Bridge Investment Group: Updates

Now that 2006 is behind us, we at Bridge Investment Group, LLC (“Bridge”) want to provide a brief status update on the progress and future directions for both our company as well as our Bridge Co-investment Fund I. This report supplements the Review of Current Investments letter of same date, which is enclosed.

I noted in the July semi-annual update that, although our financial numbers didn’t look very good for the first half of the year when compared against our budget, we felt great about our accomplishments and the company’s position for the second half. It’s certainly nice when a plan comes together! The numbers are final and Bridge’s Net Operational Income for 2006 was more than 30% better than our budget. Even more impressive, our 2006 NOI was 300% larger than in 2005 and almost 600% greater than in 2004! All operating divisions exceeded their 2006 revenue budgets and budgeted operating expenses were lower than expected as well, so it was a successful year across the board. We were able to take advantage of the improving operating fundamentals at several properties along with historically low cap rates and surging property values to harvest several of our successful investments made in 2004. At the same time, we met our targets for new existing property acquisitions and created new opportunities with several of our older investments (i.e., refinancing the Colorado Springs properties to fund major renovations and recapitalizing the Arbors to complete wholesale capital improvements and fund a conversion of the units to condominiums for sale). Finally, we made significant headway with our development projects as described more fully in the Investment Review letter.

The performance, and increases in value, of investments made by our Bridge Co-investment Fund I (“Fund”) over the past two and a half years continues to vary from very good to great! We currently believe we will exceed our return targets on all Fund projects given the value that Bridge has added through physical, management, marketing and expense improvements, along with strong investor/buyer demand in our key markets (represented by historically low cap rates). We couldn’t be more pleased with our investments. If there is any disappointment, it would only be that we have not been able to identify as many new investments by this time as we had hoped. Acquisitions have proven difficult to come by given the high values for existing properties (the same lower cap rate issues that have made it so favorable – and profitable – for us to sell several investments) and two of the acquisitions we did make lacked the institutional investor component required by the Fund. At this time, we have successfully invested 55% of your committed equity funds. However, we also recognize that due to the success of several of our harvested investments, we know that we have already returned almost 70% of the amount you have funded (just under 38% of your committed amount)! We will continue to consider alternatives to boost our Fund investments – for example co-investing with 1031 partners such as we did with the Barclay Club Apartments last year – and not limit ourselves to co-investing with institutions (these will always require the affirmative vote of the Fund investors). In any event, we remain very optimistic about the performance of our current projects, we expect to recognize some of these gains through one or more additional sales this year and we hope to increase the amount of invested capital for the rest of 2006.

BRIDGE INVESTMENT GROUP, LLC OVERVIEW

The following will provide a brief overview of each of Bridge’s operating divisions, including key activities and results for 2006 along with expectations for 2007.

Our acquisitions team was successful in identifying, underwriting, financing and closing Barclay Club and Royal Woods Apartments (both in Kansas City, MO) along with Tudor Heights Apartments in Omaha, NE. Combined, these totaled almost $60 million in new acquisitions for the year. When added to our Colorado Springs restructuring fee, we slightly exceeded our budget for the year.

In terms of dispositions, we completed the sale of the Grove Apartments (Peoria, IL), Regatta Apartments (Austin, TX), the Bridge Office Building (Salt Lake City, UT), Glenridge Apartments (Colorado Springs, CO), Rancho Montana Apartments (Tucson, AZ) Eagle Point Apartments (Albuquerque, NM) and the Marketplace Office/Retail Complex (Denver, CO). Overall, we exceeded our disposition fee expectations by approximately 45%. We also successfully placed Fountain Village Apartments (Tucson, AZ) and McNeil House Apartments (Austin, TX) under contract to sell in 2007 (in fact, Fountain Village successfully closed in January). We have listed Malibu Apartments (Austin, TX) and Timberwood Apartments (Denver, CO) for sale this year and plan to list Sienna Springs Apartments (formerly known as Presidio Apartments in Tucson, AZ) within the next few months.

