $429,483 'Other represents the Fund's share of the net assets in the non-consolidated joint ventures,carried at cost which approximates fair value. 54 .. + , nit:'•".; :� rd • Notes to Combined Financial Statements The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair value measurements used at December 31,2014: (In Thousands) OTHER INVESTMENTS FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Outstanding principal amount plus accrued Other Investments-Retail $ 211,230 interest Interest rate 4.75%-6.00%(5.41%) (In Thousands) NOTES RECEIVABLE FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Outstanding principal amount plus accrued Notes Receivable $ 17,373 interest Interest rate 4.00%-4.50%(4.31%) (In Thousands) MORTGAGE NOTES PAYABLE FAIR VALUE VALUATION TECHNIQUES) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Credit spreads 1.68%-3.96%(1.94%) Industrial $ 240,499 Net present value Loan to value ratio 29.64%-57.92%(46.71%) Credit spreads 3.38%-5.30%(4.44%) Office 88,568 Net present value Loan to value ratio 13.19%-71.58%(41.49%) Credit spreads 2.70%-3.11%(2.93%) Residential 305,839 Net present value Loan to value ratio 29.49%-39.15%(35.32%) Total Mortgage Notes Payable $ 634,906 (In Thousands) SENIOR NOTES PAYABLE FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Senior Notes Payable $1,277,165 Net present value Credit spreads 1.70%-4.33%(3.32%) The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the year ended December 31,2013: (In Thousands) LEVEL 1: LEVEL 2: QUOTED PRICES IN SIGNIFICANT LEVEL 3: ACTIVE MARKETS OTHER SIGNIFICANT FOR IDENTICAL OBSERVABLE UNOBSERVABLE DESCRIPTION ASSETS INPUTS INPUTS TOTAL Real estate investments $ — $ — $ 6,039.244 $ 6.039.244 Investment in non-consolidated joint ventures — — 510.934 510,934 Notes receivable — — 9.984 9.984 Total investments and notes receivable $ — $ — $ 6,560.162 $ 6,560,162 Mortgage notes payable $ — $ — $ 661,400 $ 661,400 Senior notes payable — — 999,587 999,587 Total mortgage and senior notes payable $ — $ — $ 1,660.987 $ 1.660,987 : ' • 55 Notes to Combined Financial Statements The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs(Level 3)during the year ended December 31,2013: (In Thousands) TOTAL TOTAL • INVESTMENT LEVEL 3 • LEVEL 3 IN NON- INVESTMENTS MORTGAGE SENIOR MORTGAGE REAL ESTATE CONSOLIDATED NOTES AND NOTES NOTES NOTES AND SENIOR INVESTMENTS JOINT VENTURES RECEIVABLE RECEIVABLE PAYABLE PAYABLE NOTES PAYABLE Beginning balance— January 1,2013 $5,333.045 $687,035 $14,252 $6,034.332 $695.681 $1,014,445 $1.710.126 Total realized and unrealized gains and losses included in net income 351.596 (24,293) — 327.303 (11,932) (14,858) (26.790) Purchases,sales,issuances, and settlements: Purchases 784.574 — — 784,574 — — — Sales (531,601) (170,444) — (702.045) Issuances — — 393 393 — — — Settlements — — — — (22.349) — (22,349) Capital expenditures 101.630 — — 101.630 — — — Conversion of note receivable to additional interest in consolidated joint venture — — (4,661) (4,661) — — — Non-consolidated ioint venture contributions — 2,612 — 2.612 — — — Non-consolidated joint venture distributions — (19,619) — (19,619) — — — Equity income from non- consolidated ioint ventures included in net income — 35,643 — 35.643 — — — Ending balance— December 31,2013 $6,039,244 $510,934 $9,984 $6:560,162 $661,400 $999,587 $1.660.987 Total unrealized gains of$362,821 for 2013 included above are Total unrealized gains of$11,932 and$14.858 for 2013 included attributable to real estate investments held at December 31, above are attributable to mortgage and senior notes payable, 2013,and are included in unrealized appreciation on real estate respectively,held at December 31,2013,and are included in investments in the accompanying combined statements of unrealized appreciation on mortgage and senior notes payable operations.Total realized losses of$11,225 for 2013 included in the accompanying combined statements of operations_ above are attributable to real estate investments sold during the year ended December 31,2013 and are included in loss on sale of real estate investments in the accompanying combined statements of operations. Included as part of total realized losses recognized is the reversal of cumulative unrealized gains as of December 31,2012 of$57,439. Total unrealized losses of$16.532 for 2013 included above are attributable to non-consolidated joint venture investments held at December 31,2013,and are included in unrealized appreciation(depreciation)on non-consolidated joint venture investments in the accompanying combined statements of operations.Total realized losses of$7,761 for 2013 included above are attributable to non-consolidated joint venture investments sold during the year ended December 31,2013 and are included in loss on sale of non-consolidated joint venture investments.Included as part of total realized losses recognized is the reversal of cumulative unrealized losses as of December 31,2012 of$63,770. 56 ! ft' Notes to Combined Financial statements . . „ The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair value measurements used at December 31,2013: (In Thousands) REAL ESTATE INVESTMENTS FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Discounted cash flows Discount rate 6.25%-9.00%(7.36%) Industrial $1.161,350 Direct capitalization analysis Exit capitalization rate 5.75%-8.00%(6.54%) Discounted cash flows Discount rate 6.25%-9.50%(7.26%) Office 2.045.037 Direct capitalization analysis Exit capitalization rate 5.50%-8.25%(6.47%) Discounted cash flows Discount rate 6.25%-10.00%(7.00%) Residential 1.874.974 Direct capitalization analysis Exit capitalization rate 5.00%-6.25%(5.58%) Discounted cash flows Discount rate 6.25%-7.75%(7.30%) Retail 692,883 Direct capitalization analysis Exit capitalization rate 5.509E-6.75%(6.00%) Discounted cash flows Discount rate 9.12%-10.00%(9.51%) Hotel 254.500 Direct capitalization analysis Exit capitalization rate 7.50%-8.00%(7.87%) Land 10.500 Sales comparison approach Price per square foot $3.00 per square foot Total Real Estate Investments $6.039.244 • .,,4 • 57 • Notes to Combined Financial statements The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair value measurements used at.December 31,2013: (In Thousands) INVESTMENT IN NON-CONSOLIDATED JOINT VENTURES FAIR VALUE VALUATION TECHNIQUES) UNOBSERVABLE INPUTS RANGES(WEIGHTED.AVERAGE) Office. Discounted cash flows Discount rate 6.75%-7.00%(6.90%) Properties $93.154 Direct capitalization analysis Exit capitalization rate 5.75%-6.25%(6.05%) Credit spreads 3.75%-4.90%(4.38%) Mortgage notes payable 41.402 Net present.value Loan to value ratio 39.14%-50.33%(44.22%) Other' 3.432 Total Office $ 55,184 Residential: Discounted cash flows Discount rate 6.50%-7.75%(7.58%) Properties $153.451 Direct capitalization analysis Exit capitalization rate 5.00%-5.75%(5.65%) Credit spreads 2.55%(2.55%) Mortgage notes payable 10.478 Net present value Loan to value ratio 50.36%(50.36%) Other' 5.292 Total Residential $148,265 Retatl' —_..._.. Discounted cash flows Discount rate 7.50%-11.00%(8.15%) Properties $253.550 Direct capitalization analysis Exit capitalization rate 7.00%-9.25%(7.44%) Credit spreads 4.55%-6.209E(5.28%) Mortgage notes payable 87.996 Net present value Loan to value ratio 46.02%-74.23%(61.47%) Other' 1.801 Total Retail $167,355 Hotel' Discounted cash flows Discount rate 10.24%(10.24%) Properties $316.763 Direct capitalization analysis Exit capitalization rate 8.97%(8.97%) Credit spreads 1.60%-10.18%(5.80%) Mortgage notes payable 187,500 Net present value Loan to value ratio 59.19%(59.19%) Other' 7.284 Total Hotel $136,547 Land. Land $ 2.790 Sales comparison approach Price per square foot $3.68-$3.72 per square foot Other 793 Total Land $ 3,583 Total Investment in Non- Consolidated Joint Ventures $510,934 5Other represents the Fund's share of the net assets in the non-consolidated joint ventures,carried at cost which approximates fair value. 58 . Notes to Combined Financial Statements The following tables show quantitative information about significant unobservable inputs related to the Level 3 fair value measurements used at December 31,2013: (In Thousands) NOTES RECEIVABLE FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Outstanding principal amount plus accrued Notes Receivable $ 9.984 interest Interest rate 4.50%(4.50%) (In Thousands) MORTGAGE NOTES PAYABLE FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Credit spreads 5.39%-6.35%(5.79%) Industrial $ 15,310 Net present value Loan to value ratio 33.74%-42.27%(38.78%) Credit spreads 4.25%-7.20%(6.01%) Office 109.919 Net present value Loan to value ratio 17.79%-72.14%(45.68%) Credit spreads 2.30%-5.75%(3.51%) Residential 448,096 Net present value Loan to value ratio 33.96%-68.121!