CITY OF LOS ANGELES DEPARTMENT OF WATER AND ......2010/08/25 · approximately 18.89%, and...

CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER

INTERDEPARTMENTAL CORRESPONDENCE

Date: August 18, 2010

To: Retirement Board Members

From4?Sangeeta Bhatia, Retirement Plan Manager

Subject: Board Agenda Item No.9: Presentation of New Investment Opportunities by Courtland Partners; Discussion and Possible Action (August 25, 2010, Regular Retirement Board Meeting)

Representatives from Courtland Partners, the Plan's real estate consultant, are presenting two investment opportunities for the Retirement Fund and the Retiree Health Benefits Fund. Presentation material from Courtland and from Lone Star Funds is enclosed. Also enclosed are two resolutions to approve the investments, should the Board decide to do so.

SB:jae

9.1

RESOLUTION NO. 11-16

RESOLUTION TO INVEST IN LONE STAR FUND VII

WHEREAS, the Board of Administration (Board) for the Water and Power Employees' Retirement Plan (Plan) previouslyadopted a 5% allocation to the Real Estate asset class for the Retirement Fund (RF) and the Retiree Health Benefits Fund (RHBF) at the regular Board meeting held on January 16, 2008 (Board Resolution No. 08-49); and

WHEREAS, representatives from Courtland Partners, the Plan's real estate consultant, recommend a total commitment of up to $10 million ($9 million from the RF and $1 million from the RHBF) to Lone Star Fund VII (Lone Star VII), a closed end commingled fund focused on opportunistic real estate and debt/loan investments; and

WHEREAS, the final closing for Lone Star VII is anticipated to be in the Fall of 2010.

NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to prepare and submit subscription documents for Lone Star VII pending legal review, and if the subscription documents are accepted by Lone Star, to proceed with the implementation of funding a commitment up to $10 million ($9 million from the RF and $1 million from the RHBF).

I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administration [created by Section 1102(b) of the. Los Angeles City Charter] at its regular meeting held on August 25,2010.

Sangeeta Bhatia Retirement Plan Manager

9.2

RESOLUTION NO. 11-17

RESOLUTION TO INVEST IN LONE STAR REAL ESTATE FUND II

WHEREAS, the Board of Administration (Board) for the Water and Power Employees' Retirement Plan (Plan) previously adopted a 5% allocation to the Real Estate asset class for the Retirement Fund (RF) and the Retiree Health Benefits Fund (RHBF) at the regular Board meeting held on January 16, 2008 (Board Resolution No. 08-49); and

WHEREAS, representatives from Courtland Partners, the Plan's real estate consultant, recommend a total commitment of up to $10 million ($9 million from the RF and $1 million from the RHBF) to Lone Star Real Estate Fund II (Lone Star II), a closed end commingled fund focused on opportunistic commercial real estate and debt investments; and

WHEREAS, the final closing for Lone Star II is anticipated to be in the Fall of 2010.

NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to prepare and submit subscription documents for Lone Star II pending legal review, and if the subscription documents are accepted by Lone Star, to proceed with the implementation of funding a commitment up to $10 million ($9 million from the RF and $1 million from the RHBF).

I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administration [created by Section 1102(b) of the Los Angeles City Charter] at its regular meeting held on August 25, 2010.

Sangeeta Bhatia Retirement Plan Manager

9.3

LOS ANGELES DEPARTMENT OF WATER AND POWER EMPLOYEES’ RETIREMENT PLAN

EVALUATION OF A PROPOSED

$10 MILLON INVESTMENT

IN

LONE STAR FUND VII (U.S.), L.P.

AND

$10 MILLON INVESTMENT

IN

LONE STAR REAL ESTATE FUND II (U.S.), L.P.

AUGUST 25, 2010

COURTLAND PARTNERS, LTD.

200 Public Square, Suite 2530 10866 Wilshire Blvd., Suite 830 Cleveland, OH 44114 Los Angeles, CA 90024

216.522.0330 310.474.3040

WPERP LONE STAR

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LOS ANGELES WATER AND POWER EMPLOYEES’ RETIREMENT PLAN

LONE STAR FUNDS

AUGUST 25, 2010 ________________________________________________________________________

TABLE OF CONTENTS

I. EXECUTIVE SUMMARY .................................................................................................................. 2

II. ADVANTAGES AND RISKS/CONCERNS SUMMARY .................................................................... 4

III. COURTLAND DUE DILIGENCE ACTIVITIES ............................................................................... 6

IV. FIRM OVERVIEW ............................................................................................................................ 7

V. INVESTMENT STRATEGY ............................................................................................................. 11

VI. TRACK RECORD ........................................................................................................................... 15

VII. FEES ............................................................................................................................................... 18

VIII. U.S. MARKET CONDITIONS ........................................................................................................ 20

IX. COURTLAND RECOMMENDATION ............................................................................................ 30

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I. EXECUTIVE SUMMARY

Courtland Partners, Ltd (“Courtland”) has prepared the following evaluation of Lone Star VII, L.P. (“LSF VII”) and Lone Star Real Estate Fund II, L.P. (“LSREF II”, collectively the “Funds”) for Los Angeles Water and Power Employees’ Retirement Plan (“The Plan”). Provided below is a summary of terms associated with the Funds and a brief discussion of advantages and risks associated with a proposed investment in the Funds.

SUMMARY OF INVESTMENT TERMS

Investments: General Partner: Fund Size: GP Co-Investment: Leverage: Investment Strategy: Final Closing: Investment Period: Fund Term: Risk/Return: Expected Returns: Preferred LP Return: Management Fee: Promoted Interest: Key Man Provision:

Lone Star Fund VII (U.S.), L.P., a Delaware limited partnership Lone Star Real Estate Fund II (U.S.), L.P., a Delaware limited partnership

LSF VII, L.P. and LSREF II, L.P. (collectively, the “GP” or “Lone Star”) Up to $5.0 billion for each of the Funds 1% of total capital commitments No more than 75% on a stabilized basis LSF VII: Global investments in distressed loans and securities including single family, corporate, and consumer debt products. Also, global control investments in banks and financially-oriented and asset-rich operating companies. LSF VII may not make significant investments in commercial real estate (“CRE”). LSREF II: Global investments in distressed commercial real estate debt and equity including secured and unsecured debt, high leverage debt financings, real estate-related debt and equity assets, operating companies and securities. LSREF II may not make significant investments in single family residential real estate. Fall 2010 Three years from the final closing date Eight years from the final closing with two one-year extensions at GP discretion Opportunistic 25%, gross of fees; 20%, net of fees 8% for aggregate capital contributions of less than $200 million 9% for aggregate capital contributions from $200 million to $400 million 10% for aggregate capital contributions in excess of $400 million 120 basis points for aggregate capital contributions of less than $200 million 105 basis points for aggregate capital contributions from $200 million to $400 million 90 basis points for aggregate capital contributions in excess of $400 million

During the Investment Period, this fee is levied on committed equity; thereafter, this management fee is lowered to 45 basis points on unreturned, invested equity.

After a full return of capital and the preferred LP return, 80/20 to the LPs until the LPs have received a 13% return, then 50/50 until the GP has received 20% of cumulative distributions, thereafter, 80/20 to the LPs. John Grayken must spend at least 75% of his time on the business of the Funds.

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COURTLAND RECOMMENDATION SUMMARY

Courtland recommends that Los Angeles Water and Power Employees’ Retirement Plan commit $10 million to Lone Star Fund VII, L.P. and $10 million to Lone Star Real Estate Fund II, L.P. This recommendation is primarily based on the compelling risk-adjusted return opportunity provided by the subject strategies. Furthermore, it is also consistent with Courtland’s desire to further diversify the WPERP real estate portfolio and to provide it with additional diversification by investment manager and style (i.e., a top-tier “opportunistic” fund manager). Courtland’s recommendation of the Funds is based on the following considerations:

1. Superior sponsor with substantive organizational strength and an experienced management team; 2. Sound investment strategy in each of the United States, Europe and Japan; 3. Proven investment track record; 4. Advantageous market conditions given ongoing dislocation in real estate and credit markets; 5. Deal sourcing capability; 6. Alignment of interests; and 7. Flexibility of investment strategy

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II. LONE STAR ADVANTAGES AND RISKS/CONCERNS SUMMARY

ADVANTAGES RISKS/CONCERNS

Organizational Strength/Management Team. Lone Star has demonstrated an ability to source and monetize opportunistic real estate and other investments and owns the infrastructure necessary to execute its strategy within each of its distinct target markets. Since 1993 and through prior Funds I-VI, Real Estate Fund I and its Brazos Funds, Lone Star has managed over 740,000 assets acquired at an aggregated purchase price of over $63.9 billion. Led by John Grayken, the management team has been working together for many years. In addition, through Hudson Advisors, LLC, the GP-affiliated asset manager for the Funds, investors have access to a full-service, in-house asset management Company experienced in managing not only real estate but also performing and non-performing and secured and unsecured loans. Lone Star has offices in the U.S., Japan, South Korea, Taiwan, France and Germany. Sound Investment Strategy. Lone Star’s tenured management teams and established operating platforms should provide it with a competitive advantage in capitalizing on the historic and ongoing dislocation that continues to affect global and domestic economies. In particular, continued stress in credit and real estate markets are forecast to persist throughout the respective Investment Periods of the Funds. At this time, Courtland believes that Lone Star has adequate organizational resources to execute its strategies in each of the U.S., Europe, and Japan. Importantly, given the severity of the economic downturn, Lone Star faces a much narrower set of competitors than in the past, as a number of its peers has either declared bankruptcy or otherwise forced from the marketplace. Proven Track Record. The returns of the Lone Star funds generally have been strong. The net projected internal rate of return (“IRR”), as of September 2009, for each of the GP’s prior funds is as follows: Lone Star VI – 18.01%; Lone Star V – 10.45%; Lone Star IV – 32.02%; Lone Star III – 31.10%; Lone Star II – 15.90%; Lone Star I – 7.51%; Lone Star Real Estate Fund I – 17.69%; and Brazos – 28.09%. The equal-weighted, average expected IRR for all of the aforementioned funds is approximately 18.89%, and generally in line with the return expectation of the Funds (i.e., 25% on a gross

Investments in Distressed Assets. The GP may invest in secured and unsecured non-performing loans or other distressed assets that involve a significant degree of legal and financial risk and, in the international context, political risks. Moreover, there are additional risks and uncertainties related to litigation, bankruptcy, and other laws affecting the rights and remedies of the Funds which may create additional financial risks. Illiquidity concerns in the U.S. and other target markets have created significant short term volatility in asset valuations that may continue to occur, which may adversely affect performance for the Funds. As a potential mitigant, through investments in previous funds, the GP has gained significant experience in dealing with distressed investments with a particular focus on non-performing debt. Key Man/Personnel Loss. The potential loss of Key Man and Lone Star founder John Grayken would likely have a material adverse impact on the ability of the Funds to deliver expected returns. In addition, Lone Star has experienced a measure of senior employee turnover, as seven senior personnel, such as Ellis Short who formerly headed the company’s Asian investment activities, have recently left the firm. The Key Man risk is reduced, and in Courtland’s opinion to a meaningful extent, in that investors in the Funds are permitted to terminate incremental commitments to the Funds (that portion of a commitment not already invested) and/or remove the incumbent General Partner in the event that Mr. Grayken spends less than 75% primarily on the business of the Funds. Leverage/Currency. The Funds may utilize up to 75% leverage on a stabilized basis. Use of significant leverage increases risk with respect to potentially adverse economic developments, including rising interest rates, continued deterioration in asset values or investment cash flows and the availability of reasonably priced credit. The current illiquidity in certain markets, such as the U.S., heightens this concern since leverage magnifies the impact of value declines. Changes in foreign exchange rates or restrictions on repatriating foreign currency may also adversely impact returns.

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basis and 20% on a net basis).

Advantageous Market Conditions. The global economic environment should provide a number of compelling investment opportunities for experienced investors. Based on its internal research, Lone Star has estimated that global write-downs on secured and unsecured loans will likely exceed $3.4 trillion. That figure includes lending activity for single family residential and commercial real estate assets, corporate loans and consumer debt. Many current creditors or investors in such securitizations will be forced to liquidate such loans, or the underlying assets that collateralize such loans, as they deleverage or are otherwise forced to recapitalize. Courtland believes that Lone Star is well positioned to capitalize on these opportunities on behalf of its investors. Deal Sourcing Capabilities. Courtland believes that Lone Star has the necessary expertise and infrastructure in place in each of its target markets to successfully execute the investment strategies of the Funds. Since 1997, Lone Star has developed an established global presence in each of the three target markets comprised of the U.S., Western Europe, and Japan. In the U.S., Lone Star has recently established itself as one of the leading investors in distressed residential mortgage-related securities. In Europe (principally Germany and France) Lone Star has been actively acquiring non-performing loan portfolios and real estate since 1998, and more recently purchased controlling interests in three financial institutions. In Japan, Lone Star is among the largest investors in distressed assets sourced from troubled financial institutions. Alignment of Interests. Lone Star provides significant co-investment opportunities for its key professionals and the affiliated Hudson Advisors, which entities have historically made significant co-investments alongside limited partners. Additionally, the base annual incentive fee is reasonable given the opportunistic nature of the Funds while the base incentive fee, as designed, only begins to truly reward the GP after a mid-teens return has been delivered to investors in the Funds.

