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August 31, 2009
Dear Bridge Investment Group, LLC Owners and Investor Partners:
Now that the first half of 2009 is behind us, we at Bridge Investment Group, LLC (“Bridge”) would like to
share our views of the market environment for our projects along with a brief overview of our investments. In
addition, this letter will provide a high level status update on the progress and future direction for the
company. Based on feedback from a number of investors, we are consolidating the information to move away
from the 20-page reports of the past and focus on the highlights and key actions. As always, Dean Allara and I
are available to discuss your individual investments in further detail.
APARTMENT INVESTMENTS
Market Fundamentals: Supply and Demand
The key driver of apartment demand is new household formation, which is primarily influenced by job growth,
immigration and population expansion. With the nation’s substantial employment losses over the past year
and a half, and the significant decrease in immigration (due to government policies and the dearth of jobs),
household formations have actually declined nationally and rental demand along with them. Apartment supply
is generally determined by new apartment construction offset by obsolescence and conversions to for-sale
condominiums. The completion of newly constructed apartment units has continued at a relatively strong pace
over the past year from projects started (and financed) in 2007 and early 2008, and condo conversions have
largely halted, thus increasing the overall apartment supply. At the same time, the “shadow rental market” of
single-family homes and condominiums that cannot be sold and are being leased, add further pressure to the
supply-side of rental units nationally (particularly in certain overbuilt areas such as Phoenix, Las Vegas,
California’s central valley, Florida, etc.). The foregoing is causing declining apartment rental and occupancy
rates for the nation as a whole – in some cases severely disrupting markets.
Fortunately, our current investments are located in areas such as Albuquerque, Colorado Springs, Denver, El
Paso, Kansas City, Omaha and Salt Lake City. While by no means immune to the nation’s challenging
economic circumstances, these markets are weathering the storm relatively well. Albuquerque and El Paso
have experienced modest job growth while job losses in Denver, Kansas City, Omaha and Salt Lake have been
more moderate than the national average. The military is now relocating troops to Colorado Springs, which
has significantly increased demand for apartments in that area. All these markets have limited new apartment
construction and “shadow rental inventory.” Thus, although apartment market fundamentals (demand and
supply) have deteriorated for most areas and the nation as a whole, our markets have held up relatively well.
In fact, most of our apartment properties are experiencing improving revenues. Expense increases have been
moderated by low inflation and the significant drop in energy/utility costs (compared with 2008 levels). Given
the current national economic situation, we are relatively pleased with these results, and attribute much of the
credit to our capable and experienced management oversight team. For the remainder of 2009, we anticipate
these relatively stable supply and demand trends will continue in our markets.
As we look ahead to the future, we believe the picture brightens appreciably, both for our markets and the
nation as a whole. First, most economists believe that the “Great Recession” is likely to end at some point
later this year (in fact many already believe it has ended!) and job growth is expected to resume sometime in
2010. New jobs, combined with continued population expansion and a resumption of historical immigration
patterns (which follow job creation), will result in increased household formations. We believe a higher
proportion of these households will choose to rent (more in line with historical homeownership rates) due to
more restrictive lending practices (compared to the 2002 – 2007 period) and the recognition that owning a
home may not be “your best investment.” At the same time this “pent-up demand” for apartments becomes
evident, the supply of new units is expected to be constrained. The pipeline of current permits for new
multifamily construction has dropped to levels not seen in more than ten years and construction financing is
scarce. We expect that the “shadow rental inventory” will likely be absorbed over the next few years as well,
which will create a constrained supply of apartments at the same time demand is surging. We believe this will
lead to markedly higher occupancy, rent levels, net income and cash flows in the 2011 – 2013 timeframe.
Overall, we are feeling relatively bullish about the operating performance of our current apartment investments
and expect most will make continued progress for the remainder of the year. In addition, we are very fortunate
to have also placed attractive debt with extended terms on our apartment properties; they do not have to be
paid off for many years. The one exception is our mortgage on the Villages at Gateway in Denver, which is
due in August 2010. However, with a fixed interest rate more than 1.5% above the current market rate, this is
the one loan we want to eliminate (either through a refinance or sale of the property).
Capital Markets
Commercial investment property values are a function of net income (“NOI”) and investor demand (“Cap
Rates”). As noted above, NOI for our apartment investments is generally increasing. Thus, with constant
Cap Rates, values would normally be rising. However, as we know all too well, these are not normal times.