(46.90%) Credit spreads 5.16%-5.179E(5.17%) Retail 88,075 Net present value Loan to value ratio 24.46%-53.53%(31.65%) Total Mortgage Notes Payable $ 661.400 (In Thousands) SENIOR NOTES PAYABLE FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGES(WEIGHTED AVERAGE) Senior Notes Payable $999.587 Net present value Credit spreads 2.00%-5.25%(3.24%) 5.REAL ESTATE INVESTMENTS Future minimum rents to be received under non-cancelable In addition to the minimum rent amounts,various leases commercial operating leases as of December 31,2014,are provide for escalation charges to tenants as well as approximately as follows(shown in thousands): percentage rents. Escalation charges and percentage rents in TOTAL the amount of approximately$55 million and$50 million are included in rental revenue for the years ended December 31, 2015 $ 268.455 2014 and 2013, respectively. 2016 244,276 During 2014,the Fund purchased 13 wholly owned properties 2017 217.850 for a total purchase price of approximately$564 million. 2018 191.262 During 2013.the Fund purchased 10 wholly owned properties 2019 164,137 for a total purchase price of approximately$783 million. Thereafter 527,655 Total $1.613.635 . . ".• 59 . , . . Notes to combined Financial statements During the year ended December 31,2014,the following properties were sold: GROSS SALE REALIZED PRICE O/ GAIN/(LOSS)a) PROPERTY NAME PROPERTY TYPE LOCATION SALE DATE (In Millions) (In Millions) Fifth Street Industrial Industrial Phoenix.AZ 04/14/2014 $9.0 $(0.6) Gwinnett Medical Office Lawrenceville,GA 08/13/2014 1L1 (0.3) Banyan Grove at Towne Square Residential Virginia Beach.VA 09/04/2014 41.0 (3.2) Geneva Industrial Industrial Tempe,AZ 10/03/2014 3.8 (0.8) Specialty Labs Office Building Office Santa Clarita,CA 12/12/2014 96.0 5.2 Vero Medical Suites Office Vero Beach.FL 12/18/2014 11.6 0.4 Total $172.5 $0.7 'Gross sale price excludes a partial sale that occurred during the year with a gross sale price of$13.1 million. =Realized gain/loss excludes the impact of any residual amount associated with properties sold in prior years,however,excludes the partial sale that occurred during the year with a realized loss of$1.3 million. During the year ended December 31,2013,the following properties were sold: GROSS SALE ' REALIZED PRICE GAIN/(LOSS)0 PROPERTY NAME PROPERTY TYPE LOCATION SALE DATE (In Millions) (In Millions) Progress Distribution Center Industrial Lawrenceville.GA 03/11/2013 $6.5 $(0.3) Elliott West Office Seattle,WA 04/08/2013 142.5 (3.0) One Metro Center Office Washington,DC 07/30/2013 307.5 (7.9) Hohokam 10 West Park Industrial Phoenix,AZ 08/06/2013 3.9 0.9 Banting I Office Irvine,CA 08/09/2013 12.9 0.9 Banting III Office Irvine,CA 08/09/2013 17.1 1.9 5315 South 3rd Street Industrial Milwaukee.WI 10/03/2013 4.9 (0.9) 5319 South 3rd Street Industrial Milwaukee,WI 10/03/2013 4.8 (1.3) Franklin Commerce Center Industrial Franklin,WI 10/03/2013 3.1 (1.4) Pewaukee Commerce Center I Industrial Pewaukee,WI 10/03/2013 3.5 (0.3) Pewaukee Commerce Center II industrial Pewaukee.WI 10/03/2013 4.2 (0.4) Falcon Pines Apartments Residential Orlando.FL 11/22/2013 31.5 0.5 Total $542.4 $(11.3) 'Realized gain/loss excludes the impact of any residual amount associated with properties sold in prior years. At December 31,2014,the Fund owned 121 properties of which Pleasant Shops for a realized gain of$2.9 million.At December 118 are wholly owned and 3 are in joint ventures in which the 31,2014, Federal owns a total of 6 properties.The carrying Fund owns the controlling interest.At December 31,2013,the value of the Fund's investment in Federal as of December 31, Fund owned 114 properties of which 111 were wholly owned and 2014 and 2013 was approximately$102 million and$101 million, 3 were in joint ventures in which the Fund owned the respectively,with an ownership interest of approximately 70%. controlling interest. During the year ended December 31,2014.the Fund 6.INVESTMENT IN NON-CONSOLIDATED JOINT VENTURES contributed$15.7 million to Federal,representing its share of the loan payoffs related to two properties,Plaza Del Mercado During the normal course.of business.the Fund makes and Atlantic Plaza. contributions to their non-consolidated joint ventures at its relative ownership interest in each joint venture. The Fund's contributions to non-consolidated joint ventures for the years ended December 31,2014 and 2013 were$43.5 million and $2.6 million,respectively. At December 31,2014 and 2013, the Fund had no unfunded commitments to its unconsolidated joint ventures. On July 1,2004.the Fund entered into a joint venture with Federal Realty Investment Trust(FRIT)and formed Federal/ Lion Venture, L.P.(Federal)to invest in neighborhood/ community shopping centers.On July 24,2014,Federal sold 60 . . .. . ") ..i n ._. . Notes to combined Financial Statements On December 29,2004,the Fund entered into a joint venture located in Denver,Colorado(Mile High).On February 14,2014 with Ramco-Gershenson Properties Trust(RPT)and formed the Fund paid$0.3 million to the joint venture partner to Ramco/Lion Venture, LP.(Ramco)to invest in neighborhood/ acquire its interests in the remaining two land parcels and community shopping centers in the Southeastern and therefore consolidating these as part of real estate investments Midwestern United States.On March 25,2013,the Fund sold its on the combined statement of assets.liabilities and equity as 70%interest in 13 of the 16 properties for a realized gain of$7.4 of December 31,2014. During the year ended December 31, million.At December 31,2014,Ramco owns a total of 3 2013,the Fund contributed$0.1 million related to the normal properties.The Fund's investment in Ramco as of December course of business for the Panattoni properties. 31,2014 and 2013 was approximately$49 million and$46 On May 23,2007,the Fund entered into a joint venture with million,respectively,with an ownership interest of 70%.During Lion Value Fund and REOI/Henley and acquired Apple the year ended December 31,2013.the Fund contributed$0.1 Hospitality Two,Inc.(Lion ES),a non-traded public REIT with million related to the normal course of business for the Ramco 47 upscale extended-stay hotels in 18 states throughout the properties. United States as of December 31,2013.The Fund's ownership On August 1.2006,the Fund entered into a joint venture with interest in Lion ES was 37.5%at December 31,2013.On August SFM-XIX,LLC and Rochester Investors,subsidiaries of R.W. 12,2014,Lion ES was sold for$800.0 million and had a realized Selby and Company,Inc.(Selby),to invest in a multifamily loss of approximately$21 million.The Fund's carrying value of residential property located in Los Angeles,California the investment in Lion ES as of December 31.2014 and 2013 (Rochester Apartments).The carrying value of the Fund's was approximately$5 million and$137 million.respectively.The investment in Rochester Apartments as of both December 31, Fund's residual investment in Lion ES at December 31,2014 2014 and 2013 was approximately$11 million with an ownership was a sale holdback,which is expected to be distributed in the interest of 90%. first half of 2015. On December 28,2006.the Fund entered into a joint venture On July 18,2007.the Fund entered into a joint venture with with Montecito Medical Investment Company,LLC(Montecito) DCD America.LLC(11 E 44th)to invest in an office building to invest in medical office properties located throughout the located in New York,New York.The Fund's carrying value of United States.Under the original agreement,the Fund had a the investment in 11 E 44th as of December 31,2014 and 2013 93%ownership interest in the joint venture. During 2012,the was approximately$21 million and$18 million,respectively, Fund paid approximately$3 million to the joint venture partner with an ownership interest of approximately 49%. to acquire its interest in 6 of the 7 properties.During the year On July 20,2007,the Fund entered into a joint venture with ended December 31,2013,the Fund contributed$1.0 million Gart Properties,LLC(Village)to invest in a community related to the normal course of business for the Knoll North shopping center located in Boulder,Colorado.The Fund's property.On August 1,2013 the Fund sold its interest in the 1 carrying value of the investment in Village as of December 31, remaining property for a realized gain of$0.3 million. 