1. MEMORANDUM
To: Bauer Investment Committee
From: Keisland P. Smalls
Effective Date: July 30th, 2016
Re: Pennzoil – Houston: Acquisition
The purpose of this memo is to seek initial approval for the purchase of Pennzoil Place in Houston, Texas.
Pennzoil is a 86.3% leased, 664,940 square foot office building located in the CBD submarket.
This memo is requesting approval for a maximum purchase price of $199 million ($300 PSF), and a total
equity commitment of $99 million.

2. Capital Markets
-Current Houston Market conditions:
Houston’s condition currently keeps decreasing with poor decision making with more
developers to build or plan for more residents. The high-end is being estimated to put
Houston’s GHP claims for 2016 increase by 21,000 new jobs to put the region behind.
The risks that are profound on the downside with the rise on housing costs which
lowers being affordable. As well as more oil prices decreasing consistently allows an
increase in drilling layoffs which makes a recession.
With these type of issues it brings great opportunity for the real estate to lead in
market sales.
Oil prices have dropped to a five-year low. Since Houston holds 29% of the nation’s
jobs in oil & gas, the Bayou City is more exposed to oil prices than most.
AnnualizedGMP/GDPGrowth:
o Avg.Past 3 Years:4.2% / Avg.Next3 Years: 2.5% (vs.US Avg. of 2.1% and2.57%, respectively)
o TrailingTwelve Months: 2.4%/ NextTwelve Months: 1.3% (vs.US Avg.of 2.4% and 2%,
respectively)
Unemployment:
o Avg.Past 3 Years: 5% / Avg.Next3 Years: 4.9% (vs.US Avg.of 6.3% and 4.7%, respectively)
o Current:5.1% / One YearForward: 5% (vs.US Avg.of 4.9% and 4.7%, respectively)
o 16.1 or 14.8% vs.US Avg.of 9.7 or 9.8%
Jobs recovered since Great Recession
Comparable Sales Transactions
Building Name Address SF Purchase Price (in mil.)Price/SF Cap Rate Year of Sale
1000 Main 1000 Main St 837,161 436$ 520.21$ 5.70% 2015
Heritage Plaza 1111 Bagby St 1,149,635 473$ 411.43$ 5.80% 2014
BG Group Place 811 Main St 972,474 490$ 503.87$ 5.50% 2013
Kinder Morgan Tower1001 Louisiana St 837,161 500$ 597.26$ 5.30% 2012
1000 Main 1000 Main St 837,161 335$ 400.16$ 6.50% 2012
Hess Tower 1501 McKinney 844,763 443$ 523.82$ 6.60% 2011
5,478,355 2,676$

3. Real Estate Market
 The lines of occupancy rates are going up and down due to volatility, but rent prices are rising over
time. For every time occupancy increases, Houston rents increases its rent price. As well as for when
occupancy decreases it remains the same with no change. Occupancy has begun to drop and rents are
expected to follow.

4.  I notice how in the Woodlands it appeared to be a strong market compared to the other graphs. The
correlations of the graphs are changing in many different ways. Galleria Occupancy is reflecting off
of CDP rents for every time it increases just even a little upwards in rents.
 In this graph you can see that businesses are switching over to class c buildings and theres a spike in
occupancy for class C in 2014.

5. Asset Level Assumptions and Underwriting
Beginning Period 9/ 1/ 2016 Purchase Price 199,482 Going-in Ca p 7.9% 300
Hold Period (Yea rs) 10 Closing Costs(50 b p ) 997 Sta b ilized Qua rter 28
Sq ua re Feet 664,940 Tota l Purcha se Price 200,479 Sta b ilized Yield 9.1% 335
Exit Da te 8/ 31/ 2026 Exit Ca p 8.8% 398
Exit Cap 8.75%
Lev era ge 55% La st Yea r NOI 21,496 Unlevered Returns
I/ R 5.50% Free Rent 1,685 IRR 9.3%
I/ O Period 3 Terminal Value 264,925 Eq uity M ultip le 1.97x
Amortiza tion Period 30 Closing Costs(50 b p ) (1,325)
Loa n Dra w son Ca p Ex (0 = Fa lse) 3 GrossSa lesProceed s 263,601
Less: Yea r 1 Ca p Ex (8,121) Gross Levered Returns
Asset M a na gement Fee (b p ) 100 Net Sales Proceeds 255,480 IRR 14.1%
Promote Hurd le 9% Eq uity M ultip le 2.42x
Hurd le Proceed sGP 20% Checks: TRUE
Hurd le Proceed sLP 80%
M a rket Rent $23 Net Levered Returns
GP Payout TI - New / Renew 50/ 30 IRR 12.4%
AM D 9,169 Ca p Ex Reserv e $0.50 Eq uity M ultip le 2.19x
Promote 12,102 Renew a l Prob a b ility 70%
Tota l 21,271
Quarter Ended 8/ 31/ 2016 11/ 30/ 2016 2/ 28/ 2017 5/ 31/ 2017 8/ 31/ 2017 11/ 30/ 2017 2/ 28/ 2018 5/ 31/ 2018 8/ 31/ 2018 11/ 30/ 2018 2/ 28/ 2019 5/ 31/ 2019
Quarter # 0 1 2 3 4 5 6 7 8 9 10 11
Rev enue 6,798 6,628 6,826 6,655 7,195 7,404 7,394 7,562 7,709 7,657 7,859
Free Rent - - (172) (109) (201) (127) - (60) (179) (54) (84)
Op era ting Exp enses (2,694) (2,693) (2,693) (2,692) (2,775) (2,778) (2,779) (2,780) (2,862) (2,863) (2,864)
Net Op era ting Income 4,104 3,936 3,961 3,854 4,218 4,498 4,615 4,722 4,669 4,741 4,910
Ca p ita l Exp end itures (83) (83) (1,434) (1,010) (2,589) (1,012) (1,012) (2,412) (1,015) (1,015) (3,000)
Ca sh Flow 4,020 3,853 2,527 2,844 1,630 3,486 3,603 2,310 3,655 3,727 1,910
Check TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
Acq uisition/ Disp osition -200,479 0 0 0 0 0 0 0 0 0 0 0
Unlev era ged Ca sh Flow -200,479 4,020 3,853 2,527 2,844 1,630 3,486 3,603 2,310 3,655 3,727 1,910
Leverage
Beg of Period 110,264 110,347 110,430 111,864 112,873 115,462 116,474 117,486 119,898 120,913 121,927
Deb t Incurred / Rep a id 110,264 - - - - - - - - - - -
Loa n Dra w s 83 83 1,434 1,010 2,589 1,012 1,012 2,412 1,015 1,015 3,000
Interest Pa yment (1,516) (1,512) (1,508) (1,523) (1,531) (1,561) (1,569) (1,576) (1,603) (1,610) (1,617)
Princip a l Pa yment - - - - - - - - - - -
End of Period 110,264 110,347 110,430 111,864 112,873 115,462 116,474 117,486 119,898 120,913 121,927 124,927
GrossLev era ged Ca sh Flow (90,216) 2,587 2,423 2,452 2,331 2,687 2,938 3,046 3,146 3,066 3,131 3,293
Asset M a na gement Fees (226) (226) (226) (226) (226) (226) (226) (226) (226) (226) (226)
Promote - - - - - - - - - - -
Net Lev era ged Ca sh Flow (90,216) 2,362 2,198 2,227 2,106 2,462 2,712 2,821 2,921 2,841 2,905 3,067