A significant part of Bridge’s revenues and profits comes from Organizational Partner distributions (“OP”s, sometimes referred to as Performance Bonuses). OPs are achieved when properties that sell exceed certain investment return thresholds for the equity investors. At time of sale, these OPs are either:

OPs historically have comprised the significant majority of Bridge’s profitability. For 2006, the Company realized almost $3.2 million in OPs; their disposition is as follows:

Only the amount received in cash is taxable in 2006, the other amounts are deferred until cash is actually received. Our strong operational performance and corresponding investment success with properties acquired over the past three years are expected to provide very strong Organizational Partner distributions for the next several years (including the deferred $1.52 million noted above). For 2007, we anticipate realizing OPs from Fountain Village, Sienna Springs and Timberwood (all of which are Buchanan JVs and will also benefit from a partial return of the deferred amounts).

For 2007, our objective is to acquire new property investments totaling at least $100 million. As noted above, finding qualified existing apartment and office properties offering the potential to add value presents a significant challenge in this era of low cap rates (high current values) and higher interest rates (than we have become accustomed to over the past few years). Accordingly, we significantly expanded our acquisition team last year with the addition of Dale Nelson (formerly our Commercial Portfolio Manager) supplementing the efforts of Rick Andrus, our President, Russ Minnick and CEO Dan Stanger. We recently divided up our target western U.S. markets between Rick and Dale, who will spend a considerable amount of time traveling to these cities and developing relationships with brokers, property management companies and select owners. In addition, Dan will spend more time in this area now that he has completed the repositioning and refinancing of the Colorado Springs portfolio, and the Arbors in Illinois. The key is to identify potential acquisitions early on, gain an inside track with seller representatives wherever possible and develop an intimate knowledge of these market demographics and apartment/office demand and supply fundamentals. In other words, find the right properties and acquire them at the right price. Russ and Dan, along with Dale and Rick are highly focused on reviewing and finding more opportunities and capitalizing on our targeted markets. As always, final decisions on acquisitions will be made by our investment committee (Dan, Russ, Dean Allara and myself).

In addition, we remain focused on finding a new institutional source of equity to supplement our solid relationship with Buchanan Street Partners. We are working two major initiatives in this arena. The first is to develop relationships with an expanded group of institutional investors comparable to Buchanan. We have been working these relationships for most of 2006 and now have nine qualified, capable and interested organizations (including Buchanan) that offer the potential to joint venture future opportunities. Once we decide to place a new property under contract, we will work with each of these nine parties to determine the best partner for each transaction. Theoretically, we could have a different partner for each new acquisition, but we believe we will narrow the list down to two or three where the relationship proves mutually beneficial. We expect to acquire most of our properties this year in this manner. As with Buchanan-funded projects in the past, our Bridge Co-investment Fund would typically participate by contributing 10% - 20% of the available equity.

From a longer-term perspective, with the help of a knowledgeable veteran with extensive equity development experience, we have spent considerable time over the past few months investigating the pros and cons of developing our own committed equity fund. We plan to pursue this strategy further since, if we were successful in raising a fund, it could remove the effort and uncertainty inherent in determining individual joint venture partners as described above. It could also benefit both Bridge and our institutional equity investors by enhancing overall returns to both parties. We might consider rolling the remaining Co-investment Fund I into this new fund (subject to the approval of those investors) or otherwise enable our current individual investor partners to participate (not limited solely to those in the Co-investment). We will provide a progress update in our next semi-annual update. In any event, we do not see any new fund of this nature being completed until the fourth quarter, if at all.