2014 and 2013 was approximately$52 million and$21 million, On March 1,2007,the Fund entered into a joint venture with respectively(see Note 8).with an ownership interest of 80%.In 3500 Partners,LLC,a subsidiary of M.David Paul&Associates, 2014.the Fund contributed$26 million to Village to fund the LLC(Central Park)to invest in an office building located in loan payoff of Village Shopping Center. Burbank,California.The Fund's carrying value of the As of December 31.2014.the Fund is not contractually investment in Central Park as of December 31,2014 and 2013 obligated to provide financial support to any of its joint was approximately$40 million and$37 million,respectively, with an ownership interest of approximately 49%. ventures. On March 9,2007,the Fund entered into a joint venture with Taconic Eastchester Investors.LLC(Taconic)to invest in a multifamily residential property located in Bronx,New York. The Fund's carrying value of the investment in Taconic as of December 31,2014 and 2013 was approximately$150 million and$137 million,respectively(see Note 8),with an ownership interest of 90%.During the years ended December 31,2014 and 2013,the Fund contributed$1.6 million and$1.4 million, respectively,to fund capital calls requested by Taconic. On April 18.2007,the Fund entered into a joint venture with Panattoni Development Company, Inc.The venture purchased four parcels of land and one operating industrial building 61 • Notes to Combined Financial statements A summary of the financial information for the non-consolidated joint ventures at December 31.2014 is as follows(shown in thousands): CENTRAL 2014 FEDERAL RAMCO PARK TACONIC LION ES OTHER' TOTAL Balance sheet Assets: Real estate investments $ 179,720 $ 99,600 $ 123,000 $ 162,000 $ - $ 167.400 $ 731,720 Other assets 5,583 2,319 7,386 9,100 14,190 5,253 43,831 Total assets $ 185,303 $ 101,919 $ 130,386 $ 171,100 $ 14,190 $ 172,653 $ 775,551 Liabilities and partners'capital Mortgage notes payable $ 34,789 $ 30,093 $ 48,000 $ - $ - $ 49,397 $ 162,279 Other liabilities 3,465 1,852 378 4,913 1,098 3,316 15,022 Total liabilities 38,254 31,945 48,378 4,913 1,098 52,713 177,301 Total partners'capital 147,049 69,974 82,008 166,187 13,092 119,940 598,250 Total liabilities and partners'capital $ 185,303 $ 101,919 $ 130,386 $ 171,100 $ 14,190 $ 172,653 $ 775,551 Fund's investment interest $ 101,906 $ 48,942 $ 40,250 $ 149,569 $ 4,909 $ 83,907 $ 429,483 Income statement Revenues $ 17,970 $ 10,636 $ 10,167 $ 18,759 $ 183,365 $ 16,067 $ 256,964 Expenses 8,772 5,957 6,281 13,123 155,498 10,395 200,026 Realized gain(loss) 4,461 - - - (56,132) - (51,671) Unrealized(depreciation)appreciation 5,987 3,457 3,772 6,095 - 10,196 29,507 Net income $ 19,646 $ 8,136 $ 7,658 $ 11,731 $ (28,265) $ 15,868 $ 34,774 Fund's equity in net income' $ 12,062 $ 5,593 $ 3,736 $ 10,558 $ (10,600) $ 10,893 $ 32,242 'Other includes the Fund's equity interest in Selby,Panattoni, Village,and 11 E 44th and excludes the investments in Marketplace at the Outlets and Palm Beach Outlets in the amount of$211.2 million which is included in the combined statements of assets.liabilities and equity. The Fund's share of equity in net income includes unrealized appreciation/depreciation and realized gain/loss on sale(if applicable). A summary of the financial information for the non-consolidated joint ventures at December 31.2013 is as follows(shown in thousands): CENTRAL 2013 FEDERAL RAMCO PARK TACONIC LION ES OTHER' TOTAL Balance sheet Assets: Real estate investments $ 200,620 $ 95,700 $ 116,000 $ 147,000 $ 844,700 $ 159,800 5 1.563,820 Other assets 2.891 1,736 6,260 10.591 37,744 5.941 65.163 .Total assets $ 203,511 $ 97,436 $ 122,260 $ 157,591 $ 882,444 $ 165.741 $ 1.628.983 Liabilities and partners'capital Mortgage notes payable $ 57,655 $ 30.506 $ 45,403 $ - $ 500,000 $ 83,780 $ 717.344 Other liabilities 1.251 1,867 1,007 4,935 18,319 3.368 30,747 Total liabilities 58,906 32.373 46.410 4.935 518.319 87.148 748,091 Total partners'capital 144,605 65,063 75,850 152.656 364.125 78.593 880.892 Total liabilities and partners'capital $ 203,511 $ 97,436 $ 122.260 $ 157,591 $ 882,444 $ 165.741 $ 1.628,983 Fund's investment interest $ 101.002 $ 45,607 $ 37.245 $ 137.391 $ 136,547 $ 53,142 $ 510,934 Income statement Revenues $ 18.864 $ 19.948 $ 9.685 $ 17,912 $ 269.628 $ 16.463 $ 352,500 Expenses 9.211 11.585 6,114 12.792 233,336 12.099 285,137 Realized gain(loss) (308) - - - (22) (330) Unrealized(depreciation)appreciation 13.223 (5.704) 7,288 (1,090) (79.997) 8,599 (57.681) Net income $ 22.876 $ '2.351 $ 10,859 $ 4,030 $ (43,705) $ 12.941 $ 9,352 Fund's equity in net income' $ 15.783 $ (5,540) $ 5,299 $ 3,627 $ (16,389) $ 8.570 $ 11,350 'Other includes the Fund's equity interest in Selby,Panattoni, Village.Montecito.and 11 E 44th. "The Fund's share of equity in net income includes unrealized appreciation/depreciation and realized gain/loss on sale(if applicable). 6 2 ... t' . Notes to Combined Financial Statements 7.OTHER INVESTMENTS period between October 7,2015 and January 7,2016.The Palm Beach Outlets closing date of the purchase shall be not less than 60 days and not more than 90 days after the option exercise notice.The In December 2014, the Fund provided$112.0 million of Fund expects to exercise the purchase option and convert the mezzanine financing to a third party developer(the loans to equity ownership within the fourth quarter of 2015. Developer)for a retail outlet center in West Palm Beach, Once converted,the property will be a wholly-owned asset of Florida(Palm Beach Outlets). The mezzanine loan has a term the Fund. of five years with a fixed annual interest rate of 6%due Based on the characteristics of this ADC Arrangement which monthly in arrears.Palm Beach Outlets has an existing first are similar to those of an investment,combined with the mortgage construction loan with Wells Fargo for$206.3 expected residual profit being greater than 50%,the million of which$123.4 million was drawn. The Fund entered arrangement is accounted for as a real estate investment and into a put/call option with the Developer,where the Fund has is reported as an investment in non-consolidated joint ventures the option to purchase the property and the seller has the and other investments in the combined statements of assets, option to sell the property to the Fund.The contractual liabilities and equity at December 31,2014.In addition,the purchase/sale price of Palm Beach Outlets is $283.0 million. Fund determined that the option to purchase the entire The Fund can exercise the option by providing written notice developed property is not a derivative financial instrument to the Developer during the period between January 2,2015 pursuant to U.S.GAAP.As such,the embedded feature is not and March 16,2015.The closing date of the purchase shall be required to be bifurcated and the fair value accounting for the not less than 45 days and not more than 90 days after the embedded feature at each reporting date is not applicable. option exercise notice. The Fund has determined Marketplace at the Outlets to be a The Fund expects to exercise the purchase option and VIE.The Fund's involvement is solely as the lender on the convert the loan to equity ownership within the first 6 months mortgage and the mezzanine loans with protective rights as of 2015.Once converted,Palm Beach Outlets will be held in a the lender.The Fund does not have power to direct the joint venture with the Fund owning a 90%interest and a activities that most significantly impact economic performance member of the Developer retaining a 10%interest.The joint of the VIE.As a result,the Fund is not the primary beneficiary venture expects to borrow up to a $165.0 million first and is not required to consolidate the VIE. mortgage concurrently with the closing of the purchase. 8.NOTES RECEIVABLE Based on the characteristics of this ADC Arrangement which are similar to those of an investment,combined with the Kettler expected residual profit being greater than 50%,the arrangement is accounted for as a real estate investment and On May 4.2009,the Fund made a loan of$3.5 million to is reported as an investment in non-consolidated joint Pentagon East One A,LLC(Pentagon),the minority interest ventures and other investments in the combined statements partner in CLPF-Metropolitan One Venture,L.P.