Demand for commercial real estate investments of all classes has declined significantly due to the economic
crisis, falling asset values and the reduction in mortgage debt structures. Consequently, there is very little new
capital being allocated to stabilized and value-added apartment strategies. Institutional funds formed prior to
mid-2008 do have billions of dollars of committed capital available for investment. However, these funds are
seeking extraordinary returns on their new investments (often demanding projected IRRs that exceed 25%)
since they are typically comparing yields with those available in distressed situations. As a result of the more
restrictive new mortgage underwriting standards and these higher equity yield requirements, the number of
transactions taking place for “non distressed” commercial investment real estate, including apartments, are
very limited. Accordingly, Cap Rates have risen significantly, leading to markedly lower current real estate
property values. In time, as the credit and financial markets thaw, we expect Cap Rates will return to more
normal trend levels – tracking the 10-year Treasury rate with a moderate risk premium.
Apartment Investment Portfolio Summary
As a result of the foregoing, the operational performance of our apartment investments is expected to remain
relatively stable for the foreseeable future and we expect limited changes in our distribution amounts. In short,“steady as she goes.” (Actual and projected distributions from your individual investments can be found on
our website at www.bridgeig.com.) Given that our property values are currently depressed due to restrictive
lending and limited investor demand as noted above, we are not projecting that we will sell any of our
apartment investments for the remainder of the year.
For those invested in Malibu, the last of our CDS – Texas assets, we had this property under contract to sell
with a closing expected next month and a final distribution of net proceeds to the partners. As you may recall,
the buyer is financing the acquisition with tax credit equity and bonds via the Section 42 housing program.
The good news is that the buyer is still proceeding ahead and has crossed significant hurdles. However, delays
in the process have extended the closing forecast until January 2010. To obtain the needed extension of time,
the buyer agreed to make $50,000 of their earnest money deposit non-refundable and payable to us if they fail
to complete the purchase of the property in January. They still need to obtain a number of approvals and there
are no guarantees they will be successful. However, the buyer has now been working this project for the better
part of the year, has expended hundreds of thousands of dollars and now has committed $50,000 of nonrefundable
earnest money to us. Consequently, we are cautiously optimistic we can complete a sale within the
next five – six months.
We are also working to re-capitalize or sell four Denver properties owned by the Co-investment Fund I in joint
venture with Buchanan Street Partners. These plans were detailed in the update recently sent to all partners in
both that Fund and our BGF Private Real Estate Investors I Fund (which may provide additional capital).
DEVELOPMENT PROJECTS
As we’ve detailed over the years, we have built considerable intrinsic value at our development projects. The
challenge now is to support our ability to maintain that value and realize returns in the future. The current
state of the economy and market conditions, combined with the issues at each of these assets, precludes us
from making any projections regarding distributions or returns at this time. Following is a brief overview of
our non-apartment investments:
• Bridges at Citifront (Phase I; 204-newly constructed condominium units in downtown Salt Lake City)
Most of the construction of this phase of the project is now complete and we’re proud of the result. Our
strategy has been to lease half the units to renters and sell the other half. The former has met with success, and
we are now fully occupied for the allocated units, as reasonable demand exists for apartments located
downtown. We began our marketing efforts to sell the other half of the Bridge’s units just over a month ago.
We’ve experienced early success with six units under contract. However, the lack of attractive buyer
financing is proving a significant obstacle to additional sales contracts. We have been working with our lender
(Zions Bank) to provide attractive options for our unit purchasers and hope to introduce a program in the near
future. Over the coming months we will evaluate whether to continue with a sales strategy or simply rent the
remaining units until conditions in the financing and “for sale” markets improve. Separately, we have closed
on our project financing with Zions and are pursuing additional financing to complete the remaining
construction, and fund our interest reserves and cash escrows. Currently there are no plans to move forward
with construction on the planned 91 units in the second phase.
• The Arbors Apartments/Pines Condominium Development (449 units in Bloomington, IL)
As we were working to complete physical improvements to the property and market condos, our lender,
Franklin Bank, was taken over by the FDIC. Despite the fact we had almost $1.5 million remaining on our
line of credit, the FDIC refused to fund additional draws, resulting in continuous legal negotiations and
deteriorating conditions at the property. Our strategy is to convert the project back to rental apartments given
the relatively strong demand that exists in the stable local market (Bloomington is the headquarters for State
Farm Insurance and Illinois State University is in nearby Normal, IL). We have begun the process of
originating new financing from FHA to fund the needed capital improvements. This plan was also dependent
on the FDIC agreeing to sell us the current first mortgage loan at a deeply discounted level. Fortunately, just
last week, they approved the purchase of our $9.9 million loan for $3.9 million (just over a 60% discount!) –
we believe, in part, to avoid a potential Chapter 11 bankruptcy and litigation. We are now working on
developing interim financing to complete the purchase of the FDIC loan and fund the operational/capital needs
of the project until the new FHA loan can be funded (within the next six months).