Bridge Property Management (“BPM”) revenues were slightly ahead of budget (about 3%) for the year, despite the fact we sold more properties than originally planned. In large part, this was due to higher than forecast revenue growth enjoyed by our managed investments (since BPM fees are a fixed percentage of project revenues, as these rise, so do BPM fees). In addition, we had significant success leasing space for our Marketplace and Bridge Building office properties, which also resulted in higher management fee revenues to Bridge. Construction management fees fell short of budget in 2006 due to some project delays, but we expect to make that up in 2007 and have planned accordingly.

BPM completed the full conversion of all properties to our new Yardi Voyager accounting system last year, which was a major project. Also, we were successful in retaining the property management contract on the Bridge Office Building with the new owner! This buyer also owns several apartment properties in the Salt Lake area and we have a reasonable opportunity to also add these assets to our management portfolio in the future. We are pleased with this success in third-party fee management and will consider this option with other select property owners in certain locations where we have extra capacity. Finally, we are looking to add one new Portfolio Manager this year so that we are able to accommodate our future growth in the portfolio.

Bridge Realty Capital (“BRC”) had a stellar year as their mortgage banking revenues exceeded plan by almost 25% for the year. This was primarily due to the team’s success with third-party (non-Bridge) borrowers and our newly created Small Loan Program. In addition, our key lender relationships (Wachovia for conduit/CMBS financing, Greystone Bank for HUD/Fannie Mae/Bond financing and Zions for Construction/Mezzanine financing) remain very strong. Notably, Clay Andrus, who joined us early in 2006, has been accepted for an internship at Wachovia’s headquarters in Charlotte, NC and will spend the first six months of 2007 learning the ropes and relationships from the heart of the organization.

BRC’s 2007 budget is comparable to 2006’s as increased acquisitions are expected to offset lower third-party loan originations. The latter is due to the relatively flat interest rate environment and lack of significant new refinancing activity in the area. Also, with Clay out for half the year, we anticipate some reduction in the Small Loan Program’s production in 2007.

Our Rainmakers, Silver Spring and Stoneridge development projects made excellent progress last year as reviewed in the Investment Summary. From a Bridge budget perspective, fees from better than expected sales volumes at Rainmakers and Stoneridge, combined with significantly higher servicing fees from our Silver Spring Courtyard development, offset revenues that did not materialize in 2006 from our Citifront and Tuscany Cove affordable housing projects (although these were not lost, simply deferred).

In terms of personnel, we were fortunate to attract Ernie Willmore to our development team last October. Ernie brings over 20 years of acquisition, financing, development and asset management experience with Northwestern Mutual, where he managed their southeastern U.S. real estate operations out of Dallas and oversaw apartment, office and retail projects. Ernie will a play a key role with our Development team. Additionally, we expect to hire an additional Development Assistant this year to complement the efforts of Brett Christensen. Finally, we promoted Brad Hansen, formerly our head Golf Professional at Villa de Paz to become the General Manager at Stoneridge. This move will free up Dean Allara to focus more time on capital development.

Our 2007 development revenue budget assumes continued solid sales volumes from Rainmakers and Stoneridge along with the beginning of sales at the Arbors. We plan one new development project, which we expect to identify over the first half of the year. Finally, Brent Andrus, our joint venture partner on the Silver Spring Courtyard, has indicated his plans to acquire our interest in the next month or so, which will generate a large performance bonus and sponsorship fee.

Finally, we have been working a significant new initiative that has the potential to create an entirely new line of business for Bridge while also complementing our existing operating divisions. As noted in our BRC section above, we enjoy a strong relationship with Greystone Bank, who also happens to be one of the country’s largest underwriters and originators of bond financing for affordable housing projects. CEO Dan Stanger and I met with their Chairman in New York earlier this year, where he described a process to acquire properties in certain states (states that offer an exemption from property taxes under certain circumstances) utilizing “low floater” bonds (debt financing with interest rates well below typical conventional apartment mortgage rates) for affordable housing properties. After exploring the concept further, we believe it has merit and provides the potential to significantly increase Bridge’s management and related fees from these properties, while creating more stability in the portfolio since we will have these assets typically at least fifteen years. Finally, it offers a means to assist the communities and lower-income residents where these properties are located by increasing the local stock of affordable housing.

