Investors get their cake--and eat it, too.

Among the many creative trends and financial products popping up in today's heated real estate market, one in particular stands out among the rest.

Equity recapitalizations have swept the real estate industry by storm, with savvy investors and developers looking to take advantage of this unconventional wealth generating mechanism.

A recapitalization, or "recap" as it is often called, usually occurs when a real estate owner wishes to either remove an existing "high temperature" investor or effectively refinance the property's increased market value.

By either refinancing its existing debt or infusing additional equity into their property, owners can often recognize the current market value of their property, continue to own the asset and substantially participate in the asset's next growth/value increase. Equity recapitalizations have become a hot trend in real estate as owners and operators look for alternative methods to replace expensive capital partners, modify their business objectives, and/or cash out on the appreciation of their investments, all while retaining a majority ownership of their properties.

Recapitalizations are like "having your cake and eating it too" in that owners can pull out a significant portion of their appreciated value but still retain ownership and management control and continue to benefit from future appreciation of the asset.

The soft U.S. dollar, also a driving factor in today's highly competitive real estate investment market, has emerged as a major catalyst for recapitalizations.

Owners are taking advantage of this phenomenon by recapitalizing their properties with passive equity from overseas capital partners, many of whom are willing to offer more aggressive terms and lower capital costs than domestic sources. These investors will often sacrifice ownership percentage in exchange for receiving a current return on their investment.

At Carlton, we have unparalleled access to German, Middle Eastern, Asians and other international investors who are actively seeking these types of real estate investment opportunities in the United States.

In January, Carlton, on behalf of Macklowe Properties, arranged the $1.7 billion recapitalization for the General Motors Building. The recapitalization allowed Macklowe to repay $300 million of mezzanine debt it had borrowed from Vornado Realty Trust and Soros Capital to help finance its purchase of this landmark office building for $1.4 billion in 2003. During our sales and marketing process, we saw a tremendous amount of interest among passive foreign equity investors wanting to buy a stake in this exceptional asset. Ultimately, Macklowe settled on a German based real estate investment firm that purchases properties in the United States and syndicates its ownership interests to German investors.

Foreign investors, however, aren't the only ones in town looking to make equity recap plays.

Historically not part of their business plans, domestic opportunity, core and value-added funds are also finding joint venture recapitalizations an attractive alternative to single one-off principal acquisition transactions.

Rather than being priced out of a low cap rate market, these investors are frequently choosing to make preferred equity investments structured in the form of recapitalizations, because they often pay a reasonable and more secure return on their investment.

As a result of being in this safer position, these investors will typically allow the sponsor to promote them (offer additional participation in the backend) for creating value and achieving specified return hurdles on a project.

As an example, Carlton recently arranged a $219 million preferred equity investment (behind an existing $224 million mortgage previously arranged by Carlton) by a major, passive, investment fund for the recapitalization of the Starrett-Lehgih Building, a 20-story, 2.3 million-square-foot office building located in the West Chelsea section of Manhattan.

We were able to move quickly and bring in this investor on a preemptive basis to fund the equity, which features a favorable promote structure for the sponsor.

Originally zoned for industrial use, the property's current owner was able to rezone the building and convert the space to offices from industrial and manufacturing. The property now' boasts a significant, high-profile and credit-worthy tenant base and its value has risen substantially over the past couple of years, due mostly to improved performance and the overall bull market of Manhattan office buildings.

This equity recap enabled the owner to cash out on the appreciation of its property while still retaining majority ownership and control.

Carlton continues to be a leading advisor on equity recapitalizations and we see no sign of this recent trend slowing down as we head towards the end of 2005, a year which could easily prove to be our most successful for this type of business to date.

This phenomenon should also be a boon to owners, who in today's overpriced real estate market are more apt to recapitalize and retain ownership of properties rather than be "forced" to acquire new ones at very aggressive cap rates.

HOWARD L. MICHAELS, CHAIRMAN

CARLTON ADVISORY SERVICES