(The Gramercy of assets, liabilities and equity at December 31,2014. In at Metropolitan Park)and a subsidiary of Kettler,Inc.The note addition,the Fund determined that the option to purchase was secured by Pentagon's 10%minority interest in The the entire developed property is not a derivative financial Gramercy at Metropolitan Park and was guaranteed by Kettler, instrument pursuant to U.S.GAAP.As such,the embedded Inc. feature is not required to be bifurcated and the fair value The loan bore interest at an annual rate of 8%with interest accounting for the embedded feature at each reporting date payments due monthly.The borrower was permitted to defer is not applicable. monthly interest,in which case any such interest was added to the unpaid principal balance annually on June 1 of each year. The Fund has determined Palm Beach Outlets to be a variable The aggregate unpaid principal amount and any outstanding interest entity(VIE).The Fund's involvement is solely as the accrued interest was payable at maturity on April 30,2013.All lender on the mezzanine loan with protective rights as the distributions due to the borrower from The Gramercy at lender.The Fund does not have power to direct the activities Metropolitan Park during the term of the loan were to be that most significantly impact economic performance of the applied towards any accrued interest and principal outstanding VIE.As a result,the Fund is not the primary beneficiary and is at that time.On July 1,2013,with an effective date of January 1, not required to consolidate the VIE. 2013,the loan was converted to equity in The Gramercy at Metropolitan Park which increased the Fund's interest to Marketplace at the Outlets 95,8%. In December 2014.the Fund provided a$10.0 million first Taconic mortgage and$89 million of mezzanine financing to a third party developer(the Developer)for a retail shopping center in On November 17,2010,the Fund made a shortfall contribution West Palm Beach.Florida(Marketplace at the Outlets). The and partner loan(as defined in the joint venture agreement)of first mortgage has a term of five years with a fixed annual $8.7 million to Taconic Eastchester Investors.LLC and Taconic interest rate of 4.75%due monthly in arrears. The mezzanine Eastchester Principals,LLC(collectively called Taconic loan has a term of five years with a fixed annual interest rate of Partners).This amount represents the Taconic Partners'pro 4.75%due monthly in arrears. The Fund entered into a put/call rata share of the total contribution necessary to secure the option with the Developer.where the Fund has the option to loan payoff at the underlying property(Eastchester Heights) purchase the property and the Developer has the option to sell on the same day. the property to the Fund. The contractual purchase/sale price The loan bears interest at an annual rate of 4,5%. of the property is$116.7 million.The Fund can exercise the option by providing written notice to the Developer during the 1 63 Notes to combined Financial Statements The principal balance and any accrued and unpaid interest are As of December 31,2013,the Fund had 20 mortgage loans, secured by a first priority lien upon and security interest in the which were collateralized by 20 real estate properties with an Taconic Partners'right to all distributions from the aggregate fair value of approximately $1,658 million.Such partnership.The aggregate unpaid principal amount and any mortgage loans had interest rates ranging from 5.22%to outstanding accrued interest is payable at maturity on 7.28%,with a weighted average interest rate of 5.68%and November 17,2020,although a five-year extension option is maturity dates ranging from 2014 to 2019. available.All distributions due to the Taconic Partners from At December 31,2013. the fair value of the Fund's fixed rate Eastchester Heights during the term of the loan shall first be first mortgage notes payable based on borrowing rates applied towards any accrued and unpaid interest at that time. available at December 31.2013 for notes with similar terms At December 31,2014 and 2013,total principal and accrued and average maturities was approximately$661 million with a interest outstanding on the loan was approximately$10.3 principal balance of approximately$644 million. million and$10.0 million,respectively. Village 10.SENIOR NOTES PAYABLE On July 30,2014,the Fund made a shortfall contribution and On April 27,2005,the Fund issued$100 million of 5.48%Senior a partner loan(as defined in the joint venture agreement)of Notes,Series B,due April 27,2017. $6.5 million to GRI Village Management LLC Gart Village On August 23,2005,the Fund issued$200 million of Senior Partners).This amount represents Gart Partners'pro rata Notes consisting of(i)$100 million of 5.22%Senior Notes,Series share of the total contribution necessary to secure the loan C.due August 23,2015,and(ii)$100 million of 5.32%Senior payoff at the underlying property(Village Shopping Center) Notes,Series D.due August 23,2017. on the same day. On December 15,2005,the Fund issued$200 million of Senior The loan bears interest at an annual rate of 4%.The principal Notes consisting of(i)$150 million of 5.62%Senior Notes,Series balance and any accrued and unpaid interest are secured by E,due December 15,2015,and(ii)$50 million of 5.72%Senior a first priority lien upon and security interest in the Gart Notes,Series F,due December 15,2017. Village Partners'right to all distributions from the On December 6,2006,the Fund issued$250 million of Senior partnership.The aggregate unpaid principal amount and any Notes consisting of(i)$125 million of 5.73%Senior Notes,Series outstanding accrued interest is payable at maturity on G,due December 6,2016,and(ii)$125 million of 5.83%Senior November 30,2024.All distributions due to Gart Partners Notes,Series H,due December 6,2018. from Village Shopping Center during the term of the loan shall first be applied towards any accrued and unpaid interest On June 15,2007,the Fund issued$200 million of Senior Notes at that time.At December 31,2014, total principal and consisting of(i)$50 million of 5.69%Senior Notes,Series I,due accrued interest outstanding on the loan was approximately June 15,2016,and(ii)$150 million of 5.84%Senior Notes,Series $6.5 million. J,due June 15,2019. 9.MORTGAGE NOTES PAYABLE On February 14,2014,the Fund issued$150 million of Senior At December 31,2014,the Fund had 17 mortgage loans, Notes consisting of(i)$12 million of 3.95%Senior Notes,Series which are collateralized by 30 real estate properties with an K,due February 14,2021;(ii)$98 million of 4.60%Senior Notes, aggregate fair value of approximately $1,672 million.Such Series L,due February 14,2024,and(iii)$40 million of 4.75% mortgage loans have interest rates ranging from 1.86% to Senior Notes,Series M,due February 14,2026. 6.75%.with a weighted average interest rate of 4.90%and On June 2,2014,the Fund issued$50 million of floating rate maturity dates ranging from 2015 to 2021.At December 31. Senior Notes.Series N,due June 2,2021.These notes bear an 2014,the fair value of the Fund's fixed rate first mortgage interest rate of LIBOR plus a spread of 1.70%.At December 31, notes payable based on market borrowing rates at December 2014,the rate was 1.93%. 31,2014 for mortgage notes with similar terms and property On July 1,2014.the Fund issued$100 million of Senior Notes specific factors was approximately$585 million with a consisting of:(i)$50 million of 4.15%Senior Notes,Series 0,due principal balance of approximately$568 million. July 1,2021;(ii)$35 million of 4.80%Senior Notes,Series P,due At December 31,2014, the fair value of the Fund's floating July 1,2024;and(iii)$15 million of 4.95%Senior Notes,Series Q. rate first mortgage notes payable based on market due July 1,2026. borrowing rates at December 31,2014 for mortgage notes The Senior Notes bear interest only and the principal payments with similar terms and property specific factors was are due on their maturity date.As of December 31,2014 and approximately$50 million with a principal balance of 2013,the estimated fair value of the Fund's Senior Notes was approximately$50 million. approximately$1,277 million and$1,000 million,respectively, The future minimum principal payments for the next five years with a principal balance of$1,250 and$950 million, and thereafter are as follows(in thousands): respectively.The fair value is calculated by discounting the - --- difference between the contractual note payments and 2015 $ 30,753 estimated market note payments at an equity discount rate 2016 24,838 equivalent to that which would be utilized by market 2017 81,094 participants. 2018 ._......._._._ _._...._,_.._._.....