Question: What has changed since our last Q&A with you?

The market cycle has matured and the economy has slowed greatly. Pricing has not come down much, but performance expectations have eroded. We are not finding investments with the risk/reward opportunity that typically characterizes Wien & Malkin acquisitions.

Q. What has been Wien & Malkin's response to this change?

We're innovating and remaining disciplined. We have created and used new investment structures, offered and invested new products, and grown our base of accredited investors to allow us to tackle larger deals and different types of opportunities. Equally importantly, we have not relaxed our underwriting standards in order to justify doing more deals. We are more cautious than ever today.

Q. What are some examples of the innovations recently introduced?

The Strategic Capital Fund is one example. SCF offers entrepreneurs short term, preferred-equity to bridge the gap between their own capital and traditional financing. Basic equity current yields fell in the mature phase of the market cycle; SCF's investments receive current, high returns over a three-to-five-year investment horizon. This differs markedly from our traditional single-asset acquisition structure, which provides a lower current return but capital appreciation over a long-term investment horizon.

Another is our use of tenancies-in-common to bring additional capital together with our investors, as we did with First Stamford Place earlier this year and 500 Mamaroneck in 1999. In each case, we have combined the resources of different investment groups to make larger acquisitions, accessing larger pools of equity, while keeping our total leverage at conservative levels.

We've also used tax-deferred property exchanges under Section 1031 of the federal tax code to recognize built up equity in properties and boost returns to investors, all in a tax efficient fashion.

Q. With inflation and fixed-income yields at very low levels today by historical standards, can Wien & Malkin preserve its 8% priority return to investors in its equity partnerships?

We have not concluded a new acquisition since January of this year. We have not been able to underwrite deals conservatively and remain competitive while maintaining the 8% priority yield. Overall yields against which we benchmark our returns have fallen greatly; if they continue to fall, I'm not sure we will be serving our investors if we are seeking returns that on a risk-adjusted basis are out of the market when compared with investment alternatives. It may make sense to offer our investors new deals at slightly lower priority returns. (Please see box below) As the market is still changing, we are continuing to observe and assess.

Q. What should investors expect going forward?

In this environment, it is extremely important to be patient and cautious, and I encourage our investors to share those attributes with us. We have been successful in real estate investment for four generations because of disciplined investing. With the changing economic picture, our assumptions and projections must allow for reduced occupancies and rents. Even properties with attractive current income may be outperforming what can be reasonably expected for the near future. As we look to the future we must be careful and constantly scout for opportunity.

Q. What lasting impact will the technology boom and bust have on Wien & Malkin?

In terms of our investments, there has been little effect. Our exposure to high-tech, especially dot.coms, was negligible because we did not find them appealing credit risks to begin with. Good, old-economy companies, particularly service businesses with exposure to dot.coms, may impact our renting and rent collection, but we hope that will be minor if at all.

We are beginning to see some technology which is useful in running our properties and marketing them to prospects. These developments are on-going but not yet here.

In investor services, the impact is positive and permanent. We have developed interrelated and interactive websites (please see "Website Upgrading" regarding website improvements) and can provide faster services to investors who take advantage of our online capabilities. For example, new offering summaries are transmitted instantly to investors for whom we have e-mail addresses, helping to ensure their timely participation in new investment opportunities.

Q. How is the relationship evolving between Wien & Malkin and its investors?

In my last Q&A, I emphasized the overriding importance of trust in our relationship. Several generations of investors have trusted the Wien and Malkin family to make investment decisions based on what's best for the long term. Over the past year or so, to help expand the range of investment opportunities, we've conducted an outreach program to grow our accredited investor base. That group of investors has grown by more than 10% - largely the result of referrals by our existing investors. That bond of trust remains strong. Keeping it so is priority one.