Of note, the GP will attempt to hedge all currency risks within the Funds.

Fund Size/Scalability. While Lone Star wants to capitalize on existing market opportunities it considers substantial, it has raised increasing amounts of capital in each of its recent funds as evidenced by the $396 million it raised for its Lone Star Fund I when compared to the $7.5 billion it raised for its Lone Star VI Fund. The current capital raise could reach as high as $10 billion across the Funds. A such, there exists a risk that the GP may have some pressure to effectively invest this significant amount of money over the prescribed Investment Period or that the firm’s orgazational resources might not be sufficient to fully accommodate the incremental business of the Funds. Lone Star is unlikely to achieve the targeted capital raise due to the difficult nature of the capital market conditions. Furthermore, there are likely to be a great deal of distressed opportunities due to current market conditions. Legal Issues/Headline Risk. There has been significant litigation regarding a foreign investment that Lone Star executed in Fund VI. In particular, Paul Yoo (a Lone Star employee in Korea) was convicted of stock price manipulation and sentenced to five years in prison as a result of Lone Star’s acquisition and subsequent sale of a publicly traded Korean bank. On appeal, the Seoul High Court acquitted Mr. Yoo on the stock manipulation charge and released him from custody. The prosecutors have since appealed the decision to the Korean Supreme Court. Incidents such as these, with or without merit, can consume significant firm time and resources, and potentially impact the performance of the Funds. In addition, such situations could ultimately impact Lone Star’s ability to conduct business in certain foreign markets. International Risks. Investment in foreign real estate exposes investors to many risks, including economic and political instability, tax changes, trade unions, underdeveloped legal systems, confiscation of assets, war, restrictions on capital transfers, and government influence not customary in the U.S. While Lone Star will generally invest only in markets where sufficient foreign direct investment and legal institutions exist, in general, each foreign country is different than every other.

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Market Flexibility. The key personnel of the GP have demonstrated discipline in underwriting investments with a conservative gross return expectation of 25%. In addition, the key personnel have also demonstrated they will change investment market focus if market conditions warrant. The target allocation for the Funds are as follows and demonstrates the flexibility of potential targets: LSF VII Residential loans and securities (60% - 70%) Operating companies (10% - 20%) Corporate and consumer debt (10% to 20%) LSREF II Distressed Loans (60% to 70%) Commercial real estate securities (20% to 25%) Equity (traditional CRE deals) (less than 10%)

Non-Traditional Investments. Assets acquired in prior funds include banks, a construction company, golf courses and other assets not traditionally included within real estate funds. Investments are also likely to include real estate operating company (“REOC”) and other operating company (typically with significant real estate assets) investments, which are often very complex investments and not often understood by the institutional investment community. Importantly, the GP reports that non-traditional investments (e.g., banks and construction companies) were purchased based on the real estate value of the underlying assets with no entity or business value attributed at purchase.

III. COURTLAND DUE DILIGENCE ACTIVITIES

Courtland has completed the following due diligence activities for the evaluation of the Funds:

Reviewed the offering materials for the Funds

Reviewed the track record of prior Lone Star funds

Discussed on-going legal issues with Lone Star management

Researched target markets for market conditions and economic data

Met with Lone Star personnel, including John Grayken in Cleveland and in New York City

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IV. FIRM OVERVIEW

ORGANIZATIONAL BACKGROUND Lone Star is a global investment firm that acquires distressed debt and equity assets including corporate, commercial real estate, single family residential and consumer debt products as well as financially-oriented and asset rich operating companies. Since the establishment of its first fund in 1995, the principals of Lone Star have organized private equity funds totaling $24 billion of capital that has been invested globally through Lone Star’s worldwide network of affiliate offices. The GP is headquartered in Hamilton, Bermuda, and has affiliate offices in Dallas, New York, Washington DC, London, Frankfurt, Paris, and Tokyo. Hudson Advisors, LLC (“Hudson”) (Lone Star’s affiliate asset management company owned by John Grayken), directly or through one or more of its affiliates, carries out the day-to-day management and servicing of the assets acquired by the prior Lone Star Funds and will continue to serve in this capacity for the Funds. Further, such services are provided to Lone Star on an exclusive basis as Hudson does not engage in any other third party business activities. Hudson and its affiliate entities collectively have domestic offices located in Dallas and New York with affiliated offices in Japan, the United Kingdom, Germany, Luxembourg, and France. Hudson provides a complete range of investment-related services including underwriting/valuation, legal, financial and tax accounting/reporting, closing, risk management, cash management, property tax management, operational, and compliance audit, as well as traditional loan servicing and asset management services. FIRM PERSONNEL Worldwide Origination and Operating Capacity – Total Employees

ASSETS UNDER MANAGEMENT Assets under management total approximately $32.0 billion as of June 30, 2009. Total investor capital commitments for prior Lone Star Funds are as follows:

Fund Name Formation Year Fund Size

Fund I 1996 $0.396 b.

Fund II 1998 $1.228 b.

Fund III 2000 $2.262 b.

Fund IV 2001 $4.208 b.

Fund V 2004 $5.050 b.

Fund VI 2007 $7,465 b.

Real Estate Fund I 2007 $2.383 b.

Brazos 1995 $0.247 b.

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Since 1993, Lone Star has played a significant role in the acquisition of a variety of investments in over 927 different investment transactions. These investments represent a broad diversity of transactional experiences ranging from operating companies, high leverage debt financing, portfolios of secured and unsecured performing loans, real estate, and financial assets, directly or through joint ventures, including complex transactions involving domestic and international operating companies, partnership interests, and debt/equity securities. Investments represented in these transactions have ranged from traditional real estate investments, such as office, multi-family, industrial, and retail to private equity investments in operating and financial companies. Through prior Lone Star Funds I-VI, Lone Star Real Estate Fund I and the Brazos Funds, the senior management and key employees of the GP have managed over 740,000 assets acquired at an aggregated purchase price of over $63.9 billion since 1993. KEY PERSONNEL/BIOGRAPHIES Biographies of the key LSF VII personnel are provided in the table below:

John Grayken Mr. Grayken has the ultimate management control of the general partner for each of the prior Lone Star Funds and Brazos Fund and will continue in this role for the General Partner with respect to the Funds. In this capacity, he has served as a key participant in sourcing, negotiating, and structuring all investments and has been the primary individual responsible for formulating investment strategy for the funds. Prior to organizing the prior Lone Star Funds and Brazos Fund, he directed the Brazos Partners portfolio and, as C.O.O. of and an investor in Colony Advisors, he directed the RTC-West Coast transaction. In addition to his managing partner duties, he is the sole owner of the corporations that serve as the general partners of each of the prior Lone Star Funds and Brazos Fund and is the sole beneficial owner of Hudson. Mr. Grayken holds a B.A. degree from the University of Pennsylvania and an M.B.A. degree from Harvard Business School.

Len Allen Mr. Allen will direct the origination activities in North America through an affiliate of the GP, the capacity in which he has served for certain of the prior Lone Star Funds. Mr. Allen’s previous experience includes Lehndorff USA and GE Capital. Mr. Allen holds a B.B.A. degree from the University of North Texas.

Bruno Scherrer Mr. Scherrer will direct the origination activities in Europe for an affiliate of the GP, the capacity in which he has served for certain of the prior Lone Star Funds. Mr. Scherrer previously was associated with Lehman Brothers. Mr. Scherrer holds a Masters degree from ESSEC Business School in Paris, France.

Shuichi Tajima Mr. Tajima will direct origination activities in Japan through an affiliate of the GP. Mr. Tajima’s previous experience includes positions with GE Capital, Japan and the Long-Term Credit Bank of Japan. Mr. Tajima holds a B.A. degree from Hitotsubashi University and an M.B.A. degree from University of Chicago.

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Biographies of the key LSREF II personnel are provided in the table below:

John Grayken Please see above.

Andre Collin Mr. Collin will direct the origination activities in North America through an affiliate of the GP, the capacity in which he has served for LSF VI U.S., and LSF VI Bermuda. Mr. Collin’s previous experience includes serving for three years as First Vice President, Real Estate Investments at PSP Investments and serving for ten years as President and Chief Operating Officer of CDP Capital – Real Estate (Cadim Inc.). Mr. Collin is a Chartered Accountant and holds a B.B.A. degree from Montréal’s École des Hautes Etudes’ Commerciales and an M.B.A. from McGill University.

Olivier Brahin Mr. Brahin will direct the origination activities in Europe through an affiliate of the GP, the capacity in which he has served, or been involved, for certain of the prior Lone Star Funds. His previous experience includes senior positions with KBC France, UIC-Sofal/Archon Group and JER Enterprise France. Mr. Brahin holds a Masters degree in Finance and Economics from the University of Paris IX Dauphine.

Takehisa Takamatsu

Mr. Takamatsu will direct origination activities in Japan through an affiliate of the GP, the capacity in which he has served for LSF IV U.S., LSF IV Bermuda, LSF V U.S., LSF V Bermuda, LSF VI U.S., and LSF VI Bermuda. Mr. Takamatsu’s previous experience includes positions with the Japanese affiliate of Hudson, Cargill Investments Japan, and the Industrial Bank of Japan. Mr. Takamatsu holds a B.A. degree from Sophia University and an M.B.A. degree from Carnegie Mellon University.

SUCCESSION PLAN AND KEY MAN PROVISION: In the event of the death or disability of John Grayken, the management and liquidation of existing investments for the Funds (Lone Star Fund VII and LSREF II) and the Prior Lone Star Funds (Lone Star Fund VI, LSREF II and other prior funds) would be governed by a committee comprised of the Regional Partners in addition to the President/CFO of Hudson, General Counsel, and Director of Investor Relations. The decision to terminate the Commitment Period of the Funds will continue to be at the sole discretion of the Limited Partners, as further explained under the key man provision which is cited on the following page. John Grayken, by and through the GP and/or one or more of his Affiliates, must spend at least 75% of his business time on activities relating to the Lone Star Fund VII, LSREF II, the Prior Lone Star Funds, his duties associated with Hudson, and when permitted, the formation and operation of successor investment entities. Violation of the “Key Man” provision will allow the Limited Partners to individually terminate their Commitments or, upon certain votes set forth in the Partnership Agreements to remove the GP. Management and Liquidation of Remaining Assets With regard to management and liquidation of the remaining assets, Mr. Grayken's position is that sufficient interest alignment exists within the senior management group and the LPs whereby GP partners would continue to maximize and preserve asset value. Because all of the GP partners have a significant amount of their personal net worth invested in the funds, they would have an incentive to fulfill their fiduciary duties and manage liquidation of the remaining assets (subsequent to Mr. Grayken's death or disability). Continuation of the Investment Period Should there be an indication by LPs that they have an interest in continuing to invest unfunded capital commitments (subsequent to Mr. Grayken's death or disability), there is a presumption that the “senior management governing committee" would convene to develop an operating proposal that would be submitted to all LPs for their review and consideration. Pursuant to the Key Man provision, each LP would

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have the unilateral right to decide whether they would immediately cancel their remaining unfunded commitment or alternatively accept the plan of operation submitted by the senior management governing committee and continue to fund their respective capital commitments through the remainder of the investment period. Below are the organization charts for the Funds. LSF VII Organizational Chart

The Investment Committee will at all times include John Grayken, the three Principals that direct the regional operations of LSF VII and Lone Star’s general counsel. LSREF II Organizational Chart

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The Investment Committee will at all times include John Grayken, the three Principals that direct the regional operations of LSREF II and Lone Star’s general counsel.

V. INVESTMENT STRATEGY

LONE STAR INVESTMENT STRATEGY Personnel from the GP Hudson and each of their affiliates bring a wide array of experience and backgrounds, especially through their broadly based and extensive knowledge of investments, including a long history of working in a variety of financial asset, corporate, and real estate-related pursuits, including as attorneys, developers, investors, lenders, and asset managers. Such experience as practitioners, as opposed to investment advisers, provides valuable market knowledge as well as the analytical discipline necessary to evaluate prospective investment opportunities. Hudson, Lone Star’s fully-dedicated asset servicing platform, carries out the day-to-day management and servicing of the assets acquired by the prior Lone Star Funds and will continue to serve in this capacity for the Funds. Hudson is a full-service asset management company experienced in managing real estate, performing loans, and secured and unsecured non-performing loans. Hudson is organized into four main areas: asset management, operations, legal, and audit compliance. Hudson emphasizes the aggressive and continuous management of each asset in the portfolio. Given that Mr. Grayken owns Hudson, concerns regarding the level of fees charged by Hudson to the Fund will be resolved through review to ensure that profit levels are reasonable as determined by independent advisors. Lone Star’s core investment strategy is to seek investment opportunities in markets that have suffered an economic and banking crisis which has resulted in distress to the financial system. Lone Star focuses on investment opportunities where the Funds can offer a total solution to a holder of distressed assets. Lone Star believes that the combination of its global team, scalable platform, and vast experience provide it with a distinctive competitive edge when implementing its strategy. The most successful executions are realized when Lone Star is able to exploit the following conditions:

Liquidity is restricted and financing is difficult for asset buyers to obtain.