__ 7,598 2019 288.835 Thereafter 185.000 Total $618,118 64 Pr. • Notes to combined Financial Statements The future minimum principal payments for the next five years combined statements of assets,liabilities and equity.All and thereafter are as follows(in thousands): outstanding redemptions and distributions were paid in - —-- -- January 2015.. 2015 $ 250,000 During 2013,the Fund received capital contributions of 2016 175.000 approximately$658 million,representing additional 2017 250,000 investments from existing investors and initial contributions --- -- — related to the admittance of 24 new investors. 2018 125,000 The Fund declared distributions to its investors,according to 2019 150,000 their share percentages at the time of distribution,aggregating Thereafter 300,000 $200 million,of which approximately$51 million remained Total $ 1,250,000 unpaid at December 31,2013,and is included in accounts payable and accrued expenses in the accompanying combined 11.CREDIT FACILITY statements of assets,liabilities and equity. On June 22,2012,the Fund obtained an unsecured credit During 2013,the Fund accepted a total of$568 million in facility(the Facility)from a syndicate of lenders in the amount redemption requests.At December 31,2013,approximately of$250 million with an accordion feature to increase the size $161 million of redemptions remained unpaid and is included in up to$400 million.On November 25,2014 the Fund exercised accounts payable and accrued expenses in the accompanying the accordion feature in the amount of$100 million,which combined statements of assets,liabilities and equity.All increased the total Facility to$350 million. The Facility has a outstanding redemptions and distributions were paid in four year term with a one year extension option,Draws under January 2014. the Facility may be Base Rate Loans or Eurodollar Rate Loans, The investors are not obligated to make any additional capital as defined. Base Rate Loans bear interest at a rate equal to contributions except as stated in each investor's Subscription Base Rate plus the Applicable Rate(as defined).Base Rate Agreement. equals the highest of(a)Federal Funds Rate plus 0.5%:(b) TRANSFER AND REDEMPTION OF INTEREST Bank of America's daily announced prime rate:and(c)the Eurodollar Rate plus 1%.Eurodollar Rate Loans bear interest at The transfer of interests and substitution of investors may be a rate equal to Eurodollar Rate plus the Applicable Rate. made at the discretion of the Manager pursuant to the terms of Eurodollar Rate equals to the daily announced BBA LIBOR. the Agreement.Any transferee of an interest in the Fund who Applicable Rate is based upon the Fund's consolidated is not admitted as a substituted investor shall have the right to leverage ratio as set forth in the most recent compliance receive allocations and distributions pursuant to the certificate. Agreement but shall have no other rights under the Agreement. The.Facility is subject to certain customary compliance requirements,including a consolidated leverage ratio,a Interests may be redeemed by an investor at any time secured and unsecured leverage ratio,an interest and throughout the term of the Agreement upon 90 days'prior unencumbered interest coverage ratio,a minimum net asset written request. Redeemed interests shall remain outstanding value requirement and certain asset and liability composition and share in any cash distributions until the interests are limitations.The Fund is in compliance with such requirements surrendered upon payment of the redemption price. at December 31,2014. Immediately prior to the redemption of an investor.the Fund The Fund values the Facility at the current contractual price shall adjust the carrying values,as defined,of the Fund's assets and liabilities upwards or downwards and such gains or losses and applicable interest rate at the time of each draw.As of December 31.2014,there was$205 million drawn on the will be allocated to the investors in accordance with their Facility. percentage interests,as defined(the Adjusted Equity).To the extent that liquid assets of the Fund,as determined in the sole 12.EQUITY discretion of the General Partner,are insufficient to satisfy CAPITAL CONTRIBUTIONS AND REDEMPTIONS redemption requests,redemptions will be redeemed on a pro rata basis as liquid assets become available.Under no During 2014,the Fund received capital contributions of circumstances will the General Partner be required to cause approximately$485 million,representing additional the Fund to sell investments to satisfy redemption requests. investments from existing investors and initial contributions The redemption price on the redeemed interest is equal to the related to the admittance of 18 new investors. investors'percentage interest in the Adjusted Equity. The Fund declared distributions to its investors,according to their share percentages at the time of distribution,aggregating $212 million,of which approximately$55 million remained unpaid at December 31,2014,and is included in accounts payable and accrued expenses in the accompanying combined statements of assets,liabilities and equity. During 2014, the Fund accepted a total of$382 million in redemption requests.At December 31.2014,approximately $130 million of redemptions remained unpaid and is included in accounts payable and accrued expenses in the accompanying • f .sr—r— 65 • Notes to Combined Financial Statements • 13.PROPERTY MANAGEMENT FEES 15.FINANCIAL HIGHLIGHTS Properties are generally managed by third-party managing ASC 946,Financial Services—Investment Companies,requires and leasing agents.The management fees.as provided by the disclosure of total return,as well as ratios of expenses and property management agreements.range from 1.3%to 4.0%of net investment income to average net assets(the Financial revenue or gross receipts.In certain cases, property Highlights). management fees are charged based upon a fixed amount,as The following are the Financial Highlights attributable to defined by the agreement. Property management fees earned investors of the Fund for the years ended December 31,2014 by third-party managing and leasing agents for each of the and 2013,after cash management and management fees, years ended December 31,2014 and 2013 were$8 million and which are not expenses of the Fund but are the obligation of $7 million.respectively,and are included in real estate individual investors: operating expenses'in the accompanying combined statements of operations. AVERAGE NET 14. RELATED-PARTY TRANSACTIONS ASSETS' CASH MANAGEMENT FEE AND MANAGEMENT FEE YEAR ENDED DECEMBER 31 2014 2013 The Fund and Clarion entered into a management agreement Net investment income ratio2 3.70% 3.88% effective April 1.2000,to provide management services to the Fund.Pursuant to the Agreement,Clarion is entitled to receive Operating expense ratio3 6.76 6.87 the following fees for its services.payable quarterly and in Total return" 12.18 11.80 arrears: 'Average net assets are measured using the weighted-average equity • A Cash Management Fee equal to 0.10%per annum of the during the year including net income adjusted for the cash p management fee and asset management fee described in Note 14. cash and cash equivalents held by the Fund;and 2Net investment income ratio includes income less all expenses including cash management and asset management fees described in ▪ A Management Fee equal to(a)1.25%per annum of the Note 14.Amount excludes realized and unrealized gains and losses. amount of each investor's Management Interest,as defined. 