Our challenge has been to find someone with the requisite skills and motivation needed to move this from concept to reality as our current senior team does not have the bandwidth to adequately pursue this new business. Fortunately, we know the right individual and are pleased to report that Bob Hallock recently accepted the position, and will start in early March! Dan and I worked closely with Bob on our highly successful Warwick Square affordable housing project in Santa Ana, CA over ten years ago and have maintained the relationship ever since. Before Warwick, Bob worked with Bridge Manager Tom Ralphs as a Development Manager on various real estate projects for the Ralphs family in San Diego. For most of the past twelve years, Bob has honed his affordable housing/tax credit financing and development skills throughout the western region with particular emphasis in California (which is one of the states that offers the property tax abatement under certain circumstances). Bob left a very lucrative position to develop and oversee this program for Bridge. He recognized the opportunity it presents to build long-term value for himself along with the Company. We are very pleased this has all come together in the past few weeks and believe this provides significant potential to grow the business along several lines in the future. We do not, however, expect this will materially impact our 2007 budget projections.

All in all, a lot of positive development activities are underway, which bode well for our future. One of the issues inherent in our Development division, however, is increased risk from construction defects and/or sales efforts. Our insurance carrier has recommended we separate our development activities from the rest of Bridge so as to reduce the risk of any future liabilities involving the rest of the Company. We are investigating this matter and will likely make a recommendation to restructure our Development division into a wholly separate company. Any changes we make in this regard will require the approval of the Class C Manager as well as at least a majority of the Class C Members. Also, our expectation is that all current owners of Bridge Investment Group would have exactly the same effective ownership percentage in any new Bridge Development company we form.

As noted on our first page summary, budgeted operating expenses for the year were slightly below plan. We did have some expenses that were not budgeted and caused overall expenses to run slightly over plan (less than 2%) including:

Bridge’s Net Operational Income for the year was almost 30% higher than budget due to our revenues of just over $7.9 million compared with our budget of $7.12 million. Notably, the $7.9 million booked this year includes only the $1.255 million in Organizational Partner distributions (“OP”) received in cash. In fact, we realized an additional $1.52 million in OPs from 2006 property sales that were deferred (we expect to receive these in cash in future years). Also, we realized over $400,000 in OPs that were reinvested in new acquisitions (which are expected to pay cash flow distributions to the Company).

In October, we made a distribution to the owners. For Class C Members, this equated to a 16% return on their invested equity. This was the only Class C Member distribution made in 2006. The Management Committee also approved a distribution this month to close out 2006, which represents an additional 7.2% return on Class C Member’s invested equity. Class C Members will find these checks enclosed.

Also, many of you will recall that at the time we formed and funded Bridge in March 2004, the Class A Members (Bridge’s Senior Management Team) set aside stock they owned equivalent to 5% of Bridge’s overall ownership interests and allocated this among our longer-term loyal investor partners (proportional to their investment history in our sponsored projects) as a gift in appreciation for their past contributions to Bridge’s success. This entity is known as Bridge Group Holdings, LLC (“BGH”). Essentially, this gift was provided to (and BGH’s members consist of) all those individuals who invested a cumulative total of at least $100,000 in at least three separate ventures prior to the summer of 2003 (and who also accepted the gift by authorizing and returning the required acceptance documents). We made a significant distribution last October and BGH Members will find a check enclosed for this month’s distribution.