Financial institutions’ balance sheets are under pressure and there is a need to move high volumes of assets to manage capital, deleverage, and build liquidity.

Lone Star is able to achieve a favorable position in a transaction through its large network of relationships across the globe.

The Funds’ targeted acquisitions primarily fall under one of the following approaches to the strategy:

Buying large multi-asset portfolios at wholesale prices and selling them at retail prices.

In the case of LSF VII, making controlling investments in asset rich companies whose acquisition price is principally supported by the value of the underlying assets.

The GP is seeking global investment opportunities in Japan, Western Europe, and the United States. LSF VII will be composed of approximately 70% U.S., 20% Western Europe, and 10% Japan. LSREF II will be comprised of approximately 33% U.S, 33% Western Europe, and 33% Japan as shown in the charts on the following page.

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Geographic Targets

Lone Star Fund VII Lone Star Real Estate Fund II

U.S.

70%

Europe

20%

Japan

10%

U.S.

34%

Europe

33%

Japan

33%

Lone Star’s core investment strategy is to seek investment opportunities in markets that have suffered an economic and banking crisis which has resulted in distress to the financial system. From its inception during the U.S. Savings and Loan Crisis of the early 1990’s, Lone Star has maintained a primary strategic focus of buying distressed asset investments (primarily distressed debt assets) in developed markets where there is a disequilibrium between the supply and demand of such assets as a result of an economic or banking crisis. Rather than change its core investment strategy as markets recover from the aforementioned disequilibrium, the GP’s operating practice calls for winding down operations in the recovering market and refocusing its resources on economic environments for which a distressed strategy is best suited. For example, as the U.S. Savings and Loan Crisis came to an end in the mid 1990s, Lone Star was successful in relocating and implementing the investment strategy into other countries such as Canada (1995), Japan (1997), Korea (1998), Taiwan (2000), and Germany (2002) as each of these countries experienced their own economic and banking crises. Additionally, as some of these markets recovered to the point that the strategy no longer was viable (Canada, Korea, and Taiwan), Lone Star significantly contracted or in some cases ceased its operations. LSF VII will invest in a broad range of financial and other investments including, but not limited to, investments in single family residential debt products, secured and corporate unsecured debt, consumer debt products, financially-oriented operating companies, and operating companies with significant tangible assets, through the acquisition of portfolios of assets and entity-level debt and/or equity, but excluding any “Commercial Real Estate.” The Funds consider “Commercial Real Estate” to mean all real estate and real estate-related assets that are investments in (i)multi-family residential real estate and related assets, (ii) retail real estate and related assets, (iii) industrial real estate and related assets, (iv) hotels and other hospitality related assets, and (v) commercial office real estate and related assets. LSF VII may invest in single family residential real estate. However, LSF VII may not invest in Commercial Real Estate, except in asset portfolios or mixed use development where Commercial Real Estate is not the predominant asset class. LSREF II will invest in a broad range of financial and other investment assets in Commercial Real Estate including, but not limited to, investments in secured and unsecured debt, high leverage debt financing, real estate-related debt and equity assets, operating companies and securities, including real estate portfolios, single asset acquisitions, commercial mortgage-backed securities (“CMBS”), joint ventures, development opportunities, tax exempt bonds and limited partnership interests. LSREF II will not invest in single family residential real estate, except in asset portfolios or mixed use development where single family is not the predominant asset class.

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LSF VII will be composed of approximately 60%-70% single family residential loans and securities, 10%-20% financially oriented and asset rich operating companies, and 10%-20% corporate and consumer debt products. LSREF II will be composed of approximately 60%-70% distressed loans, 20%-25% CMBS, and less than 10% equity (traditional CRE deals) as show in the charts below. Investment Type Targets

Lone Star Fund VII Lone Star Real Estate Fund II

Operat ing

C o mpanies

20%

R esidentia l

R eal

Estate

70%

C o rpo rate

C o nsumer

10%

C R E Lo ans

70%

C R E

Securit ies

20%

Equity

10%

INVESTMENT OPPORTUNITY United States Execution Capacity LSF VII: Affiliates of the GP employ more than 10 investment professionals in New York and Dallas who are engaged in the identification, sourcing, origination, and structuring of investments and affiliates of Hudson employ approximately 70 people in New York and Dallas who are engaged in loan servicing and asset management activities. In addition, portfolio companies of certain prior Lone Star Funds own two residential servicing platforms: Accredited Home Lenders, based in San Diego, which employs approximately 170 people across three offices and services $5 billion, and CIT Home Lending, which employs approximately 270 people and services 66,000 loans totaling $8.9 billion. Both operations include primary servicing, special servicing, and REO management. In the U.S., Lone Star has invested $5.9 billion of equity capital in 35 transactions of the same type that will be the primary target of LSF VII. LSREF II: Affiliates of the GP employ 8 investment professionals in New York and Montreal who are engaged in the identification, sourcing, origination, and structuring of real estate investments. In addition, affiliates of Hudson employ approximately 70 people in New York, Montréal, and Dallas who are engaged in loan servicing and asset management. In the U.S., Lone Star has invested $1.2 billion of equity capital in 96 transactions of the same type that will be the primary target of LSREF II. Europe Execution Capacity LSF VII: Affiliates of the GP employ 11 investment professionals in London and Frankfurt who are engaged in the identification, sourcing, origination, and structuring of investments. In addition, affiliates of the prior Lone Star Funds and Hudson employ approximately 300 people in London, Frankfurt, Munich, Paris, Brussels, Dublin, and Luxembourg who are engaged in loan servicing, asset management activities and fund operations. In Europe, Lone Star has invested $1.9 billion of equity capital in 81 transactions of the same type that will the primary target of LSF VII.

14

LSREF II: Affiliates of the GP employ eight investment professionals in London, Frankfurt, and Paris who are engaged in the identification, sourcing, origination, and structuring of real estate investments. In addition, affiliates of prior Lone Star Funds and Hudson employ approximately 300 people in London, Frankfurt, Munich, Paris, Brussels, Dublin, and Luxembourg who are engaged in loan servicing, asset management activities, and fund operations. In Europe, Lone Star has invested $2.3 billion of equity capital in 75 transactions of the same type that will be the primary target of the LSREF II. Japan Execution Capacity LSF VII: Affiliates of the GP employ 11 investment professionals who are engaged in the identification, sourcing, origination, and structuring of investments and affiliates of Hudson employ approximately 290 people who are engaged in loan servicing and asset management activities, representing one of the largest investment platforms in Japan. In addition, AEL Ltd., a portfolio company of certain prior Lone Star Funds owns a consumer finance servicing platform with a staff of 74 people who are capable of processing up to 750,000 accounts or $3 billion in loans. In Japan, Lone Star has invested $2.3 billion of equity capital in 86 transactions of the same type that will be the primary target of LSF VII. LSREF II: Affiliates of the GP employ 11 investment professionals who are engaged in the identification, sourcing, origination, and structuring of real estate investments. In addition, affiliates of Hudson employ approximately 290 employees and represent one of the largest investment platforms in Japan. INVESTMENT PROCESS Proposed investment transactions will be documented in the form of an investment memorandum and must be approved by the Investment Committee. The staff of the GP will identify and initially review and analyze each potential investment by the Funds meriting such review. As part of the overall review process, commercially reasonable due diligence will be conducted. Once the GP has satisfactorily completed its review process, the acquisition of each investment must be approved by the Investment Committee, which is comprised of John Grayken, the three Principals that direct the regional operations of the Funds, and Lone Star’s general counsel. The Investment Committee will provide the final approval of all acquisitions of the Funds with an affirmative vote of no less than three members required to accept an investment. Following final approval, the GP may formally make an investment. Senior management of Hudson meets regularly with representatives of the GP to discuss the status of assets under management and address any proposed changes to the underlying business plans as needed. This review is conducted no less than every 90 days as the projected cash flows for each investment are reviewed and updated before inclusion in the quarterly reports submitted to investors. For those assets where Lone Star controls the liquidation strategy, to the extent there are changes in the market or the assets are expected to over perform or underperform, the portfolio management teams may run sensitivity analyses based on various value drivers to determine whether a reforecasting is required. For example, portfolio management teams run sensitivity analyses on the value drivers for each investment in the portfolio of residential securities on a quarterly basis. These analyses show a base case, best case, and stress case scenario, illustrating how changes in value drivers affect the IRR of an investment. Senior management and key employees of affiliates of the GP, as well as key employees of Hudson, have developed long-standing working relationships, disciplined procedures and substantial asset management expertise by participating in the formation and/or operation of the prior Lone Star Funds. These affiliated entities have managed approximately 740,000 assets acquired at an aggregate purchase price of over $63.6 billion since 1993.

15

The following table shows the track record of all prior Lone Star investments as of September 16, 2009.

VI. TRACK RECORD

16

Overall, Lone Star has produced significant positive returns. However, not all funds have met their targeted returns. During Fund I’s investment period, the supply of distressed assets opportunities began to contract in the North American market. In response to changing market fundamentals, the North American origination team broadened its investment scope, acquiring certain investments late in the investment period which lacked the requisite control characteristics to effect monetization at the GP’s discretion. As a result, the timing of the liquidation of these investments was extended, resulting in a negative impact on the overall fund-level returns. From this experience, Lone Star recognized that rather than modify its distressed investment strategy as markets recover, resources would be redeployed to markets where a distressed strategy is best suited. Beginning in 1997, Lone Star began pursuing distressed debt and equity investment opportunities in Japan and Europe, establishing a global presence in each of the Funds’ three target markets. Fund V has been directly impacted by the global economic events of the last two years as the majority of its investments were acquired between 2005 and 2007, a challenging investment period that witnessed rising real estate values. Lower projected returns for Fund V are primarily attributable to the following:

Disappearance of Available Credit: Prospective buyers have experienced significant difficulties securing the financing necessary to acquire assets, resulting in an extension of the holding period for many Fund V investments.

Deleveraging of Investments: As a result of the current market situation, it became challenging to secure favorable refinancing terms for certain Fund V investments with short to mid-term debt maturities. Accordingly, Lone Star infused equity capital into certain leveraged Fund V investments, resulting in a decrease in projected returns.

The GP continues to closely monitor the remaining assets held by Fund V and expects a stabilization of the projected return profile going forward. The following tables show a summary of similar investments to each of the Funds:

17

Net Projected

Closing Deal Contributions Distributions Capital Equity

Transaction Date Type Realized? * to Date to Date Invested Multiple

LONE STAR FUND VI

Japan

Stellar Jun-08 Financial Operating Co. No 232,652 - 232,652 1.76

Europe

IKB Deutsche Industriebank AG Oct-08 Financial Operating Co. No 675,220 7,649 667,571 2.07

G-Mac Apr-09 Whole Loans No - - - 1.50

North America

Merrill Lynch Sep-08 CDOs No 1,608,908 221,919 1,386,989 2.14

Merrill Lynch II Sep-08 RMBS No 1,025,859 491,606 534,253 1.39

MCB I May-09 RMBS No 36,750 - 36,750 2.50

MCB III Jun-09 RMBS No 34,888 - 34,888 2.00

MCB II May-09 RMBS No 55,468 - 55,468 1.82

Project Mercury Jul-08 Whole Loans No 1,037,385 1,813 1,035,572 1.75

Tiberius Jun-08 CDOs No 366,956 121,871 245,085 1.43

RBS II Jul-08 RMBS No 174,131 24,305 149,826 1.48

Kleros Real Estate III May-08 CDOs No 68,827 15,774 53,053 1.54

RBS May-08 RMBS No 57,827 3,457 54,371 1.35

RBP I May-09 RMBS No 58,212 - 58,212 3.41

Residential Loan Pool I Mar-08 Whole Loans No 14,700 11,658 3,042 1.30

Residential Loan Facility Aug-08 Whole Loans No 53,900 21,170 32,730 1.42

Total Lone Star Fund VI Lone Star Fund IV 5,501,683$ 921,221$ 4,580,462$ 1.82

* Defined as: greater than 80% of Contributed Capital or 100% of projected distributions have been returned as of the reporting date.

Summary of Fund VII Type Investments

as of September 16, 2009

(dollar amounts in thousands)

Net Projected Gross

Closing Deal Contributions Distributions Capital Equity Projected

Transaction Date Type Realized? * to Date to Date Invested Multiple IRR

LONE STAR REAL ESTATE FUND I

Japan

Diana Jun-08 Office No 61,740 - 61,740 1.62 25%

JREF 2008 Mar-08 Mixed No 122,500 - 122,500 1.25 21%

Loop 101 Mar-08 Office No 93,100 - 93,100 1.22 22%

REF Hotel Investments I Aug-08 Hotel No 70,560 - 70,560 1.52 22%

Europe

Project Caroline Jun-08 Mixed No 467,460 - 467,460 1.62 25%

North America

Exhibition City Aug-08 Non-Performing Loans No 172,480 - 172,480 1.85 25%

Golden Age Jan-09 Residential No 141,120 735 140,385 2.10 25%

Summer Sep-09 Whole Loans No - - - 1.50 25%

Total Lone Star Real Estate Fund I Lone Star Fund IV 1,128,960$ 735$ 1,128,225$ 1.56 24%

* Defined as: greater than 80% of Contributed Capital or 100% of projected distributions have been returned as of the reporting date.