In addition, approximately $2.5 million exists in subordinate debt and accrued interest that needs to be repaid.
Given our successful resolution with the FDIC and confidence in the new FHA financing and the project’s, we
plan to raise these funds through a capital call (equal to just over 80% of our current investment capital). We
expect to provide additional information to the partners and call for funds within the next few weeks.
• ACE (originally Bridge ACE, CDS ACE and ACE Lenders)
After negotiations failed to yield a reasonable settlement offer for the $1 million owed to us by the buyer
(“Rubin”) of our ACE-related interests, we filed a claim in court last year to collect these funds. Rubin is
fighting the suit vigorously, including filing counter-claims. We believe our position is very strong and we
expect to prevail. However, the legal system provides many opportunities for delay and we have been warned
by counsel that the case could continue to drag on for a year or more. At least the cost of our counter-claim
defense appears to be covered by our Directors and Officers Insurance, so we expect the significant expense
associated with discovery, the filing of extensive motions, answers and a possible jury trial, will prove more
burdensome to Rubin than to ourselves. We remain open to reasonable settlement discussions.
• Rainmakers (2,380-acre home site/golf development in Ruidoso, NM)
The Robert Trent Jones, Jr. golf course, opened last year, continues to garner rave reviews (including a “Top
10 New Private Course” accolade from Golf Week magazine). Property prices remain stable, however, sales
volumes have slowed considerably. Although this is clearly due in large part to the economy, the uncertainty
connected with the financing and construction of the golf clubhouse has resulted in reluctance on the part of
potential lot and town home buyers, to commit to contracts. A credit union syndicate has tentatively approved
new financing subject to an appraisal and we expect to close on this new loan within the next thirty days. We
believe that once construction begins on the new facilities (expected next month as well) a number of buyers
will move forward with lot, membership, and town home purchases. We are encouraged with the solid level
of interest in our golf and real estate offerings despite the significant economic and credit market challenges
that remain. In addition, the transfer of our additional water rights into the water utility, appear to be on track
for 2010. This transfer, combined with the county’s efforts to establish Eastern New Mexico University’s
Performing Arts College adjacent to the Spencer Theater, will have a substantial positive impact on the area,
and create significant value for our undeveloped land and utility company.
• Stoneridge (650-acre home site/golf development in the northern Idaho lakes region)
This project features great views and fully developed amenities (including an award-winning golf course)
along with an active and involved membership community. Sales of new lot, town home and motor coach
sites this year, however, have proven elusive, which we attribute to the economic uncertainty and the difficulty
potential buyers have in selling their homes to free up equity. Revenues from the golf course, restaurant and
membership dues largely offset the necessary operating expenses, but we have continued to borrow funds to
cover negative cash flow and service debt. Essentially, we are in “hunker down” mode until the economy,
housing and credit markets improve.
Our most pressing challenge is that the first mortgage with Zions Bank comes due next month. We are
currently negotiating a refinance or extension of the loan. However, it is already clear that we will need to
raise significant additional equity capital before the end of the year to stabilize the project. Given the current
depressed market values, and the difficulty of raising equity funds for golf course developments, we believe
this new capital investment (from current and, likely, new investors) will require a preferred return over our
existing investment amount. Stoneridge’s potential remains strong given that we have a full range of existing
completed lot, town home and motor coach inventory, a fully-developed amenity package and the opportunity
to develop more than 500 additional home sites. However, the ability to protect our value and opportunity is
dependent on a successful re-capitalization. We are working to develop this plan and expect to communicate
Stoneridge’s financial needs and opportunities to the partners within the next 30 days.
• Villa de Paz (golf course and approved lots in Phoenix, AZ)
The operation is benefitting from the economy as golfers seek better value. In fact, we expect to complete
more golf rounds this year than any of the last five years. This is aiding merchandise and food sales as well.