For 2007, our revenue budget is about 15% lower than our 2006 actual results. This decline can be attributed directly to fewer forecast sales of properties with less attendant Organizational Partner distributions (these two categories combined equate to more than the 15% difference). Property Management and Mortgage Banking fees are also budgeted at lower levels in 2007 than was realized in 2006 (due to the smaller property portfolio and softer refinance markets), but these are more than offset by an increased budget for Acquisitions and Development. Our overall expense budget is forecast to be approximately 9% higher in 2007 than our 2006 actual results. The primary drivers for this increase are:

The foregoing results in projected Net Operational Cash Flow just under half of our 2006 results as we replace many of our sold properties with new acquisitions and establish the personnel required for the future. After considering non-operational cash flow items such as equity investments (generally required by our institutional equity partners on joint venture acquisitions), pay downs on our Rainmakers equity loan, distributions to Bridge from investments, etc., we project that the distributable cash flow from 2007 will equate to approximately a 10.4% return on Class C Member’s invested equity. At the moment, we are not able to forecast when future distributions will be forthcoming and in what amount. Although this projection is significantly lower than our distributable cash flow from 2006, it nonetheless is 30% higher than the distributable cash flow generated in 2005. More importantly, as we look from 2008 – 2011, we project significantly exceeding our 2006 distributable cash flow. Thus, 2007 is a year to build and grow for the future, while still forecasting a reasonably strong annual return on investment.

With significant distributions being paid out from Bridge, our property investments, the Co-investment Fund and the completion of our Silver Spring Courtyard project, we are often asked what new investment opportunities from Bridge may be on the horizon. The short answer is that we simply don’t know. Our first priority for existing apartment and office property acquisitions is to fulfill the needs of our Co-investment Fund I investors and partners where we have previously committed to support their Section 1031 tax-deferred property exchanges. There is some possibility we may have opportunities later this year for direct investment of new capital into these types of investments, but fulfilling our 1031 and Fund partners needs fully subscribed these opportunities over the past year. As described below, it is our goal to invest the remaining Co-investment Fund I committed capital by the end of this year, which will present an opportunity to invest in a new Co-investment Fund. This is not expected to require cash investments in 2007, but will be our committed vehicle for the coming years. Given the tremendous success enjoyed by our Fund I, this should prove a very attractive future opportunity.

We occasionally have other investment opportunities in more high risk/high reward development projects. Our Arbors condominium conversion recapitalization funded last August is such an example. Although we have not identified any new projects of this type, we do expect to undertake a limited number of new projects and will provide you with the information to consider an investment.

Finally, our partners have typically benefited in the past from investments made with property in our developments. For example, prices of our original Boulders condominium conversion in San Diego more than quadrupled over a ten-year period from the original investor pricing levels and partners who took advantage of our initial discounted land prices with lots at our Stoneridge and Rainmakers projects have already experienced price increases of 20% - 50%. We will begin sales of our Arbors condominiums (named “The Pines”) later this month and will be providing our investors with a 5% discount off the already attractive entry-level pricing. Since it is our desire to have this project primarily owner-occupied to maintain value, only 20% of the condominiums will be sold to investors and we plan to limit each investor to a maximum of two units.

Our local staff will provide property management services to rent and maintain units during our tenure with the property, which we estimate will be eight years. There are risks associated with this type of investment, not least of which is the ability to keep the condominium rented and we’re certainly not projecting the kinds of returns experienced by our Boulders, Stoneridge and Rainmakers initial buyers. However, with initial purchase prices for our investors averaging less than $85 a square foot for a fully renovated unit, there are opportunities for attractive risk-adjusted returns.

We have completed the updates to our website, accessed at www.BridgeIG.com. Please visit your personal homepage to check current investment amounts, ownership percentages and actual as well as projected cash distributions. If you have any questions on the website or your homepage, please contact Devanie Mensah at (801) 284-2905 or on DMensah@BridgeIG.com.

The tax return and investor K-1 preparation process is well underway and we remain confident in our ability to deliver your K-1 tax forms not later than March 15. To meet that commitment, however, we will need to keep all our available resources focused on the project and will not be able to send out any K-1s earlier or to provide estimates for individual investors. We appreciate your support as we work to accurately prepare and mail out almost 150 tax returns and over 8,000 K-1s within the next 45 days!