Summary of LSREF II Type Investments

as of September 16, 2009

(dollar amounts in thousands)

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18

Below is a comparison of current debt funds’ size, fees, and target return. In Courtland’s opinion, both Lone Star’s base management and incentive fees are competitive given the firm’s track record, especially considering the significant fee breaks for larger investors, and in relation to its peers.

FUND SIZE MANAGEMENT FEES/PROMOTED INTERESTS TARGET RETURN

Cornerstone Core Mortgage Fund I, L.P.

$1.25 b

Management Fee: 0.48% on invested capital

Incentive Fee: 7% preferred return hurdle, 15% to the GP thereafter

8%-9%, gross

GE Capital Real Estate Debt Fund, L.P.

$2.00 b

Management Fee: 1.0% on committed capital during the investment period; 1.0% of invested equity thereafter


10%-13%, gross

Heitman Strategic Finance Partners, L.P.

$0.25 b

Management Fee: 0.75% on committed capital

Origination Fee: 0.75% on the total cost of fund investments


12%-15%, net

Invesco Mortgage Recovery Fund, L.P.

$2.00 b

Management Fee: 1.0% on invested capital

Incentive Fee: 8.0% preferred return hurdle, 20% to the GP thereafter

20%, gross

LoanCore Capital Fund II, L.P.

$0.50 b

Management Fee: 1.0% on committed capital during the investment period, 1.0% on invested capital thereafter

Origination Fee: Up to 0.50% on any origination fees generated.


15%, gross

LoneStar Fund VII, L.P. &

LoneStar Real Estate Fund II, L.P.

$5.00 b

Management Fee: 1.2% on committed capital during the investment period, 0.45% on invested capital thereafter (for investments less than $200mm)

Incentive Fee: 8% preferred return hurdle, 50% to the GP until LPs receive a 13% return 20% to the GP thereafter

25%, gross

Madison Realty Capital Sullivan Debt Fund, L.P.

$0.30 b

Management Fee: 1.5% of committed capital during the investment period, 1.5% of invested capital thereafter

Incentive Fee: 9% preferred return hurdle, 50% to the GP until the GP receives 20% of total distributions, 20% to the GP thereafter

18%, net

Mesa West Real Estate Income Fund II, L.P.

$0.50 b

Management Fee: 1.5% on committed capital during the investment period, 1.5% on invested equity thereafter

Incentive Fee: 8% preferred return hurdle, 20% to the GP until the LPs receive a 12% return, 50% to the GP thereafter

14%-16%, gross

Oaktree PPIF Private Fund, L.P.

$1.10 b

Management Fee: 0.65% of invested capital during the investment period, 0.65% on the lower of investment cost and net asset value thereafter

15%-20% gross

VII. FEES

19

Incentive Fee: 8% preferred return hurdle, The GP shall receive distributions equal to the internal rate of return of the Fund, net of management fees and expenses, but gross of carried interest (“Adjusted IRR”). If the Adjusted IRR is less than 8.0%, the incentive percentage will be zero. In no event may the incentive percentage exceed 25%.

PCCP First Mortgage II, L.P.

$0.50 b

Management Fee: 0.25% on committed capital and 0.50% in invested capital during the investment period, 0.75% on invested capital thereafter


7%-8%, net

Principal CMBS Separate Account

TBD

Management Fee: 0.40% to 1.0% based on size and risk profile of the proposed separate account

Incentive Fee: TBD

8%-10%, net

Rialto Real Estate Opportunity Fund, L.P.

$0.75 b

Management Fee: 1.5% on committed capital during the investment period, 1.5% on invested capital thereafter

Incentive Fee: 10% preferred return hurdle, 20% to the GP until LPs receive a 14% return 50% to the GP until GP receives 20% of total distributions, 20% to the GP thereafter

20%, net

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VIII. U.S. MARKET CONDITIONS

The Current Problem is a Huge Financing Gap Commercial Real Estate The ongoing global financial crisis, which started with the collapse of the U.S. property market in mid-2007, has resulted in massive write-downs and credit losses at banks and other financial institutions. Lenders that survived the resulting credit and liquidity crunches have hoarded capital and, for all practical purposes, stopped making new loans. To the extent that balance sheet lenders are providing new loans, most are focused on existing client relationships and legacy loan books. As illustrated in the chart below, since the start of the global financial crisis in mid-2007, banks have applied considerably more stringent lending standards on commercial real estate loans. Overall, loan standards have never been tighter. As a result, banks reported that originations on commercial loans dropped substantially during the period.

Most Stringent Standards on Record

-40%

-20%

0%

20%

40%

60%

80%

100%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Net % of Banks Tightening Commercial Real Estate Loan Standards Source: Federal Reserve

U.S. banks and other financial institutions need significant new capital. These entities need to rid themselves of poorly performing, illiquid assets in order to free up their balance sheets for new lending activity, which in turn is sorely needed by the struggling economy. To date, these entities have refused to sell such assets into the marketplace at severely depressed prices, which would in turn force them to recognize additional loan losses and further crimp their mandatory capital ratios. As a result, many are engaged in practices that will only push the problem further into the future which is not truly providing a practical solution. These practices are referred to as “extend and pretend” efforts, whereby banks are effectively turning a blind eye to potential borrower delinquencies and defaults in order to forestall more formal remediation, including foreclosures. If underlying properties are generating sufficient cash flow to service debt, then maturity events can generally be delayed. If underlying properties are failing to generate sufficient interest coverage, banks have the option of working with borrowers to restructure loans or offer discounted payoffs of principal. To the extent that banks can continue to borrow from the Federal Reserve and traditional depositors at historically low rates, their “newfound profitability” allows additional flexibility to deal with legacy loans.

21

In order to jumpstart economic growth, capital must flow more freely to eligible borrowers. Since banks and other traditional sources of debt capital remain on the sideline, or are temporarily to permanently impaired (e.g., commercial real estate securitizations), the opportunity for highly attractive risk-adjusted returns should persist for ready sources of debt capital. A key driver of this distress and the related investment opportunity is described in the graphic below. An estimated $2.5 trillion in U.S. commercial real estate loans will mature and come due over the next five years. As commercial property values and banks’ appetite for risk continue to decline, it is extremely unlikely that these loans will be renewed, or rolled over, on terms that bear any resemblance to the original.

Forward Commercial Real Estate Maturities – Estimate for 2010-2018

Source: Mortgage Bankers Association, Trepp, Federal Reserve Flow of Funds and KBW Research

Legacy sources of financing (e.g., banks and insurance companies) will be significantly constrained in meeting this demand for new capital. Adding to the dilemma is that all metrics upon which borrowers and lenders rely have now trended wholly in favor of lenders. With pronounced declines in asset values and recession-fed drags on occupancy and rents, the few active lenders are basing new loans on lower valuations, increased margins, and more conservative loan-to-value ratios. All of the above pressure the commercial borrower to come to the table with higher quality properties and more equity, ultimately resulting in higher borrowing costs.

The Commercial Real Estate Capital Stack – Then and Now

Source: Courtland Partners, Ltd.

65%

50%

15%

18%

25%

2%

25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2009

A-Note B-Note Mezzanine Equity

22

In the capital stack above, note that a legacy commercial loan from vintage years 2005-2007 could have been financed with as much as 98% debt capital and only 2% equity. Things have changed. Not only has the underlying property value likely declined by more than 30%, but forward loan-to-value ratios have declined as well. Borrowers attempting to refinance existing commercial real estate loans are now faced with the grim reality that their properties are likely worth significantly less than they were even a short while ago. Further, to the extent that such loans cannot be worked out or substantially paid down, a borrower’s entire equity investment is likely wiped out. In fact, depending upon the property in question and the original loan-to-value thereon, even the first mortgage lender may fail to recover its full investment.

The Impact of Steep CRE Value Declines on Less Secured Investors

Source: Courtland Partners, Ltd.

As shown below, this funding gap between historic and current commercial real estate valuations will not be filled (at least in the near-to-intermediate term) by any significant new issuance of CRE securitizations. New CMBS issuance is almost non-existent today and off 90% or more from highs witnessed in 2006 and 2007.

Annual CMBS Issuance – 1990 to 2010

$0

$50

$100

$150

$200

$250

$300

$350

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Non-U.S.

U.S.

Source: Commercial Mortgage Alert, CMSA

23

In all, borrowers will have to find a way to come up with substantial new equity capital in lieu of handing properties back to lenders. In turn, there will be a significant need for fresh debt capital for some time. Whoever is able to assist borrowers to bridge this “financing gap” to a healthier economic environment stands to reap substantive risk-adjusted returns. Residential Real Estate Residential mortgage-backed securities (“RMBS”) are formed by the aggregation of hundreds of individual single-family mortgage loans, which have historically been bundled and sold to investors looking for solid current income and the safety of the underlying principal. As underlying borrowers make monthly payments of principal and interest on their mortgage loans, those cash flows are paid out to investors that own the mortgage-backed securities. Since the collateral underlying an RMBS is not a single mortgage loan from a single homeowner but generally hundreds more, the risk of any one borrower going into payment delinquency or default is spread over the entire pool, giving investors a degree of comfort that no single borrower or geographic concentration of borrowers could negatively affect the underlying cash flows. Since any particular RMBS issue may not have sufficient diversification in and of itself to satisfy potential investors, it is not uncommon for investors to purchase complementary RMBS issues for fuller diversification. Typical RMBS investment portfolios are well diversified by borrower quality, borrower geography, loan vintage and loan sponsor, et al. Unlike the aforementioned “financing gap” that currently exists in commercial real estate, investment opportunities in RMBS comprise the purchase of existing, non-agency RMBS from troubled financial institutions struggling with the increasingly poor performance of those legacy securities. These packaged loans were either purchased for investment or, in many cases, those that could not be re-packaged and sold as RMBS before that market collapsed. In many cases, financial institutions ended up “stuck” with these poorly performing assets, and subsequently were forced to mark the assets to market at significantly reduced prices and therefore were compelled to hold additional, qualifying collateral in reserve.

U.S. Non-Agency Securities Outstanding

Source: Loan Performance, Fitch Ratings, Moody’s, SIFMA, Thomson Reuters

Until recently, RMBS were considered relatively safe fixed-income investments due to most underlying borrowers being current on monthly principal and interest payments and few ever losing their homes to foreclosure. As such, historic delinquency and default rates remained very low leading to the performance of most RMBS securities staying in line with investor expectations.

24

However, the recent boom in residential real estate prices led to easy credit, loose-to-fraudulent underwriting standards and incapable-to-complicit rating agencies. The inevitable result was an American homeowner who increasingly found it difficult, if not impossible, to stay current on his mortgage, leading to delinquency and default rates that could never have been predicted by historic precedent.

U.S. Residential Foreclosure Activity – 1Q10

Source: RealtyTrac

U.S. Metro Areas with the Highest Foreclosure Activity

1Q2009 % Households

Metro Area, State in Foreclosure

Las Vegas-Paradise, NV 4.48

Merced, CA 4.21

Cape Coral-Fort Myers, FL 3.85

Stockton, CA 3.72

Riverside-San Bernardino, CA 3.54

Modesto, CA 3.42

Bakersfield, CA 2.70

Vallejo-Fairfield, CA 2.69

Phoenix-Mesa-Scottsdale, AZ 2.48

Port St. Lucie, FL 2.15

1Q2010 % Households

Metro Area, State in Foreclosure

Las Vegas-Paradise, NV 3.51

Modesto, CA 2.93

Cape Coral-Fort Myers, FL 2.82

Riverside-San Bernardino-Ontario, CA 2.81

Stockton, CA 2.77

Merced, CA 2.76

Phoenix-Mesa-Scottsdale, AZ 2.63

Vallejo-Fairfield, CA 2.41

Bakersfield, CA 2.33

Orlando-Kissimmee, FL 2.30

Source: RealtyTrac

Invariably, the credit metrics of most RMBS issues have continued to deteriorate along with increased job losses and unemployment, reduced wages in the form of furloughs and/or mandatory leave, and legacy loans-to-value that were simply unrealistic. For the latter, it was not uncommon for what would now be considered an unqualified borrower to achieve residential loans-to-value at or in excess of 95%. Some of these mortgages featured reduced interest or interest-only features that delayed, for a short time, the requirement of normal payments of principal and interest. Others featured adjustable interest rates that started low and reset much higher after an initial “teaser” period. As illustrated in the chart below, option adjustable-rate mortgages are estimated to accelerate starting in the spring of 2010 from about $4 billion a month to a peak of $14 billion in September 2011. According to Credit Suisse, about $500 billion of option adjustable-rate mortgage loans are outstanding.

25

Monthly Mortgage Rate Resets (in billions)

Source: Credit Suisse

In a significant number of these cases, homeowners were granted loans under false or fraudulent pretenses (with questionable representations made by borrowers and loose lending restrictions by lenders) which all but guaranteed that the underlying mortgages would fall into default. When the U.S. property market collapsed in mid-2007, inflated home prices that served as the basis for aggressive lending practices were reset at much lower levels, and in many cases below the nominal value of outstanding mortgages. Residential mortgage defaults remain a glaring problem. Many of the refinancing initiatives undertaken by the government and private lenders to keep citizens in their homes have either again resulted in foreclosures or were insufficient to meaningfully change the economics to the homeowners. The result is that home prices continue to decline and home foreclosures continue to increase at a pace that few expected would be so robust. The problem has widened to the extent that the government is now reconsidering forcing residential mortgage lenders to accept “cram-downs” on existing loans to the benefit of homeowners. Cram-downs would force lenders to reduce the outstanding principal amount and/or the interest rate owed by borrowers.