However, “greens fee” pricing remain constrained and net cash flow continues to be negative. We have
worked for several years to obtain permits on a portion of our property to build 120 condominium units and
finally succeeded earlier this year. Although there is little value today given Phoenix’s oversupplied housing
market, we believe west Phoenix will emerge earlier than most other sub-markets in the area to support new
housing construction in the affordable segment. Thus, we expect there will be incremental value to our
development in time.
Our $750,000 second loan comes due next month. We believe we will be able to negotiate an extension with a
partial repayment of principal. Accordingly, we will be issuing a capital call with the appropriate details to the partners within the next 30 days for $250,000 (equivalent to just under 15% of your original investment amount).
BRIDGE INVESTMENT GROUP, LLC (“Bridge”) OVERVIEW
Since the company’s inception over twelve years ago, our focus has been on finding apartment, office and
development opportunities that we could acquire at an attractive price, adding value (through capital
improvements, marketing/leasing and expense controls) and then realizing that value through a successful sale.
Gross returns for completed investments have exceeded a 26% IRR and our investor partners have realized net
returns of around a 20% IRR. Our investors and Bridge have benefitted from these completed transactions.
However, the current economic, financial and credit landscape is far different for the nation, and the world,
than at any time in the past fifteen years. As a result, Bridge has focused this year on three key areas:
- Managing our existing investments to maintain value and position ourselves for more favorable future
capital markets conditions
- Establishing a lending platform to offer a fixed income investment alternative (the “BCF”)
- Developing a strategy to participate in distressed real estate and mortgages backed by real property
(the “ROC Fund”)
We are pleased with our progress in all three areas. As reviewed earlier in this letter, our apartment portfolio
is relatively stable and we are working to restructure/refinance our development projects as appropriate.
Acquisition, disposition, financing and development fee income has declined due to the lower volume of
transactions. However, revenues at our apartment portfolio are increasing at a moderate pace and these are
generating a steady stream of management fee income for the company. We have been able to significantly
reduce non-essential expenses, and lowered payroll through attrition and some recent administrative reductions
in force, while maintaining our key team members.
Bridge completed a number of joint venture investments over the past several years with Buchanan Street
Partners (a large institutional investor), which resulted in significant earned distributions. Per the terms of our
agreement, however, fully half of these amounts, totaling over $2.6 million, have been held in escrow pending
the sale of our remaining joint ventured properties. Buchanan would now like to liquidate these investments,
so they can close their own investment funds, and we are working to find a new joint venture partner to replace
them. If a buyout of their current interests does not come to fruition they would like us to sell the properties.
In either case, this would free up the $2.6 million in income and stabilize cash flow for the company. We also
anticipate significant future earnings from the ROC Fund as reviewed below.
In terms of distributions to Bridge’s Class “C” Partners (those who acquired an interest in the company in
2004), we anticipate making a payout of at least the preferred amount (equal to an 8% annualized rate on your
investment contribution) once the funds are received from the Buchanan-related properties as described above.
BRIDGE PARTNERS CREDIT FACILITY (the “BCF”)
The BCF, introduced earlier this year, represents a compelling savings/investment alternative It provides
investors with a transparent savings program that pays a guaranteed fixed 10% annual interest rate (with
upside) every six months and offers preservation of principal with redemption (repayment) rights.
The program possesses similar attributes of a successful bank. It takes in “deposits” from individuals
(“Lenders”) and pays these Lenders a guaranteed 10% annual interest return, with interest payments made in
January and July. Lenders can request a return of their “deposits” with 60-days notice (after an initial six
month period). The BCF loans these deposits at higher interest rates to our properties with short to medium
term cash requirements. The BCF ONLY loans funds to properties completely controlled by the BCF’s
owners (which are the principal officers and owners of Bridge Investment Group). These loans are senior to
all invested equity capital in these projects (which is significant). In addition to the guaranteed 10% annual
return, BCF lenders will share in the BCF’s profits, which provides a modest additional yield.
The BCF offers complete transparency – there is full clarity regarding where the funds are being lent and we
provide complete disclosure. In addition to the senior rights of these loans (relative to equity capital), the
owners of the BCF also guarantee repayment of all principal and the 10% annual guaranteed interest payments
If you, or others you know, are interested in finding out more about the BCF, Dean Allara or I would
appreciate the opportunity to review the program in detail. There is a $50,000 minimum loan amount and
Lenders must be accredited investors.
