Commercial RE market creeping towards recovery in 2002.

As we embark upon the second half of 2002, the New York City economy is creeping back towards recovery. Traditionally, recovery in the real estate market follows the rest of the economy by six months. As owners of over two million SF of well-located secondary office buildings in Manhattan, we are beginning to see increased demand for space and higher rents versus six months ago.

Himmel + Meringoff will continue marketing campaigns for our properties. Earlier this year we hosted a successful broker luncheon at 6 East 32nd St. We highlighted "Six Reasons to Meet Us at 6 East 32nd Street" -- outstanding rental value, walking distance to all major transportation, award-winning lobby, low loss-factor, tenant-controlled HVAC and superior owner-management. As a result of our efforts, which included spending over $1 million to renovate the property, the property was 100% leased within three months! New to 6 East 32nd St. are Graphic Productions on the third floor with 13,500 SF, Town Total Nutrition with 13,500 SF on the fifth floor and 6,500 SF on part of the sixth floor, and ACC Construction with 13,500 SF on the seventh floor.

The successful marketing campaign we held last year for the property at 1356 Broadway resulted in the creative sale of the property, for which Insignia/ESG was presented with REBNY's "Deal -of the Year" award. The purchase and sale of 1356 Broadway included the structuring of two intricate deals. The purchase by Himmel + Meringoff included the purchase of four different ownership entities from various selling groups (HSBC, an Integrated Resources limited partnership, a net lease to Republic Bank, and a land interest held by a venture capital fund). The complex ownership structure was comprised of a ground lease with a remainderman interest, a building leasehold position within a tax-sheltered limited partnership, mortgages collateralized by both the fee and leasehold interests, and the ownership of air rights that needed to be severed from the building and remain with Himmel + Meringoff as the seller, allowing us to transfer the air rights to another site at an undetermined future point in time.

Record high sales prices have been achieved through a flight of capital running from low interest rates and decreased stock prices to the hope of higher returns in real estate. Although we typically hold properties for long-term ownership, we realize it is currently a seller's market and are presently in contract to sell two properties. At the same time, we are aggressively seeking acquisitions to create value through the three "R's" -- repositioning, renovating and retenanting. We continue to focus on secondary office buildings in Manhattan and the Boroughs. We can innovatively structure acquisitions with joint ventures, net leases with options to buy, partial sale-leasebacks and tax-free exchanges, closing expeditiously with all cash.

As co-chair of REBNY's economic development committee, we are writing a 2002 proposal that will be presented to Mayor Michael Bloomberg's economic consultants. This proposal will focus on ways to revitalize and rejuvenate the New York City economy with the understanding that the city is facing a $5 billion budget deficit. Therefore, the recommendations will concentrate on expanding the city's tax base through initiatives that are of minimal costs to the city. Proposals will center on business attraction and retention, zoning changes, transportation and infrastructure, new benefits to non-profits, affordable housing development and the recovery of lower Manhattan.

We are optimistic that the New York City Economic Development Corporation, through the dynamic leadership of Dan Doctoroff and Andrew Alper, will be receptive to cutting through "bureaucratic" and archaic zoning laws and unfair bias against the not-for-profit organizations (the REAP benefit packages available to attract tenants to the boroughs exclude not-for-profits). As noted in a recent New York Times article, not-for-profits are growing in the number of employees and are a critical part of the New York City cultural base. Further, zoning laws today still protect tenants and industries that no longer statistically exist in areas.

For example, the Garment District is zoned M1-6, which requires 50% of the space on side streets to be designated for manufacturing tenants. Many landlords simply ignore this requirement, putting in broom closet manufacturing on a floor. It is not economically feasible to renovate a building and spend several million dollars to upgrade the lobby, elevators and common corridors in one half of the building.

The most important job for the current administration will be the rebuilding of the infrastructure of New York City. As a recently appointed executive board member of the Association for a Better New York (ABNY), I viewed Dan Doctoroff's superb presentation of "2012 -- Olympics in Manhattan," which emphasized the importance of the expansion of current subway lines, railroad, ferry and bus service. The #7 subway line extension is crucial to developing the west side of Midtown Manhattan. Currently there is no public transportation to make this area a viable, competitive location for retail and office tenants.

Similarly, the plan for downtown brilliantly developed and presented by Brookfield Properties envisions a "New Grand Central" in downtown, with direct access for commuters from Long Island and the Metro North/Connecticut area in 20 minutes, rather than the present commute to Penn Station or Grand Central, with a transfer to another means of transportation to continue downtown. This current emphasis on rebuilding New York City's infrastructure is the key to helping to attract new industry growth.

We are hopeful as we pass through the next six months, we will have a stronger and better New York. Change creates opportunity through new challenges and we are forging ahead for an even stronger New York City. Himmel + Meringoff Properties remains committed to Manhattan and the boroughs. We firmly believe that New York City is our international capital of ideas, commerce and finance and will continue to invest our resources in acquiring secondary office buildings in order to rejuvenate this important property class.