S&P/Case-Shiller Home Price Indices

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

Composite-20

Composite-10

Las Vegas

Phoenix

Miami

Detroit

Tampa

Los Angeles

San Francisco

San Diego

Minneapolis

Chicago

Washington

Seattle

New York

Atlanta

Portland

Boston

Charlotte

Cleveland

Denver

Dallas

May 2010

Source: Case-Shiller

From 2007 through 2009, many investments in RMBS were “trading” strategies, whereby managers attempted to capitalize on the ongoing chaos in RMBS pricing to “buy low” and “sell high”. These strategies

26

would generally also include the potential to hold such securities for their income potential, but the correction in RMBS prices, as witnessed in the second half of 2009 and into 2010, gave many managers the opportunity to “flip” their portfolios for extraordinary short term gains. The correction in RMBS and CMBS prices over this time frame are graphically represented on the following pages. Today, institutional quality investments in RMBS are almost exclusively focused on purchasing existing RMBS at a discount to original face value, taking on the servicing of the underlying loans, and holding them for investment. New owners, by necessity, generally own the servicing and research infrastructure necessary to harvest value. CMBS Market The sharp deterioration in commercial property fundamentals and continuing tightness in the credit markets have heightened the risk for CMBS loans. For the first time since the industry began forming CMBS, delinquencies reached close to 6% in January 2010, an increase of nearly 500% over December 2008 levels. The delinquent unpaid balances for CMBS have increased to $45.94 billion in January 2010 up 326% from one-year ago (when only $10.79 billion of delinquent unpaid balances were reported), and are now over 20 times the low point of $2.21 billion in March 2007. According to Realpoint Research, the delinquency percentage is forecast to grow to between 6% and 7% through the first quarter of 2010, and potentially approaching and surpassing 8%-9% by the mid-2010. As delinquency rates continue to rise, an increasing number of loans will transfer into special servicing and/or default. This will spur a continuing stream of downgrades from rating agencies.

Monthly CMBS Delinquency Rates

Source: Realpoint Research

27

Public/Private Solutions to Bridge the Financing Gap

In an attempt to rid financial institutions’ balance sheets of “toxic assets” and restore some flexibility for new credit, public and private players alike have forwarded potential solutions. The most publicized public option to date is the two-part Public-Private Investment Program (“PPIP”), jointly sponsored by the U.S. Treasury and the Federal Deposit Insurance Corporation. The PPIP is designed “to support market functioning and facilitate price discovery in asset-backed markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses.”

The PPIP is designed for a specific purpose: to provide liquidity for opaque, poorly performing, hard-to-value assets on the balance sheets of U.S. financial institutions. In theory, PPIP investments would allow banks some measure of relief from assets currently acting as a drag on earnings and new lending activity, forward more transparent price discovery on assets that have proven difficult to accurately value, and allow taxpayers some share in the potential profits.

Legacy Securities Program

The first part of the PPIP is the Legacy Securities Program, designed to draw new private capital into the market for banks’ legacy asset securitizations by providing private investors with two substantive government incentives: low-cost, non-recourse, matched-term debt financing and a significant equity co-investment. By definition, securities eligible for purchase through the LSP only include CMBS, RMBS and other asset-backed securities that were initially issued with a triple-A rating and prior to 2009.

For every dollar of investment equity raised from private sources, the U.S. government/taxpayers will put up one dollar of co-investment equity as well as two dollars of attractive debt capital. As such, LSP investments will carry up to 50% leverage, though most managers anticipate the ability to achieve unlevered returns in the high-single to low-double digit range.

The U.S. Treasury has performed due diligence on potential sponsors for its LSP, focusing on the subject firms’ capability to raise significant private equity capital, their experience in the asset classes targeted by the program, and their back office capacity to execute the buy-and-hold investment strategy. To date, the U.S. Treasury has identified nine sponsors eligible to participate in the program: AllianceBernstein, Angelo Gordon/GE Capital Real Estate, BlackRock, Invesco, Marathon Asset Management, Oaktree Capital, RLJ/Western Asset Management, TCW Group, and Wellington Management. Since the initial announcement of those nine, internal issues at TCW Group have forced the government to rescind its invitation to that company, leaving the other eight to proceed.

In short, while the LSP has emerged as a viable, though a limited and still theoretical, alternative to help push financial institutions into a healthier, more flexible operating environment, the overall impact to the broader economy will likely be muted. This is due to the fact that LSP sponsors to date have only raised about $10 billion in private equity capital. When combined with the aforementioned taxpayer co-investment and 50% leverage, the initial total buying power of the LSP amounts to approximately $40 billion, an amount that pales in comparison to the total universe of eligible LSP securities.

Legacy Loan Program The second part of the PPIP, designed alongside the LSP, is the FDIC-sponsored Legacy Loan Program (“LLP”). The LLP is intended “to boost private demand for distressed assets and facilitate market-priced sales of troubled assets”. In this case, troubled assets refer to pools of residential or commercial loans held directly on the books of U.S. banks and savings institutions. Such assets, like those targeted by the LSP, are difficult to accurately value and offer little reasonable liquidity to current owners.

28

In the LLP, the FDIC provides for the formation, funding and operation of a number of vehicles that will purchase legacy loans directly from banks or indirectly through the FDIC. Private investors will invest new equity capital with the provision that the FDIC will guarantee the accompanying debt issued by those vehicles to finance troubled asset purchases. The FDIC also has the option, but not the obligation, of investing its own equity alongside private equity. The Legacy Loan Program is similar to the strategy employed by the Resolution Trust Corporation (“RTC”) during the 1990s, whereby the RTC would assist interested equity investors with below-market, non-recourse leverage. Term Asset-Backed Securities Loan Facility Another government-sponsored program designed to assist in the development of new commercial mortgage securitizations is the Term Asset-Backed Securities Loan Facility (“TALF”.) TALF, generally under-utilized to date, is designed to support the issuance of asset-backed securities collateralized by real estate, student and auto loans, credit card receivables, etc. Under TALF, the Federal Reserve Bank of New York offers to make attractive, non-recourse term loans against qualified collateral (e.g., AAA-rated assets backed by newly originated consumer and small business loans). The major drawbacks of the program have been the exclusivity (i.e., newly AAA-rated issues only) of collateral that qualifies financing and the relative lack of market interest in supporting single-issuer securities. To date, only a handful of real estate concerns, including Developers Diversified, Inc. (NYSE: DDR), has taken advantage of the TALF on the real estate side to issue $400 million in newly securitized debt.

CMBS TALF Amounts Requested on Each Funding Date

$1.5

$1.3

$1.5

$2.1

$1.4

$2.3

$0.7

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0

January 20

December 14

November 17

October 21

September 17

August 20

July 16

TALF CMBS Loans Requested

Total Requested - $10.7 billion

Source: Wells Fargo Securities, Federal Reserve

As detailed below, we would note that market pricing for many of the distressed assets (i.e., RMBS and CMBS) currently targeted for investment has improved (in some cases significantly) over the past six months. In our opinion, the significant narrowing of these spreads intimates that the opportunity for exceptionally outsized returns may have passed. In other words, the window for executing strategies solely focused on trading RMBS and CMBS has tightened considerably. However, as detailed in a number of the graphics to follow, it is apparent that the opportunity for significant risk-adjusted returns will linger for some time. The general consensus amongst RMBS managers is that the marketplace is now more accurately pricing these securities with a clearer-than-historic view on borrower delinquencies, defaults, and loss severities. The fact that RMBS prices have not bounced more forcefully from early 2009 lows is reflective of the severe, ongoing distress in most of these securitizations and the reality that most will incur significant losses. As opposed to

29

2008-2009, RMBS strategies are now skewed towards buy-and-hold initiatives, as managers almost unanimously believe that the bottom for RMBS prices is behind us.

Monthly RMBS AAA Index (ABX 2006-2)Price

Source: Bloomberg

CMBS managers believe that the difference in current pricing between RMBS and CMBS is that the marketplace has already digested the grim reality of residential distress, while the commercial distress is only now becoming apparent. Many expect a continued widening in spreads for stressed CMBS issues and have expressed a degree of uncertainty as to whether most CMBS prices are accurately reflecting underlying property values. As a result, most PPIP managers (who are able to purchase both legacy RMBS and CMBS) intend to initially invest in RMBS and then balance out their portfolios towards CMBS in two to four years.

CMBS Spreads to 10-yr. U.S.T. (06/07-12/09)

Source: JP Morgan

30

IX. COURTLAND RECOMMENDATION

Courtland recommends that Los Angeles Water and Power Employees’ Retirement Plan commit $10 million to Lone Star Fund VII, L.P. and $10 million to Lone Star Real Estate Fund II, L.P. As requested by Water and Power Employees Retirement Plan Staff, the investment will be allocated as follows: W&P Retirement Plan W&P Retirees Health Care Lone Star VII $ 9,000,000 $ 1,000,000 Lone Star II $ 9,000,000 $ 1,000,000 Total $18,000,000 $ 2,000,000 This recommendation is primarily based on the compelling risk-adjusted return opportunity provided by the subject strategies. Furthermore, it is also consistent with Courtland’s desire to further diversify the WPERP real estate portfolio and to provide it with additional diversification by investment manager and style (i.e., a top-tier “opportunistic” fund manager). Courtland’s recommendation of the Funds is based on the following considerations:

1. Superior sponsor with substantive organizational strength and an experienced management team; 2. Sound investment strategy in each of the United States, Europe and Japan; 3. Proven investment track record; 4. Advantageous market conditions given ongoing dislocation in real estate and credit markets; 5. Deal sourcing capability; 6. Alignment of interests; and 7. Flexibility of investment strategy.

COURTLAND PARTNERS, LTD.

Lone Star Fund VIILos Angeles Department of Water and Power Employees’ Retirement Plan

The contents of this pamphlet are confidential, and the delivery of this pamphlet and its contents do not constitute an offer of securities in any existing or to-be-formed issuer or a solicitation of an offer to purchase any such securities by any person. Offers of securities will only be made by delivery of a Confidential Private Placement Memorandum.

INTRODUCTION TO LONE STAR FUNDS

Lone Star Funds (“Lone Star”) is a global investment firm that acquires distressed debt and equity assetsincluding corporate commercial real estate single family residential and consumer debt products as well


including corporate, commercial real estate, single family residential and consumer debt products as wellas financially-oriented and asset rich operating companies. Since the establishment of its first fund in1995, the principals of Lone Star have organized private equity funds totaling approximately $26 billionof capital that has been invested globally through Lone Star’s worldwide network of affiliate offices.

LONE STAR GLOBAL NETWORKAffiliate offices are located in Dallas, New York, Washington D.C., Montreal, London, Frankfurt, Munich,

k d d

2

Paris, Tokyo and Bermuda.

LONE STAR FUND VII DESCRIPTIONLONE STAR FUND VII DESCRIPTION

Partnerships Lone Star Fund VII (U.S.), L.P., a Delaware L.P. (U.S. investors) Lone Star Fund VII (Bermuda), L.P., a Bermuda exempted L.P. (non-U.S. investors) Side-by-side co-investment agreement between the Funds

Target Fund Size $4 billion ($5 billion hard cap) U.S. and Bermuda funds combined

Investment Strategy Investments in single family distressed loans and securities. Will also include global control investments in banks, financially-oriented and asset rich operating companies.

Expected Investment U S 70% Europe 20% Japan 10% Expected Investment Capital Allocations(1)

U.S. 70%, Europe 20%, Japan 10% General Partner affiliate offices in Dallas, New York, Washington D.C., Montreal, London,

Frankfurt, Paris and Tokyo

Target Investment ( )

25% target IRR investment level returns Returns(2)

Investment Period 3 years

(1) The Expected Investment Capital Allocations set forth herein are only estimates. Actual investment capital allocations of Lone Star Fund VII (U.S.), L.P. and Lone Star Fund VII (Bermuda), L.P. may vary

3

substantially. (2) Target returns are not representative of returns that may be realized by Lone Star Fund VII (U.S.), L.P. or Lone Star Fund VII (Bermuda), L.P. Investment level returns do not reflect expenses, management fees,

or the carried interest that will be charged at the fund level. No assurance is given that the target returns will be achieved and actual results may vary significantly.

U S INVESTMENT ENVIRONMENTU.S. INVESTMENT ENVIRONMENT

Supply / Opportunity • U.S. housing prices down 35% from their high on an average weighted basis

$12 illi f d b di ll li d b i l f il h i h U S• $12 trillion of debt outstanding collateralized by single family homes in the U.S.