THE ROC FUND
The economic, financial and credit crisis have created significant opportunities to acquire real property, and
loans secured by real property, at significant discounts. In fact, over the next several years, we anticipate an
enormous volume of these assets will be available for sale at deeply discounted prices and represent a
significant opportunity to build value for Bridge. After considering a wide range of alternatives, we made the
decision earlier this year to team up with some highly qualified and capable partners to form the Real Estate
Opportunity Capital Fund, L.P. (the “ROC” Fund). Bridge offers extensive capabilities to evaluate/underwrite,
finance, operate, manage, construct, operate and sell investment real estate. Our partners bring very deep
fund-raising, investment sourcing, construction, development and fund-management skills and experience.
Additional information on the ROC Fund is available at www.TheROCFund.com.
The Fund intends to raise $500 million for investment in distressed U.S. real estate and mortgages. Our
partners offer significant fund-raising contacts and expertise, particularly in Asia. For example, the founding
partner, Donaldson Hartman, raised billions of dollars during the Asian credit crisis of the late 1990s with
Solomon Brothers, and then Citigroup, to recapitalize sovereign currencies and banks in countries such as
Thailand, Indonesia and Korea. In fact, in October the ROC Fund is co-hosting a Banking and Real Estate
conference in Bangkok along with the U.S. Embassy.
Fund operations began in March and we have already invested over $20 million. Although we expect to build
investment value with many of the Fund’s investments over time, the Fund has already liquidated two
investments at IRRs that both exceeded 40%. The opportunities in this area are significant.
As noted, we expect to raise the majority of the investment capital overseas. Also, since the SEC restricts the
number of investors, and the Fund size is $500 million, the Fund Managers determined that the minimum
investment would be $1 million and come primarily from Qualified Investors (essentially the SEC defines this
as having $5 million or more in investable assets). If you are a Qualified Investor, or know of others who are,
we would appreciate the opportunity to present additional details on the Fund for your/their consideration.
The General Partner (“GP”) of the ROC Fund (Pacific Finance Holdings, LLC or “PFH”) is structured to
receive a standard private equity 2% management fee (of total investment subscriptions) and 20% of the
Fund’s profits. As one of the owners of PFH, Bridge will participate in the GP profits. In addition, Bridge’s
operating entities may be paid fees for services provided to the Fund such as property/construction
management or underwriting (these related party transactions must be approved as to their necessity and
reasonableness by a fully independent Valuation Committee). As a result of the Fund’s size and potential
investment profits, we expect that Bridge will realize attractive profits over the next several years.
OVERALL SUMMARY
Given the state of the economy, along with the credit and capital markets, this past year, we are pleased with
the progress of our stable apartment portfolio. Our development projects have significant inherent value,
which we are working to maintain until market conditions improve. Nonetheless, these investments face
significant capitalization challenges, which must be resolved over the next several months. Our lenders realize
that Bridge is “part of the solution” and not “part of the problem,” and are working with us to achieve these
objectives as well. These existing apartment and development investments remain Bridge’s top priority.
As a well diversified operating company, Bridge is generating stable income from asset and property
management fees to help offset the reduction in transaction-based revenue. At the same time, we are working
to reduce non-essential costs to improve cash flow while maintaining our key team members and
infrastructure. Our balance sheet remains strong and we are working to strengthen our liquidity through a
recapitalization or sale of the Denver apartment properties held in conjunction with our joint venture partner.
We have enjoyed considerable success with the Bridge Partners Credit Facility (BCF) since its inception
earlier this year. The program provides reliable guaranteed semi-annual interest payments at an attractive 10%
fixed interest rate along with preservation of principal and liquidity options.
We are also energized by Bridge’s involvement in the ROC Fund. The number of “distressed” real properties,
and loans backed by real estate, is already large, but we believe these represent just the “tip of the iceberg.” In
terms of new investments, Bridge’s focus will be with the ROC Fund opportunities. With the complementary
skills, experiences and relationships contributed by our partners, we believe the opportunity to add significant
future cash flow and value to our company is very strong.
If you have any questions regarding your existing investments, Bridge, the BCF opportunity or the ROC Fund,
please don’t hesitate to contact me at (732) 212-0920 or on CYoung@BridgeIG.com; Dean Allara is also
available on DAllara@BridgeIG.com or at (650) 579-1350. We look forward to an improving future!
Warm Regards,
BRIDGE INVESTMENT GROUP, LLC

Christian Young
Chairman
The SEC generally defines an accredited investor as having over $1 million in net worth or personal income exceeding
$200,000 annually for the past two years or $300,000 in annual family income for the past two years.
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