'Operating expense ratio includes all expenses including cash up to and including$10 million;(b)1.00%per annum of each management and asset management fees described in Note 14. °Annual time-weighted returns are calculated by linking quarterly investor's Management Interest,as defined,in excess of$10 returns,quarterly returns are calculated by dividing net income after million up to and including$25 million;and(c)0.85%per cash management and management fees over weighted-average time- annum of the amount of each investor's Management equity.Weighted-average equity is calculated by adding time- g weighted contributions to and subtracting time-weighted Interest,as defined,in excess of$25 million up to and distributions from the beginning equity balance. including$100 million.The Management Fee for investors with Management interests,as defined,in excess of$100 16.SUBSEQUENT EVENTS million shall be agreed upon between the Manager and such investor. Subsequent events have been evaluated by the Fund through The Cash Management Fee and Management Fee are the March 3,2015,the issuance date of the combined financial statements. obligation of each individual investor and,therefore,are not reflected in the accompanying combined financial statements. On January 2,2015,the Fund made draws totaling$130 million Fees not paid directly by any individual investor will be paid by under the Facility,which bear interest at a rate of the Fund on behalf of such investor and deducted from approximately 1.2%. quarterly distributions.For the years ended December 31,2014 On January 6,2015,the Fund sold Platinum Southside,a and 2013,such fees were approximately$47 million and$42 multifamily property in Austin,Texas,for a gross sales price of million,respectively. $28.5 million. PROPERTY MANAGEMENT FEES On January 7,2015.the Fund sold 49%of the common units of Certain related parties to the Fund are the management and CLPF-Sand Hill Commons,L.P.for a purchase price of$70.6 leasing agents for several properties.The management fees,as million.The Fund retained the remaining 51%interest in the provided by the property management agreements,range common units as well as a preferred partnership interest of from 2.5%to 3.3%of revenue,gross receipts or a fixed amount, $96 million. as defined by the agreement.Property management fees On January 9,2015,the Fund paid down$80 million under the earned by the related parties were approximately$1.4 million Facility. and$2 million for the years ended December 31.2014 and 2013,and are included in real estate operating expenses in the accompanying combined statements of operations. Property management fees payable to the related parties were approximately$0.1 million and$0.2 million for the years ended December 31,2014 and 2013,respectively,and are included in accounts payable and accrued expenses in the accompanying combined statements of assets,liabilities and equity. 66 . . . . The Management Team IC ' 1, . . IF < \ , ,.. .. \ t 4 < . . .... r • f. . ..,, - - ,) • _ ,, , „ .., 4, . _..., , • ,.. , ., ..., f i 1 . .. 1 l441 . , . PICTURED FROM LEFT TO RIGHT: Doug VVoiski,Director,Lion Properties Fund Assistant Portfolio Manager Lynn Stattel,Vice President.Lion Properties Fund Controller Geneva Ring,Senior Associate,Lion Properties Fund Assistant Controller Daniel Farr,Senior Vice President,Lion Properties Fund Chief Financial Officer Job Belford,Managing Director.Lion Properties Fund Portfolio Manager Joe Leahy,Associate,Lion Properties Fund Deteisha Smith,Senior Associate,Lion Properties Fund Assistant Controller Jon Gelb,Senior Vice President,Lion Properties Fund Assistant Portfolio Manager Harris Markowitz,Senior Associate,Lion Properties Fund Cui Tung,Vice President,Lion Properties Fund Controller ABOUT CLARION PARTNERS One of the leading real estate investment advisors in the Americas,Clarion Partners. strength is derived from a broad network of experienced professionals who bring a deep knowledge of local markets to every investment decision.With offices in major markets across the United States and Brazil,Clarion Partners offers an array of real estate investment services to institutional investors.For 30 years,Clarion Partners has achieved investment success in both the private and public sectors 1A1WW.CLARIONPARTNERS.COM ( : r L t. 31 3. :"4 i'...."<"'•••1"r:...t! 4, 1-L'r'i r,67 CLARION PA _ . ATLANTA BOSTON DALLAS LONDON LOS -;EI ES . RK SAO PAULO SEATTLE WASHINGTON DC CLAM, PAP . • • ETI'C'. ORM OF ASSUMPTION OF LEASE AGREEMENT EXHIBIT 2 KPMG 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OH( LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Financial Statements —Federal Income Tax Basis December 31, 2014 and 2013 (With Independent Auditors' Report Thereon) 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Table of Contents Page(s) Independent Auditors' Report 1-2 Statements of Assets, Liabilities,and Owners' Equity—Federal Income Tax Basis 3 Statements of Revenues and Expenses—Federal Income Tax Basis 4 Statements of Changes in Owners' Equity—Federal Income Tax Basis 5 Statements of Cash Flows—Federal Income Tax Basis 6 Notes to Financial Statements—Federal Income Tax Basis 7— 12 KPMG KPMG LLP 345 Park Avenue New York,NY 10154-0102 Independent Auditors' Report The Partners 1691 Michigan Ave Investment LP (Formerly OIK Lincoln Miami Beach Investment LLC): We have audited the accompanying financial statements of 1691 Michigan Ave Investment LP (the Company), which comprise the statements of assets, liabilities, and owners' equity — Federal income tax basis as of December 31, 2014 and 2013, and the related statements of revenues and expenses — Federal income tax basis,changes in owners' equity—Federal income tax basis and cash flows—Federal income tax basis for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the basis of accounting the Company uses for federal income tax purposes;this includes the design,implementation,and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement,whether due to fraud or error. Auditors'Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.The procedures selected depend on the auditors'judgment,including the assessment of the risks of material misstatement of the financial statements,whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management,as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP is a Delaware limited liability partnership, the U.S.member firm of KPMG International Cooperative ("KPMG Intemational°),a Swiss entity. KP G Opinion In our opinion, the financial statements referred to above resent fairly, in all material respects, the assets, P Y P liabilities,and owners' equity of 1691 Michigan Ave Investment LP as of December 31,2014 and 2013,and its revenues and expenses,changes in owners' equity and cash flows for the years then ended in accordance with the basis of accounting the Company uses for Federal income tax purposes described in Note 2(a). Basis ofAccounting We draw attention to Note 2(a) of the financial statements, which describes the basis of accounting. The financial statements are prepared on the basis of accounting the Company uses for Federal income tax purposes, which is a basis of accounting other than U.S. generally accepted accounting principles. Our opinion is not modified with respect to this matter. Emphases of Matters As described in Note 2(f),because many types of transactions are susceptible to varying interpretations under Federal,state and local income tax laws and regulations,the amounts reported in the accompanying financial statements may be subject to change at a later date upon final determination by the respective taxing authorities. As described in Note 1, on August 1, 2013, American Fund US Investments LP, a Delaware limited partnership, as the sole limited partner, owning a 100%economic interest in the Company, filed IRS Form 966 "Corporate Dissolution or Liquidation" to dissolve itself and the Company by no later than July 31, 2016. Our opinion is not modified with respect to these matters. KiPS4G- LCP August 21,2015 2 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Statements of Assets,Liabilities, and Owners' Equity—Federal Income Tax Basis December 31, 2014 and 2013 Assets 2014 2013 Real estate—net of accumulated depreciation of$16,809,806 and $14,840,444 in 2014 and 2013, respectively $ 60,724,882 62,225,693 Cash and cash equivalents 5,834,467 3,810,425 Accounts receivable 254,034 309,475 Prepaid expenses and other assets 38,337 38,701 Deferred financing costs, net of accumulated amortization of $514,289 and$419,458 in 2014 and 2013, respectively 73,131 70,461 Deferred leasing commissions, net of accumulated amortization of $870,085 and$675,280 in 2014 and 2013,respectively 880,707 712,876 Organization costs, net of accumulated amortization of$58,348 and$51,238 in 2014 and 2013,respectively 48,308 55,418 Total assets $ 67,853,866 67,223,049 Liabilities and Owners' Equity Mortgage payable $ 39,000,000 39,000,000 Accrued interest 367,453 370,010 Accounts payable and accrued liabilities 340,973 413,293 Tenant security deposits 517,928 431,862 Total liabilities 40,226,354 40,215,165 Commitments and contingencies(notes 5 and 6) Owners' equity 27,627,512 27,007,884 Total liabilities and owners' equity $ 67,853,866 67,223,049 See accompanying notes to financial statements—Federal income tax basis. 