― Bank legacy NPL whole loans: $478 billion

― Originally rated AAA credit sensitive RMBS and CDOs held by U.S. banks: $700 billion

― U.S. RMBS and CDOs on European bank balance sheets: $400 billion

Fi i l i tit ti• Financial institutions

− 2,500 U.S. banks and thrifts will require additional equity

− 725 U.S. banks and thrifts projected to fail

− Projected equity funds required for U.S. banks and thrifts: $150 billion

Demand / Competition • Traditional competitors currently not in the market (investment banks)• Most real estate private equity funds not experienced in distressed residential assets and do not

control special servicing platforms• Large barriers to entry as scale buyer include:

Capital asset management data and systems— Capital, asset management, data and systems

Execution Capacity • Vast transactional experience. Invested $7.1 billion of equity capital in 51 transactions• 18 investment professionals engaged in origination• 351 employed by Hudson (affiliate asset manager) in New York and Dallas

4

• 450 employees in residential loan servicers

EUROPE INVESTMENT ENVIRONMENT

Supply / Opportunity • $960 billion of credit losses expected during this cycle$400 billion corporate


− $400 billion corporate− $400 billion commercial real estate− $60 billion residential mortgage− $100 billion consumer

• German banks (particularly Landesbanken) continue to be large holders of NPLs and have (p y ) gexposure to securitized debt products

• Massive opportunity to buy residential mortgage debt and securitized product from UK banks• Forced deleveraging and loss recognition will drive sales• Aggregator banks (Switzerland) will provide supply• I t t t iti ( ith t i t ) i f il d b k• Investment opportunities (with government assistance) in failed banks

Demand / Competition • Traditional competitors currently not in the market (investment banks)• Most real estate private equity funds not experienced in distressed assets, are struggling with

legacy issues and do not have asset management platforms• Large barriers to entry as scale buyer include: • Large barriers to entry as scale buyer include:

— Capital, asset management, data and systems

Execution Capacity • Vast transactional experience. Invested $2.0 billion of equity capital in 81 transactions• 11 investment professionals engaged in origination

5

• 290 employed by Hudson (affiliate asset manager) in London, Frankfurt, Munich and Paris

JAPAN INVESTMENT ENVIRONMENT

Supply / Opportunity • $180 billion of credit losses on Japan based loans expected during this cycle


pp y / pp y J p p g y

− $70 billion corporate

− $90 billion commercial real estate

− $20 billion consumer

• Opportunities in corporate distressed debt with secured assets

• Opportunities to buy consumer debt from consumer finance companies without taking over major gray zone liabilities

Demand / Competition • Traditional competitors currently not in the market (investment banks)l f d d d d l• Most real estate private equity funds not experienced in distressed assets, are struggling

with legacy issues and do not have asset management platforms• Large barriers to entry as scale buyer include:

− Capital, asset management, data and systems

Execution Capacity • Vast transactional experience. Invested $2.7 billion of equity capital in 86 transactions• 10 investment professionals engaged in origination• 239 employed by Hudson (affiliate asset manager) in Tokyo• 40 employed by consumer finance servicing platform

6

PERFORMANCE SUMMARY OF PRIOR LONE STAR FUNDS(1)

as of June 30, 2010

Fund VI LSREF I Fund V Fund IV Fund III Fund II Fund I BrazosLSF VI

(Bermuda)LSREF I

(Bermuda)LSF V

(Bermuda)LSF IV

(Bermuda)LSF III

(Bermuda)LSF II

(Bermuda)(Bermuda) (Bermuda) (Bermuda) (Bermuda) (Bermuda) (Bermuda)Formation Date December 2007 December 2007 September 2004 December 2001 July 2000 September 1998 (2) November 1996 March 1995Fund Size (3) $7.465 billion $2.383 billion $5.050 billion $4.208 billion $2.262 billion $1.228 billion $396 million $247 million

Investment Period 24 months 24 months 36 months 36 months 29 months 21 months 22 months 15 months

Portfolio Summary:Number of Investments 28 11 45 54 46 32 46 19

Aggregate Purchase Price (4) $19.846 billion $6.163 billion $15.914 billion $13.063 billion $5.062 billion $2.642 billion $1.330 billion $1.271 billion

Number of Assets 78,924 (5) 1,324 4,558 525,882 (5) 116,372 (5) 12,752 725 3,878

Portfolio Investment Diversification(6):

Non-performing and Other Loans 24% 20% 31% 22% 40% 74% 15% 78%

Mortgage Related Securities 62% 3% 2% 0% 0% 0% 0% 0%

Financial Operating Companies 13% 0% 21% 34% 20% 0% 0% 8%

Other Operating Companies 0% 0% 12% 17% 13% 0% 0% 0%

Direct Real Estate 0% 77% 32% 22% 27% 26% 61% 0%

Other 1% 0% 2% 5% 0% 0% 24% 14%Other 1% 0% 2% 5% 0% 0% 24% 14%

Portfolio Global Diversification(7):

Japan 6% 35% 41% 49% 54% 49% 12% 0%

Europe 17% 35% 33% 9% 5% 6% 8% 0%

North America 77% 30% 24% 6% 7% 20% 80% 100%

South Korea 0% 0% 1% 30% 29% 25% 0% 0%

Other Asia 0% 0% 1% 6% 5% 0% 0% 0%

Fund Summary:

Capital Called $5,774 million $1,975 million $5,051 million $4,007 million $2,217 million $1,228 million $396 million $242 million

Future Projected Capital Calls $791 million $50 million $0 $201 million $45 million $0 $0 $0

Total Cash Distributed (8) $1,200 million $100 million $1,449 million $7,423 million $5,051 million $1,707 million $507 million $397 million

Estimated Distributable Cash from Projected Realizations (9) $10,646 million (10) $3,205 million (10) $4,964 million $3,370 million $420 million $0 $0 $0

Projected Gross IRR (11) 24.36% (13) 22.37% (13) 10.14% 45.51% 43.16% 23.48% 12.38% 38.35%

P j t d N t IRR (12) 18 41% (13) 16 74% (13) 7 14% 32 02% 30 86% 15 95% 7 51% 28 09%

7

Note: The chart set forth above, together with the footnotes on page 9 and 10, provide a summary of the track record of prior investment funds sponsored by Lone Star. Each prospective investor and its advisors should carefully review the information set forth above, together with the footnotes regarding the methodology employed in calculating values and projected cash flows of the prior unrealized investments and the more detailed information relating thereto which is available upon request.

Projected Net IRR ( ) 18.41% ( ) 16.74% ( ) 7.14% 32.02% 30.86% 15.95% 7.51% 28.09%

PERFORMANCE SUMMARY OF PRIOR T

1) The return data for the prior Lone Star funds is provided for informational purposes only. It reflects returns as of June 30, 2010 and may be outdated. The return data has not been audited or otherwise verified by any outside party and should not be construed as representative of the returns that may be achieved by investors in Lone Star Fund VII (U.S.), L.P. and Lone Star Fund VII (Bermuda), L.P. (each, a “Fund”). The returns received by investors in the prior Lone Star funds are not representative of the returns that may be realized by investors in the Funds. Past performance is not an indication of future results and no representation or warranty is made as to the returns which may be experienced by investors in the Funds.

LONE STAR FUNDS (continued)

p f f f p y y p y

2) LSF II Bermuda was formed in November 1998.

3) With respect to Fund VI and LSF VI Bermuda, LSREF and LSREF Bermuda, Fund V and LSF V Bermuda, Fund IV and LSF IV Bermuda, Fund III and LSF III Bermuda, and Fund II and LSF II Bermuda, Fund Size represents the aggregate commitments to both entities from the limited partners and the general partner of the respective fund.

4) Aggregate Purchase Price includes equity capital utilized by each of the funds to purchase each investment together with the co-investment by the key employees of Hudson Advisors, any third-party co-investment as well as leverage employed. p y g p y

5) Assets reported under Fund IV / LSF IV Bermuda include consumer debt assets totaling 511,484. Assets reported under Fund VI / LSF VI Bermuda and Fund III / LSF III Bermuda include residential mortgage loans totaling 69,665 and 92,865 assets, respectively.

6) Portfolio Investment Diversification is presented as a percentage of invested partnership equity, and, in the case of Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda, is presented as a percentage of invested and committed partnership equity. The historical track record, including the Portfolio Investment Diversification, includes investments in Commercial Real Estate (as such term is defined in the Confidential Private Placement Memorandum). Because the Funds will not make investments in Commercial Real Estate, the Portfolio Investment Diversification of the Funds will vary significantly from that of the prior Lone Star funds, which will affect comparability.

7) Portfolio Global Diversification is presented as a percentage of invested partnership equity, and, in the case of Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda, is presented as a percentage of invested and committed partnership equity. The historical track record, including the Portfolio Global Diversification, includes investments in Commercial Real Estate. Because the Funds will not make investments in Commercial Real Estate, the Portfolio Global Diversification of the Funds will vary significantly from that of the prior Lone Star funds, which will affect comparability.

8) Total Cash Distributed includes all distributions of cash to the limited partners and the general partner of the various prior Lone Star funds, but is before the deduction of the carried interest payable to the respective general partner.

9) Estimated Distributable Cash from Projected Realizations includes projected distributions of cash to the limited partners and the general partner of the various prior Lone Star funds. The Estimated Distributable Cash from Projected Realizations is after deduction of expenses including, but not limited to, management fees, unconsummated transaction fees, professional fees, organizational fees and interest, but is before deduction of the carried interest payable to the respective general partner. The Estimated Distributable Cash from Projected Realizations is calculated using actual and forecasted fund-level net cash flows and represent cash flow that might be received by the respective prior Lone Star fund if all of the remaining assets were liquidated in accordance with the respective general partner’s current proposed exit plans for their current estimated fair market value. The estimates of future expected cash flows to be generated from the underlying investments have not been discounted to current cash values. The Estimated Distributable Cash from Projected Realizations is based on the general partner’s projections of the value of the underlying assets, which includes unrealized gains and losses, and may not be equivalent to the amount of cash that will be received upon the realization or sale of such assets. The timing and remaining cash flows of the remaining investments are based on projections which may or may not be realized. The Estimated Distributable Cash from Projected Realizations is subject to uncertainties and are based upon assumptions which may not prove to be valid and may be changed without notice. The Estimated Distributable Cash

8

j j p p y p y gfrom Projected Realizations has not been audited or otherwise verified by any outside party and may not be representative of the actual cash that may be available for distribution by the prior Lone Star funds. There is no assurance that the Estimated Distributable Cash from Projected Realizations will actually be available for distribution or that either Fund will experience similar returns of capital.

PERFORMANCE SUMMARY OF PRIOR LONE STAR FUNDS ( i d)

10) Estimated Distributable Cash from Projected Realizations for Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda includes both projected investment-level net cash flows for investments closed to date, as well as a deemed 25% level gross IRR for capital expected to be invested in future investments that have not yet closed. Please refer to Footnote 9 for


f g f p p f y f fadditional information regarding the calculation of the Estimated Distributable Cash from Projected Realizations for Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda.

11) Projected Gross IRRs are prior to deduction of the carried interest and expenses charged directly to the respective fund, including, but not limited to, management fees, unconsummated transaction fees, professional fees, organizational fees, and interest. The Projected Gross IRRs are calculated using actual and forecasted investment-level net cash flows and represent IRRs that might be received by the respective prior Lone Star fund if all of the remaining assets were liquidated in accordance with the respective general partner’s current proposed exit plans. The timing and remaining cash flows of the remaining investments are based on projections which may or may not be realized. The Projected Gross IRRs are subject to uncertainties and are based upon assumptions which may not prove to be valid and may be changed without notice. There is no assurance that the Projected Gross IRRs are subject to uncertainties and are based upon assumptions which may not prove to be valid and may be changed without notice. There is no assurance that the Projected Gross IRRs will be obtained or that either Fund will experience similar returns.

12) Projected Net IRRs are after deduction of the carried interest and expenses charged directly to the respective fund, including, but not limited to, management fees, unconsummated transaction fees, professional fees, organizational fees, and interest. The Projected Net IRRs are calculated using actual and forecasted fund-level net cash flows and represent IRRs that might be received by the respective prior Lone Star fund if all of the remaining assets were liquidated in accordance with the respective general partner’s current proposed exit plans. The timing and remaining cash flows of the remaining investments are based on projections which may or may not be realized. The Projected Net IRRs are subject to uncertainties and are based upon assumptions which may not prove to be valid and may be changed without notice There is no assurance that the Projected Net IRRs will be obtained or that either are based upon assumptions which may not prove to be valid and may be changed without notice. There is no assurance that the Projected Net IRRs will be obtained or that either Fund will experience similar returns.

13) The Gross IRR for Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda only reflects projected investment level IRRs for investments closed to date. In comparison, the Projected Net IRR for Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda includes both projected investment level IRRs for investments closed to date, as well as a deemed 25% investment level IRR for capital expected to be invested in future investments that have not yet closed.

