New Year brings unique challenges to market.

2005: "It was the best of times; it was the worst of times." The Kalmon Dolgin Affiliates family of brokers, staff and professionals experienced another banner year, a record-setting eighth straight increase in all segments: sales & leasing, management, appraisal & consulting and acquisitions.

The year will, however, be most remembered for the passing of our Chairman and industry-wide leader, Israel M. Dolgin last July at the age of 92.

He left a legacy of dedication to profession and staff, hard work, long-hours and an intimate hands-on knowledge of almost every property transaction that took place in Brooklyn in the past century. The family business is now headed by Kalmon and Neil Dolgin representing the third generation and Josh Dolgin, the fourth generation to serve in this capacity.

This year sales and leasing activity totaled over $260 million developed by our team of over 35 brokers and sales staff.

Some of our major transactions included leases for such tenants as Wonder Foods, Williamsburg Furniture, Forever Bath & Kitchen, Family Dollar, Dragonwood Imports, Daroma Restaurant Equipment and Care for the Homeless, Inc. High profile sales included 100 Sutton Street, 242 South 1st Street, 5902 3rd Avenue and 361 Stagg Street in Brooklyn; 48-02 25th Avenue in Astoria, Queens; 1353 Webster Avenue in The Bronx; and 320 Elizabeth Avenue in Newark, NJ, as well as development sites in The Bronx, Brooklyn and the Chelsea section of Manhattan

Family acquisition and sales transactions were in excess of $100 million and included the purchase of the Falchi Building in Long Island City and the former Grumman property in Bethpage, NY, as well as the sale of the Smokestacks Building in Long Island City and an six-building industrial complex in Bloomfield, NJ.

The New Year, our 102nd, brings many unique anomalies that will require a skilled navigator to travel safely through some waters which at this time look to be somewhat "uncharted." The initial market stimulus that began a number of years ago was the lowering of interest rates. With that cycle reversed we fully anticipated seeing a lowering of unfettered exuberance in the investment sector.

This has not happened as yet and while these trends normally lag behind the real causal events, we are baffled by it nonetheless.

Prime offerings are the daily bread of my email system from all over the country and they present a plate of flawless and delectable properties, but all carry the caveat: "Buyer Beware!"

The yields offered on prime packages vary little around the country and are squeezing the 6% level in many instances. With interest rates rising it becomes increasingly more difficult to leverage these deals, and in fact, other than the institutional or REIT investor, many of these offerings are going to show a reverse leveraged yield. Coupled with the inverted yield curve of the past few weeks, uncertainty in energy pricing, overseas investors adding fuel to the fire due to the interest-rate play and (in most markets) a very conservative pace of new construction, this all equates to produce a highly volatile mixture.

That doesn't mean that all offerings should be tossed out and we spend the year playing golf or skiing, but it does mean that a purchaser needs to be very careful in defining what each transaction's particular goal might be.

In some instances the ability to acquire pure, prime location which will be solid for the next 50 years counter-balances the low yields, as does the comparison with what is currently available in the "liquid" investment market with bond income. For others, the feeling that they can increase the bottom line by better management or cutting costs is an incalculable part of the yield equation.

Other instances may be short-term roll-overs at below market current rents which, while increasing the uncertainty of the cash flow stream, can serve as the counter-part in the equation to determine whether or not to jump into a deal at these low initial rates.

Added to all of these reasons is the continuing influence of 1031 exchange requirements. By transferring their investment basis and deferring capital gains taxes an investor is able to realize, in essence, a 30% increase in its actual "after-tax" equivalent yield.

On the other side of the equation, however, is the time-tested formula for successful real estate investment: When purchasing real property, remember that you are buying brick and mortar and not only yields. An investor has to be very focused on what their exit strategy is going to be and make sure that they are buying at a price that will, at some defined point of time in the future, reasonably allow them to sell or refinance at a profit.

The recent game for large-portfolio investors has been the public bid with no set pricing. It does serve to create a wild auction atmosphere that is unique to the last half decade or so. We prefer, where possible, to negotiate one-on-one, face-to-face with the seller. Our ability to close quickly with short (if any) due diligence time and no financing requirements by contract signing has allowed us to acquire a number of deals that never reached the "book" stage. Could the Seller have gotten a slightly higher price via the auction market? Perhaps. What we brought to the table was certainty of closing and no conditions; not an unattractive coin!

For the first time in our 102 year history we are selling selected properties rather than repositioning them ourselves.

This allows us to acquire select deals which we feel can be enhanced by our value-added experience and hedge the pricing by selling some of our existing portfolio for current top dollar prices.

That doesn't mean, as I said above, that the buyers of these properties are foolish. IF they have a plan and/or bring certain skills to the table that we don't possess, then it's a good match.

Our sale of the Smokestack building in Long Island City comes to mind, where we sold for a very substantial profit but the purchaser had better capacity to develop the property as a 60-story residential tower than we did. The investor's key mantra should be: "careful, but not hesitant, and know thyself!"

We are looking for another strong year for our brokerage department. The consolidation and conversion of many former industrial buildings has taken a lot of space off the market and created a strong environment in many of the outer-borough neighborhoods, close-in Long Island and Northern New Jersey.

In addition, Manhattan companies being forced out of industrial West Side locations are finding cheaper space with amenities and transportation at least equal to (and often superior to) their former buildings ... at far lower rates. Coupled with a plethora of tax incentives, this makes for a very compelling argument for the continued strength of these markets.

Building owners that are forward-thinking and have reinvented old spaces by equipping them with the latest in technological advances will have a distinct advantage during the coming year.

All in all, unless we are hit with unforeseen tragedy, skyrocketing energy increases and higher-than-predicted inflation, we look to 2006 to be another banner year!

KALMON DOLGIN

PRESIDENT

KALMON DOLGIN AFFILIATES INC.