3 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Statements of Revenues and Expenses—Federal Income Tax Basis Years ended December 31, 2014 and 2013 2014 2013 Revenues: Rental income $ 4,676,681 4,778,337 Tenant reimbursements 557,506 572,428 Parking income 2,203,615 2,101,390 Interest and other income 15,025 196,351 Total revenues 7,452,827 7,648,506 Expenses: Depreciation and amortization 2,266,108 2,423,654 Interest 839,737 967,907 Property operating expenses 1,122,163 1,011,305 Real estate taxes 914,125 840,816 Parking garage expense 634,428 532,747 Ground rent 518,890 524,460 General and administrative expenses 164,596 289,409 Property management fees 174,863 170,475 Asset management fees 166,104 151,042 Bad debt 32,185 81,682 Total expenses 6,833,199 6,993,497 Excess of revenues over expenses $ 619,628 655,009 See accompanying notes to financial statements—Federal income tax basis. 4 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Statements of Changes in Owners' Equity—Federal Income Tax Basis Years ended December 31,2014 and 2013 1691 Michigan Ave Investment GP LLC (General AFUS Partner) (Formerly IVG) Total Balance,December 31,2012 $ — 28,067,704 28,067,704 Excess of revenues over expenses — 655,009 655,009 Deemed contribution from Owner — 3,781 3,781 Cash distribution to Owner — (1,718,610) (1,718,610) Balance,December 31,2013 — 27,007,884 27,007,884 Excess of revenues over expenses — 619,628 619,628 Balance,December 31,2014 $ — 27,627,512 27,627,512 See accompanying notes to financial statements—Federal income tax basis. 5 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Statements of Cash Flows—Federal Income Tax Basis Years ended December 31,2014 and 2013 2014 2013 Cash flows from operating activities: Excess of expenses over revenues $ 619,628 655,009 Adjustments to reconcile excess of expenses over revenues to net cash provided by operating activities: Depreciation and amortization 2,266,108 2,423,654 Changes in operating assets and liabilities: Decrease in accounts receivable 55,441 47,991 Decrease in prepaid expenses and other assets 364 36,659 Decrease in accounts payable and accrued liabilities (72,320) (37,496) Increase(decrease)in tenant security deposits 86,066 (40,260) (Decrease)increase in accrued interest (2,557) 370,010 Net cash provided by operating activities 2,952,730 3,455,567 Cash flows from investing activities: Payments for building and improvements (2,759) (68,984) Payments for tenant improvements (465,792) (192,052) Payments for deferred leasing commissions (362,636) (138,994) Net cash used in investing activities (831,187) (400,030) Cash flows from financing activities: Payments for deferred financing costs (97,501) (281,827) Cash distribution to owner — (1,718,610) Net cash used in financing activities (97,501) (2,000,437) Increase in cash and cash equivalents 2,024,042 1,055,100 Cash and cash equivalents,beginning of year 3,810,425 2,755,325 Cash and cash equivalents,end of year $ 5,834,467 3,810,425 Supplemental cash flow information: Cash paid for interest $ 842,294 597,897 Supplemental disclosure of noncash investing and financing transactions: Operating expense paid by AFUS treated as a deemed capital contribution — 3,781 See accompanying notes to financial statements—Federal income tax basis. 6 f 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Notes to Financial Statements—Federal Income Tax Basis December 31, 2014 and 2013 (1) Organization and Business OIK Lincoln Miami Beach Investment LLC (OIK Lincoln), a Delaware limited liability company, was formed on June 6, 2006. Oppenheim Immobilien Kapitalanlagegesellschaft mbH, a German limited liability company, as nominee for American Fund OIK(01K),was the sole common unitholder of OIK Lincoln. In November 2007, IVG Institutional Funds GmbH acquired a 50.1% interest in Oppenheim Immobilien Kapitalanlagegesellschaft mbH, thus changing its name to IVG Institutional Funds GmbH as nominee for American Fund—OIK(IVG). OIK Lincoln was organized for the objective and purpose of making investments in real estate assets, and owning, managing, supervising and disposing of such investments. On July 18, 2006, OIK Lincoln purchased a 162,577 square foot office building, retail space, parking garage, and related improvements located at 1691 Michigan Avenue, Miami Beach, Florida (the Property)and assumed the leasehold interest in the ground lease of the Property. On May 25,2009, 1691 Michigan Ave Investment LP(the Company)was formed as a Delaware limited partnership to be treated as a disregarded entity for U.S. federal income tax purposes pursuant to section 368(a)(1)(A) of the Internal Revenue Code (the Code)by and between 1691 Michigan Ave Investment GP LLC(the General Partner),owning a zero percent economic interest in the Company, and American Fund US Investments LP(AFUS),a Delaware limited partnership, as the sole limited partner, owning a 100% economic interest in the Company. IVG is the limited partner of AFUS with a 100% economic interest and American Fund US Investments GP LLC is the general partner of AFUS with a 0%economic interest.On June 17,2009,OIK Lincoln merged with and into the Company(the Merger).The Company has been accounted for on a carryover basis pursuant to the Code. The Company's purpose was to acquire the Property, and to thereafter, own, encumber, operate, sell or otherwise deal with all or part of the Property for the benefit of AFUS. On August 1,2013,AFUS filed IRS Form 966"Corporate Dissolution or Liquidation"to dissolve itself and the Company by no later than July 31, 2016. As of December 31, 2014, AFUS has not formally liquidated or filed a Certificate of Cancellation. (2) Summary of Significant Accounting Policies (a) Principles of Reporting The accompanying financial statements of the Company have been prepared on the accrual basis of accounting utilized for Federal income tax reporting purposes in the United States of America. Accordingly, such statements are not intended to present financial position, results of operations, changes in owners' equity and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP), which would require, among other things: adjustments to depreciation and amortization to reflect the economic useful life of real estate; rental income to be recorded on straight-line basis over the terms of the related leases; and recording of nondeductible expenditures as expenses in the statements of revenues and expenses. 7 (Continued) 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Notes to Financial Statements—Federal Income Tax Basis December 31,2014 and 2013 (b) Use of Estimates The preparation of financial statements in conformity with the accrual basis of accounting utilized for Federal income tax reporting purposes requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on management's best estimates and judgment.Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment.The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions, including projected future revenue and leasing activity. Management adjusts such estimates when facts and circumstances dictate. As future events and their effects cannot be determined with precision,actual results could differ from those estimates. The real estate and capital markets are cyclical in nature.The real estate industry is affected by the repricing of risk,the illiquidity of the financial markets and the change in the U.S.economy.These significant market risks impact transaction and leasing activity and created uncertainty as to the future operation and valuation of real estate investments. Management has exercised their professional judgment in determining the valuations and estimates contained in the financial statements. Real estate investment values are affected by, among other things, occupancy rates, rental rates and interest and inflation rates. As a result, determining the estimates of certain accounts involves many assumptions.Amounts ultimately realized from these accounts may vary significantly from the carrying values presented. (c) Revenue Recognition The Company recognizes revenue on the accrual basis in accordance with the Federal income tax basis of accounting. Prepaid rents, including tenant reimbursements, are recognized as rental income in the period received. (d) Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of ninety days or less at the time of acquisition to be cash equivalents. The Company maintains cash and cash equivalent balances which, at times during the year, exceeded the $250,000 amount insured by the Federal Deposit Insurance Corporation. (e) Depreciation Depreciation is calculated by the Modified Accelerated Cost Recovery System(MACRS)method and is deducted over a recovery period, as defined by the Code. The Company also recognizes bonus depreciation as applicable and allowable under the Code. 8 (Continued) 