9

LONE STAR TRACK RECORDLONE STAR FUND VII TYPE INVESTMENTS

as of June 30, 2010

Invested Partnership Equity Projected Vintage ($ in millions) %

Fund VI 2008 23.61% $6,348.3 91.79%

Fund V 2004 17.31% $2,834.1 44.25%

Invested Partnership Equity Projected Gross IRR

Vintage Year

Fund V 2004 17.31% $2,834.1 44.25%

Fund IV 2002 38.65% $3,077.3 61.12%

Fund III 2000 46.56% $1,294.9 51.21%

Fund II 1999 62 46% $58 4 4 40%Fund II 1999 62.46% $58.4 4.40%

Fund I 1997 -12.17% $122.4 23.18%

Combined Funds 33.78% $13,735.5 55.23%

Note: The Projected Gross IRRs shown in the chart above are presented prior to the deduction of the carried interest, management fees and expenses charged directly to the respective fund. Such fees and expenses will reduce the returns experienced by investors in the Fund The projections are subject to change and are not representative of the actual gross amounts received with respect to such investments For a full

10

will reduce the returns experienced by investors in the Fund. The projections are subject to change and are not representative of the actual gross amounts received with respect to such investments. For a full description of the carried interest, management fees and other expenses of the Funds, see the Confidential Private Placement Memorandum of the respective Fund. Past performance is not an indication of future results. Lone Star has, on a retrospective basis, presented prior investments that conform to the proposed investment objectives of the Funds, which exclude Commercial Real Estate investments.

LONE STAR FUND VII TYPE INVESTMENTSLONE STAR FUND VII TYPE INVESTMENTS

Note: The Projected Gross IRRs noted in the graph set forth above are presented on an investment by investment basis and are prior to deduction of the carried interest, management fees and expenses charged directly to the respective fund. Such fees and expenses will reduce the returns experienced by investors in the Funds. The projections are subject to change and are not representative of the actual gross amounts received with respect to such investments. For a full description of the carried interest, management fees and other expenses of the Funds, see the Confidential Private Placement Memorandum of the respective

11

received with respect to such investments. For a full description of the carried interest, management fees and other expenses of the Funds, see the Confidential Private Placement Memorandum of the respective Fund. Past performance is not an indication of future results. Lone Star has, on a retrospective basis, presented prior investments that conform to the proposed investment objectives of the Funds, which exclude Commercial Real Estate investments. Investments designated as “liquidating” are those held by a Lone Star fund for liquidation in accordance with such investment’s business plan.

LONE STAR FUND VII ORGANIZATION CHARTCHART

John P. Grayken

Bruno ScherrerEurope

Len AllenNorth America

Shuichi TajimaJapan

Origination Origination Origination

10 InvestmentProfessionals

17 Investment Professionals


12

WORLDWIDE ORIGINATION AND OPERATING CAPACITY

Lone Star Hudson Total

U.S. 43 351 394

Japan 20 239 259

Europe 125 290 415

Bermuda 3 - 3

TOTAL 191 880 1 071TOTAL 191 880 1,071

13

LONE STAR FUND VII TERMSLONE STAR FUND VII TERMS

• 1% of total commitmentsGeneral Partner Commitment:

• Preferred Return based on LP commitment amount:≥ $300 million† 10%≥ $150 million to < $300 million ∞ 9%< $150 million 8%

† Or an aggregate of ≥ $400 million to LSF VII and LSREF II combined

Highlights of Structure:

† Or an aggregate of ≥ $400 million to LSF VII and LSREF II combined∞ Or an aggregate of ≥ $200 million to LSF VII and LSREF II combined

• Catch-up Provision: 80%/20% LP/GP split up to a 13% return 50%/50% LP/GP split after a 13% return up to a 20% return80%/20% LP/GP split thereafter

• Management Fees on LP commitment amount:

During Commitment Period*≥ $300 million† 90 bps≥ $150 million to < $300 million ∞ 105 bps$ $ p< $150 million 120 bps


Post Commitment Period** 45 bps all LP’s* F b d itt d t d it l

14

* Fee based on committed, unreturned capital** Fee based on outstanding invested capital

APPENDIXAPPENDIX

Hudson Advisors & Vericrest FinancialVericrest Financial

15

HUDSON ADVISORSHUDSON ADVISORS

• Formed in 1993, Hudson Advisors LLC (“Hudson Advisors”), is a globally integratedI l l 900 f i l ld id h

Hudson Regional Officesasset management company. It employs nearly 900 professionals worldwide whopossess significant skills in managing and restructuring real estate and under-performing assets, including corporate liquidations and financial asset restructurings.

• Hudson Advisors is headquartered in Dallas, Texas and has affiliate offices in NewYork, London, Frankfurt, Munich, Paris and Tokyo.

HudsonEurope

LondonFrankfurtMunich

Paris

DallasNew York

Hudson Americas

Hudson Japan

Tokyo

, , , , y

• Hudson Advisors principally handles the management, restructuring, and servicingof assets acquired by Lone Star, including asset management, underwriting, realestate due diligence and valuation, operating company oversight, management ofmortgage backed securities portfolios, financing, accounting and reporting, income

d li d i h d i i kHudson Global Support

Luxembourg~290 Professionals~140 Professionals~240 Professionals

Specialty Management Firms Owned by Previous Funds

and property tax compliance, currency and interest rate hedging, risk management,and information technology development and systems support. Hudson Advisors isa rated primary and special servicer by Fitch Ratings.

• Hudson’s management fee structure is approved in advance by the limited partnerswithin the limited partnership agreement of each fund.

ppDallas / Washington D.C.

~200 Professionals

Manages operations for all hotel and other hospitality assets

owned by the Lone Star Funds in Japan.

LSF IV

Manages operations for all golf course properties owned by the Lone Star

Funds in Japan.

LSF III & LSF IV

Manages collection, modification, and

reporting activities for residential whole loan

portfolios.

LSF VI

t t e ted pa t e s p ag ee e t o eac u d.

• In the course of making investments, previous Lone Star Funds have acquired orcreated certain specialty management companies to service various assets requiringspecific management expertise. While these specialty companies manage the day today activities of these investments, Hudson Advisors manages the business plans forh d d h h l f d d l

16

the investments and provides these organizations with a capital focused discipline.

HUDSON ADVISORS

Lone Star Funds Hudson Advisors

HUDSON ADVISORS

The Investment Process Division of Responsibility:

Investment Strategy

Deal Sourcing

Indicative Pricing

Benefits of the Dedicated Asset Management Model

Exclusive Relationship: Through its exclusive arrangementwith Hudson, Lone Star can be assured that the managementof its assets recei es dedicated focus and attentiong

Due Diligence / Underwriting

Transaction Structuring

Business Plan Development

Field Work & Data Mining

Anc

of its assets receives dedicated focus and attention.

Privacy of Information: Critical proprietary buy-side andsell-side information is (subject to certain legal restrictions)regularly exchanged between Lone Star and Hudson,eliminating the risk of a costly confidentiality breach to acompetitor.


IC Presentation

Closing & Financing

A t B i Pl

cillary ServicesScale / Cost Control: Because of its large scale and broad-based expertise, Lone Star’s asset management costs areconsistently and significantly lower than comparable thirdparty servicers.

Alignment of Interests: Through the HudCo Co-InvestmentProgram, Lone Star provides incentives to key employees to

Outsourced to HudsonPursuant to Lone Star’s Approval

Augment Business Plan

Manage Assets until Liquidation

Liquidate Assets

ensure an alignment of interests between Lone Star andHudson. This is difficult to achieve on a 3rd party basiswhere the manager seeks rich, long dated fee streams.

17

Periodic Investment Review Periodic Investment Review

VERICREST FINANCIALVERICREST FINANCIAL

I 2009 L St F d VI i d th h l di b i l tf f CIT G I i l di Th CITIn 2009, Lone Star Fund VI acquired the home lending business platform of CIT Group Inc., including The CITGroup/Sales Financing, Inc., a Delaware corporation. Following the acquisition, the name of The CIT Group/SalesFinancing, Inc., was changed to Vericrest Financial, Inc. (“Vericrest”).

Vericrest is a privately held, premier financial services company primarily engaged in the servicing of residentialVericrest is a privately held, premier financial services company primarily engaged in the servicing of residentialmortgage and consumer finance loans. Vericrest is led by a seasoned team of financial services industryprofessionals who have over 20 years of experience in working with customers and investors. Vericrest isdedicated to providing superior customer care and maintaining the highest level of quality, integrity and trust thatcustomers, employees, investors and other business associates expect and deserve. Vericrest is regulated bynumerous state and federal regulatory agencies and holds the requisite licenses to service mortgage and consumerfinance loans and to conduct other aspects of its business in those states where it does business.

Vericrest, headquartered in Oklahoma with operations in San Diego and New Jersey, employs 450 people and hasthe primary responsibility for servicing all whole loan investments acquired by Lone Star Funds. HudsonAdvisors LLC works closely with Vericrest management to implement targeted special servicing strategies thatAdvisors, LLC, works closely with Vericrest management to implement targeted special servicing strategies thatinclude loss mitigation and loan migration.

18

This presentation does not constitute an offer of securities in any existing or to be formed issuer or a solicitation of an offer to purchase any such securities byany person. Offers of securities will only be made by delivery of a Confidential Private Placement Memorandum.

The information in this presentation has been presented for informational purposes only. Although the information has been obtained from sources whichLone Star deems to be reliable, all of which is subject to change, no representation or warranty is made as to its accuracy or completeness. In preparing thispresentation, Lone Star has relied upon and assumed, without independent verification, the accuracy and completeness of all information available frompublic sources or which was otherwise reviewed by it.

The data presented herein is as of June 30, 2010, unless noted otherwise, and may be outdated. The data is based upon or derived from the historical trackrecord of Lone Star and its affiliates, and is not indicative of the future portfolio composition of the Funds. Certain persons previously associated with LoneStar participated in the transactions that comprise the historical track record and will not be associated with Lone Star with respect to the Funds or theirinvestments. Not all of the past investments would be suitable for the Funds. In addition, the risk profile of the investments made by Lone Star and itsaffiliates may have changed, which may affect comparability. Past performance is not an indication of future results and no representation orwarranty is made as to the returns which may be experienced by investors in either Fund. An investment in the Funds is speculative andinvolves a substantial risk of loss including loss of principal. The returns presented are calculated in US dollars and, for non-US dollar investments,contain a component of foreign exchange impact No assumptions are made about future exchange rate fluctuations Such fluctuations may have an adversecontain a component of foreign exchange impact. No assumptions are made about future exchange rate fluctuations. Such fluctuations may have an adverseeffect on the value, price or income return of the investment. You should conduct your own analysis as to the expected rate of return.

An investment of this nature would be highly speculative and subject to a high degree of risk. The most significant of such risks include lack of liquidity,economic conditions, and real estate risks (including the effect of bankruptcy). An investor should consider such risks in their entirety. This presentationwas prepared exclusively for the benefit and internal use of those persons to whom it is presented by representatives of Lone Star Partners VII, L.P. (the“General Partner”) in order to indicate, on a preliminary basis, the feasibility of a possible investment and does not carry any right of publication orp y f y f p y y g f pdisclosure to any other party.

This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by representatives of theGeneral Partner. Any reproduction or distribution of this presentation, in whole or in part, and any disclosure of its contents or use of any informationherein for any purpose other than considering an investment is prohibited.

19

Lone Star Real Estate Fund IILos Angeles Department of Water and Power Employees’ Retirement Plan

The contents of this pamphlet are confidential, and the delivery of this pamphlet and its contents do not constitute an offer of securities in any existing or to-be-formed issuer or a solicitation of an offer to purchase any such securities by any person. Offers of securities will only be made by delivery of a Confidential Private Placement Memorandum.


Lone Star Funds (“Lone Star”) is a global investment firm that acquires distressed debt and equity assetsincluding corporate commercial real estate single family residential and consumer debt products as well


including corporate, commercial real estate, single family residential and consumer debt products as wellas financially-oriented and asset rich operating companies. Since the establishment of its first fund in1995, the principals of Lone Star have organized private equity funds totaling approximately $26 billionof capital that has been invested globally through Lone Star’s worldwide network of affiliate offices.

LONE STAR GLOBAL NETWORKAffiliate offices are located in Dallas, New York, Washington D.C., Montreal, London, Frankfurt, Munich,

k d d

2

Paris, Tokyo and Bermuda.

LONE STAR REAL ESTATE FUND II DESCRIPTIONLONE STAR REAL ESTATE FUND II DESCRIPTION

Partnerships Lone Star Real Estate Fund II (U.S.), L.P., a Delaware L.P. (U.S. investors) Lone Star Real Estate Fund II (Bermuda) L P a Bermuda exempted L P (non U S investors) Lone Star Real Estate Fund II (Bermuda), L.P., a Bermuda exempted L.P. (non-U.S. investors) Side-by-side co-investment agreement between the Funds

Target Fund Size $4 billion ($5 billion hard cap) U.S. and Bermuda funds combined

Investment Strategy Global opportunistic and value investments in distressed commercial real estate debt products and equity.

Expected Investment Capital Allocations(1)

U.S. 33%, Europe 33%, Japan 33% General Partner affiliate offices in Dallas, New York, Washington D.C., Montreal, London,

Frankfurt, Paris and Tokyo

Target Investment 25% target IRR investment level returns gReturns(2)

% g

Investment Period 3 years

(1) The Expected Investment Capital Allocations set forth herein are only estimates Actual investment capital allocations of Lone Star Fund VII (U S ) L P and Lone Star Fund VII (Bermuda) L P may vary substantially

3

(1) The Expected Investment Capital Allocations set forth herein are only estimates. Actual investment capital allocations of Lone Star Fund VII (U.S.), L.P. and Lone Star Fund VII (Bermuda), L.P. may vary substantially.(2) Target returns are not representative of returns that may be realized by Lone Star Real Estate Fund II (U.S.), L.P. or Lone Star Real Estate Fund II (Bermuda), L.P. Investment level returns do not reflect expenses,

management fees, or the carried interest that will be charged at the fund level. No assurance is given that the target returns will be achieved and actual results may vary significantly.