The Fund consists of our individual investors who wanted to participate in future acquisitions along with Buchanan (or other qualified institutional investors). We closed the Fund in 2004 with commitments to invest a total of $9.37 million in equity. Amounts are only “called” when we have properties under contract in which institutional partners have agreed to fund at least 75% of the required equity capital (or when a majority of the investors consent to a different investment strategy). This Fund has so far “called” 55% of the committed amounts and has invested just over $4.6 million as follows (details on performance of these investments is provided in our Review of Current Investments):

As noted above and in the Investment Summary Letter, Marketplace, Eagle Point and Fountain Village have all closed and the proceeds distributed to the Co-investment Fund I partners. Marketplace proceeds to the Fund totaled just under $995,000, representing more than a 150% return on investment and just under a 24% IRR. The Fund received just under $775,000 from the sale of Eagle Point plus $111,800 in operational cash flow distributions for a total return of $886,800, equivalent to a 236.5% total return and a 59% IRR. Finally, the Fund in January 2007 received $832,700 from the close of Fountain Village. When added to the $167,700 in combined cash distributions, the Fund’s total return from Fountain Village was $1,000,700, equivalent to a 174% total return and over a 30% IRR. Needless to say, the Fund’s completed investments have all been outstanding and, as the Investment Review describes, we anticipate varying levels of profits on all our other investments (although probably not quite as strong as the average of our first three completed projects!).

As a reminder of how the Fund is structured, all available cash is distributed to the partners until you have received a return of your total invested capital plus an amount that equals a 12% IRR. Thereafter, all proceeds are distributed 75% to the Fund’s cash partners and 25% to Bridge Investment Group as the Class B Member of the Fund. Thus, although the returns from our initial investments are all well above the 12% threshold, no amounts will be distributed to Bridge until the terms outlined are realized.

Overall, the Fund has paid cash distributions totaling just over $3,750 for each $5,500 invested by the partners and we still own six of our nine properties! Presidio (now known as Sienna Springs) is the only property likely to sell in 2007. Distributions for the remainder of the year (the next one is scheduled for April) are projected to be equal to around $64 for each $10,000 you originally committed, which is equivalent to a 14% annual return on your current net investment (the difference between the amounts contributed and the amounts distributed back). This projection does not include any distribution from a sale of Sienna Springs or any other investment in the Fund.

In terms of future capital calls, we do not currently have any acquisitions under contract but have narrowed down a number of properties and hope to identify additional investment opportunities within the next several months. As noted earlier, Bridge’s 2007 business plan projects the acquisition of properties with an aggregate value of $100 million, which will require approximately $30 million in equity. By contributing 10% - 20% of this total from the Co-investment Fund I, our goal is to “call” our remaining capital by the end of this year (approximately $4,500 for each $10,000 originally committed).

In summary, we are very pleased with the success enjoyed by Bridge as a company and the Co-investment Fund I in 2006. Both the Company and the Fund are positioned well for 2007 as we seek to increase our overall portfolio of assets through new acquisitions and, at the same time, invest the remainder of our Fund equity commitment. We are also energized by Bridge’s initiatives to develop a significant committed Institutional Equity Fund that we can all participate in and develop a new line of business with affordable housing properties.

As always, we appreciate our relationship with you, our individual partners and hope to continue to earn your confidence and support. If you have any questions on the foregoing, 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 are prepared for continued opportunities and challenges this year and look forward to a bright and prosperous future.

[1] Cap rate is defined as a given property’s Net Operating Income (“NOI” equals total operating revenues less total operating expenses) divided by the price or value of the asset in question. It is essentially the return an investor expects to receive on current operating cash flow. So, if a property generates NOI of $1 million and has a value of $12.5 million, it has an 8.0 Cap rate. As the Cap rate declines, the value of a property (amount a buyer is willing to pay) increases. Thus, a property with $1 million in NOI and a value of $14.286 million would have a 7.0 Cap rate.