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Notes to Financial Statements—Federal Income Tax Basis December 31, 2014 and 2013 (1) Income Taxes The Company is a disregarded entity for federal income tax purposes; however AFUS is subject to federal and state income taxes on the Company's taxable income. The Company's excess of revenues over expenses is included in AFUS's income tax returns.No provision for Federal,state or local income taxes is made in the accompanying financial statements. Because many types of transactions are susceptible to varying interpretations under Federal, state and local income tax laws and regulations, the amounts reported in the accompanying financial statements may be subject to change at a later date upon final determination by the respective taxing authorities. The Company has assessed its tax positions for all open tax years which are from 2011 to 2014 and concluded that there were no material uncertain tax liabilities to be recognized or disclosed. (g) Capital Expenditures Significant renovations which extend the useful life of the Property are capitalized as required by the Code. Expenditures for maintenance and repairs are charged to operations as incurred. (h) Deferred Costs Deferred financing costs are amortized on the straight-line method over the term of the mortgage payable. Deferred leasing commissions are amortized on the straight-line method over the lease term. Organization costs are amortized on the straight-line method over fifteen years. (i) Environmental Matters Under various Federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances.These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of,or was responsible for,the presence or disposal of such substances. Accordingly,the Company, as the owner of such property may be held directly liable for any such damages. As of December 31, 2014 and 2013, the Company is not aware of any environmental matters that could have a material impact on the financial statements. (j) Recent Accounting Pronouncements In August 2014,the FASB issued guidance which requires management to assess an entity's ability to continue as a going concern for a period of one year after the financial statements are issued. The guidance is effective for years beginning in 2017 for nonpublic companies. Management is currently evaluating the impact of adopting this new standard on the financial statements. 9 (Continued) 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Notes to Financial Statements—Federal Income Tax Basis December 31,2014 and 2013 (3) Real Estate The following is a summary of the components of real estate at December 31,2014 and 2013: 2014 2013 Building and improvements $ 74,903,782 74,901,023 Tenant improvements 2,630,906 2,165,114 Total 77,534,688 77,066,137 Less accumulated depreciation 16,809,806 14,840,444 Real estate,net $ 60,724,882 62,225,693 The Property is a Class "A" low-rise multi-tenant office building and was acquired for approximately $75.8 million.The Property is subject to a long-term ground lease with the City of Miami Beach,which owns the underlying land (Note 6a). As of December 31, 2014 and 2013,the Property is 91% and 86% occupied, respectively. (4) Allocation to Owners Income, losses and cash distributions are allocated 100%to AFUS. (5) Mortgage Payable On July 9, 2010, AFUS obtained a$39 million mortgage payable with a foreign bank with an original maturity date of July 9, 2012. In 2012, the lender approved the extension of the maturity date of the mortgage payable to July 9, 2014. For the first six months of the extension term, the mortgage note payable bore interest at a variable rate of 6-month LIBOR, plus a 2.1% margin. For the remaining 18 months of the extension term,the Company elected an interest rate at a variable rate of 6-month LIBOR plus 1.96%. On June 11,2014,the lender approved a two year extension of the maturity date of the mortgage payable to July 8, 2016. The loan bears interest at a variable rate of 6-month LIBOR, plus a 1.6%margin. The interest rate was 1.9272%and 2.356%as of December 31,2014 and 2013,respectively. The mortgage payable requires the Company to maintain a debt service coverage and loan to value ratio, as defined. As of December 31, 2014 and 2013, the Company was in compliance with the debt service coverage and loan to value ratio. Interest expense in 2014 and 2013 amounted to$839,737 and$967,907,respectively. 10 (Continued) 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY 01K LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Notes to Financial Statements—Federal Income Tax Basis December 31, 2014 and 2013 (6) Commitments and Contingencies (a) Ground Lease The Property is subject to a long term ground lease expiring in 2053. The base ground rent was originally $300,000 per annum, set to increase by the lesser of 12% or the cumulative consumer price index(CPI)over the previous five year period commencing with the eleventh year(2012), and every five years thereafter. In 2012,the base ground rent increased to$336,000 per annum. In addition to the base ground rent,the Company pays annual percentage rent equal to 2.5%of Project Revenue, as defined. In 2014 and 2013,the percentage rent amounted to $182,890 and $188,460, respectively, which is included as part of ground rent expense on the accompanying statements of revenues and expenses—Federal income tax basis. As of December 31,2014,future minimum base ground rent payments due under the ground lease are approximately as follows: Year ending December 31: 2015 $ 336,000 2016 336,000 2017 376,320 2018 376,320 2019 376,320 Thereafter 19,558,692 $ 21,359,652 (b) Other The Company, in the normal course of business, may be involved, either directly or indirectly, in litigation,claims and other legal matters. While the outcome of these proceedings is not presently determinable with certainty,management believes that any such outcome will not have a material adverse impact on the financial position or results of operations of the Company. (7) Related-Party Transaction AFUS has engaged Real Estate Capital Partners Limited Partnership as the asset manager (Asset Manager) for the Company and certain of its affiliates. Prior to the Merger, IVG paid certain fees on behalf of OIK Lincoln directly to the Asset Manager, which are not included in the accompanying financial statements. Subsequent to the Merger, the Asset Manager began charging the Company an asset management fee of 4% of the net operating income derived from the Property, as defined. Asset management fees amounted to$166,104 and$151,042 for the years ended December 31,2014 and 2013, respectively. 11 (Continued) r 1691 MICHIGAN AVE INVESTMENT LP (FORMERLY OIK LINCOLN MIAMI BEACH INVESTMENT LLC) (A Delaware Limited Partnership) Notes to Financial Statements—Federal Income Tax Basis December 31,2014 and 2013 (8) Property Management Fees On June 18,2011,the Company entered into a property management agreement with Jones Lang LaSalle America (Florida), Inc. (the Property Manager) to provide management and leasing services to the Company. The Property Manager has responsibilities for managing the day to day operations of the Property. The Property Manager is entitled to a property management fee equal to the greater of (i) $4,500 or (ii) 2.5%of the Property's gross income, as defined. Property management fees incurred amounted to$174,863 in 2014 and$170,475 in 2013. In addition, the Property Manager is also entitled to a fee for supervision of construction, capital improvements and tenant leasehold improvements at the Property. In 2014 and 2013, no construction supervision fees were incurred by the Company. (9) Future Minimum Lease Payments Minimum lease payments under the noncancelable leases in effect at December 31,2014,are as follows: Year ending December 31: 2015 $ 4,428,697 2016 4,192,338 2017 2,944,032 2018 2,095,053 2019 1,843,924 Thereafter 1,504,977 $ 17,009,021 The above table does not include option or renewal periods. In addition to the minimum lease payments described above, some leases require tenants to reimburse the Company for certain operating expenses, which amounted to$557,506 and$572,428 in 2014 and 2013,respectively. In 2014 and 2013, one tenant in the entertainment industry represents approximately 13% of rental income. (10) Subsequent Events The Company has evaluated subsequent events through August 21, 2015 the date at which its financial statements were available to be issued and determined that there were no subsequent events requiring recognition or disclosure. 12