U S INVESTMENT ENVIRONMENT

Supply / Opportunity • $400 billion of credit losses on commercial real estate expected this cycle

U.S. INVESTMENT ENVIRONMENT

pp y pp y• Falling values, withdrawal of credit, maturities and deteriorating fundamentals have and will

continue to result in unprecedented defaults and losses• Opportunities in mortgage loans and securitized products

− $524 billion of commercial mortgages held by U.S. banks and thrifts are expected to come due before 2012 and $1.5 trillion matures by end of 2014, of which two-thirds ywould not qualify for refinancing as they exceed 90% of the property’s value

− Over $134 billion of CMBS collateral matures before 2012, of which an estimated 52% likely will not qualify for refinancing

• Expected sellers: U.S. banks, Foreign banks, FDIC and Special Servicers


legacy issues and do not have asset management platforms• Large barriers to entry as scale buyer include:

C it l t t d t d t− Capital, asset management, data and systems

Execution Capacity • Vast transactional experience. Invested $1.7 billion of equity in 120 transactions• 8 investment professionals engaged in origination• 351 employed by Hudson (affiliate asset manager) in New York and Dallas

4

p y y ( g )


Supply / Opportunity • Will focus on major markets – UK, Germany and France – which account for 75% of value of European real estate stock


p• Opportunities in CRE debt and securitized products, as unprecedented default rates and

write-downs are ongoing and anticipated − €450 billion of debt set to mature by end 2012− Asset valuations down across Europe by 20 – 30% (c.45% in UK)− Limited availability of credit (64% decline from the 2007 peak)

• Clear evidence of pressure from regulators, bad banks / asset protection schemes and government shareholders, on banks to reduce balance sheet exposure and repay tax-payer support through loan book sales

• Expected sellers: U.S. and European banks, investment banks, and governments


legacy issues and do not have asset management platforms• Large barriers to entry as scale buyer include: g y y

− Capital, asset management, data and systems

Execution Capacity • Vast transactional experience. Invested $2.6 billion of equity capital in 77 transactions• 8 investment professionals engaged in origination

5

• 290 employed by Hudson (affiliate asset manager) in London, Frankfurt, Munich and Paris


Supply / Opportunity • There are $540 billion in commercial real estate loans in Japan and $240 billion were originated during the market peak between 2005 and 2007 for 3 to 5 year terms


during the market peak between 2005 and 2007 for 3 to 5 year terms• These loans will mature within the next 3 years and about half of them may not be

commercially refinanced at the original terms• $90 billion credit losses on CRE debt are expected this cycle• Increased regulatory pressure on banks’ solvency and equity ratios will drive sales for

f i d f i l f liperforming and non-performing loan portfolios:− Overseas banks are winding down CRE debt operations − Japanese banks face regulatory pressure to make massive loan loss reserves for selling

loans in near future


legacy issues and do not have asset management platforms• Large barriers to entry as scale buyer include:

− Capital asset management data and systemsCapital, asset management, data and systems

Execution Capacity • Vast transactional experience. Invested $5.6 billion of equity capital in 455 transactions• 10 investment professionals engaged in origination• 239 employed by Hudson (affiliate asset manager) in Tokyo

6

PERFORMANCE SUMMARY OF PRIOR LONE STAR FUNDS(1)

as of June 30, 2010

Fund VI LSREF I Fund V Fund IV Fund III Fund II Fund I BrazosLSF VI

(Bermuda)LSREF I

(Bermuda)LSF V

(Bermuda)LSF IV

(Bermuda)LSF III

(Bermuda)LSF II

(Bermuda)( ) ( ) ( ) ( ) ( ) ( )Formation Date December 2007 December 2007 September 2004 December 2001 July 2000 September 1998 (2) November 1996 March 1995Fund Size (3) $7.465 billion $2.383 billion $5.050 billion $4.208 billion $2.262 billion $1.228 billion $396 million $247 million

Investment Period 24 months 24 months 36 months 36 months 29 months 21 months 22 months 15 months

Portfolio Summary:Number of Investments 28 11 45 54 46 32 46 19

Aggregate Purchase Price (4) $19.846 billion $6.163 billion $15.914 billion $13.063 billion $5.062 billion $2.642 billion $1.330 billion $1.271 billion

Number of Assets 78,924 (5) 1,324 4,558 525,882 (5) 116,372 (5) 12,752 725 3,878

Portfolio Investment Diversification(6):

Non-performing and Other Loans 24% 20% 31% 22% 40% 74% 15% 78%

Mortgage Related Securities 62% 3% 2% 0% 0% 0% 0% 0%

Financial Operating Companies 13% 0% 21% 34% 20% 0% 0% 8%

Other Operating Companies 0% 0% 12% 17% 13% 0% 0% 0%

Direct Real Estate 0% 77% 32% 22% 27% 26% 61% 0%

Other 1% 0% 2% 5% 0% 0% 24% 14%Other 1% 0% 2% 5% 0% 0% 24% 14%

Portfolio Global Diversification(7):

Japan 6% 35% 41% 49% 54% 49% 12% 0%

Europe 17% 35% 33% 9% 5% 6% 8% 0%

North America 77% 30% 24% 6% 7% 20% 80% 100%

South Korea 0% 0% 1% 30% 29% 25% 0% 0%

Other Asia 0% 0% 1% 6% 5% 0% 0% 0%

Fund Summary:

Capital Called $5,774 million $1,975 million $5,051 million $4,007 million $2,217 million $1,228 million $396 million $242 million

Future Projected Capital Calls $791 million $50 million $0 $201 million $45 million $0 $0 $0

Total Cash Distributed (8) $1,200 million $100 million $1,449 million $7,423 million $5,051 million $1,707 million $507 million $397 million

Estimated Distributable Cash from Projected Realizations (9) $10,646 million (10) $3,205 million (10) $4,964 million $3,370 million $420 million $0 $0 $0

Projected Gross IRR (11) 24.36% (13) 22.37% (13) 10.14% 45.51% 43.16% 23.48% 12.38% 38.35%

7

Note: The chart set forth above, together with the footnotes on page 8 and 9, provide a summary of the track record of prior investment funds sponsored by Lone Star. Each prospective investor and its advisors should carefully review the information set forth above, together with the footnotes regarding the methodology employed in calculating values and projected cash flows of the prior unrealized investments and the more detailed information relating thereto which is available upon request.

Projected Net IRR (12) 18.41% (13) 16.74% (13) 7.14% 32.02% 30.86% 15.95% 7.51% 28.09%

PERFORMANCE SUMMARY OF PRIOR T

1) The return data for the prior Lone Star funds is provided for informational purposes only. It reflects returns as of June 30, 2010 and may be outdated. The return data has not been audited or otherwise verified by any outside party and should not be construed as representative of the returns that may be achieved by investors in Lone Star Real Estate Fund II (U.S.), L.P. and Lone Star Real Estate Fund II (Bermuda), L.P, (each, a “Fund”). The returns received by investors in the prior Lone Star funds are not representative of the returns that may be realized by investors in the Funds. Past performance is


( ), , ( , ) y p f p f y y p fnot an indication of future results and no representation or warranty is made as to the returns which may be experienced by investors in the Funds.

2) LSF II Bermuda was formed in November 1998.

3) With respect to Fund VI and LSF VI Bermuda, LSREF and LSREF Bermuda, Fund V and LSF V Bermuda, Fund IV and LSF IV Bermuda, Fund III and LSF III Bermuda, and Fund II and LSF II Bermuda, Fund Size represents the aggregate commitments to both entities from the limited partners and the general partner of the respective fund.

4) Aggregate Purchase Price includes equity capital utilized by each of the funds to purchase each investment together with the co-investment by the key employees of Hudson Advisors, any third-party co-investment as well as leverage employed. g p y

5) Assets reported under Fund IV / LSF IV Bermuda include consumer debt assets totaling 511,484. Assets reported under Fund VI / LSF VI Bermuda and Fund III / LSF III Bermuda include residential mortgage loans totaling 69,665 and 92,865 assets, respectively.

6) Portfolio Investment Diversification is presented as a percentage of invested partnership equity, and, in the case of Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda, is presented as a percentage of invested and committed partnership equity. The historical track record, including the Portfolio Investment Diversification, includes investments other than Commercial Real Estate (as such term is defined in the Confidential Private Placement Memorandum). Because the Funds will only make investments in Commercial Real Estate, the Portfolio Investment Diversification of the Funds will vary significantly from that of the prior Lone Star funds, which will affect comparability.

7) P tf li Gl b l Di ifi ti i t d t f i t d t hi it d i th f F d VI d LSF VI B d d LSREF d LSREF B d i t d 7) Portfolio Global Diversification is presented as a percentage of invested partnership equity, and, in the case of Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda, is presented as a percentage of invested and committed partnership equity. The historical track record, including the Portfolio Global Diversification, includes investments other than Commercial Real Estate. Because the Funds will only make investments in Commercial Real Estate, the Portfolio Global Diversification of the Funds will vary significantly from that of the prior Lone Star funds, which will affect comparability.

8) Total Cash Distributed includes all distributions of cash to the limited partners and the general partner of the various prior Lone Star funds, but is before the deduction of the carried interest payable to the respective general partner.

9) Estimated Distributable Cash from Projected Realizations includes projected distributions of cash to the limited partners and the general partner of the various prior Lone Star funds. The Estimated Distributable Cash from Projected Realizations is after deduction of expenses including, but not limited to, management fees, unconsummated transaction fees, professional fees, organizational fees and Distributable Cash from Projected Realizations is after deduction of expenses including, but not limited to, management fees, unconsummated transaction fees, professional fees, organizational fees and interest, but is before deduction of the carried interest payable to the respective general partner. The Estimated Distributable Cash from Projected Realizations is calculated using actual and forecasted fund-level net cash flows and represent cash flow that might be received by the respective prior Lone Star fund if all of the remaining assets were liquidated in accordance with the respective general partner’s current proposed exit plans for their current estimated fair market value. The estimates of future expected cash flows to be generated from the underlying investments have not been discounted to current cash values. The Estimated Distributable Cash from Projected Realizations is based on the general partner’s projections of the value of the underlying assets, which includes unrealized gains and losses, and may not be equivalent to the amount of cash that will be received upon the realization or sale of such assets. The timing and remaining cash flows of the remaining investments are based on projections which may or may not be realized. The Estimated Distributable Cash from Projected Realizations is subject to uncertainties and are based upon assumptions which may not prove to be valid and may be changed without notice. The Estimated Distributable Cash from Projected Realizations has not been audited or otherwise verified by any outside party and may not be representative of the actual cash that may be available for distribution by the prior Lone Star funds. There is no assurance that the Estimated Distributable Cash from Projected Realizations will actually be available for distribution or that either Fund will experience similar returns of capital.

8

PERFORMANCE SUMMARY OF PRIOR LONE STAR FUNDS ( i d)

10) Estimated Distributable Cash from Projected Realizations for Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda includes both projected investment-level net cash flows for investments closed to date, as well as a deemed 25% level gross IRR for capital expected to be invested in future investments that have not yet closed. Please refer to Footnote 9 for additional information regarding the calculation of the Estimated Distributable Cash from Projected Realizations for Fund VI and LSF VI Bermuda and LSREF and LSREF Bermuda


calculation of the Estimated Distributable Cash from Projected Realizations for Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda.

11) Projected Gross IRRs are prior to deduction of the carried interest and expenses charged directly to the respective fund, including, but not limited to, management fees, unconsummated transaction fees, professional fees, organizational fees, and interest. The Projected Gross IRRs are calculated using actual and forecasted investment-level net cash flows and represent IRRs that might be received by the respective prior Lone Star fund if all of the remaining assets were liquidated in accordance with the respective general partner’s current proposed exit plans. The timing and remaining cash flows of the remaining investments are based on projections which may or may not be realized. The Projected Gross IRRs are subject to uncertainties and are based upon assumptions which may not prove to be valid and may be changed without notice. There is no assurance that the Projected Gross IRRs will be obtained or that either Fund will experience similar returns.

12) Projected Net IRRs are after deduction of the carried interest and expenses charged directly to the respective fund, including, but not limited to, management fees, unconsummated transaction fees, professional fees, organizational fees, and interest. The Projected Net IRRs are calculated using actual and forecasted fund-level net cash flows and represent IRRs that might be received by the respective prior Lone Star fund if all of the remaining assets were liquidated in accordance with the respective general partner’s current proposed exit plans. The timing and remaining cash flows of the remaining investments are based on projections which may or may not be realized. The Projected Net IRRs are subject to uncertainties and are based upon assumptions which may not prove to be valid and may be changed without notice. There is no assurance that the Projected Net IRRs will be obtained or that either Fund will experience similar returns.

13) The Gross IRR for Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda only reflects projected investment level IRRs for investments closed to date. In comparison, the Projected Net IRR for Fund VI and LSF VI Bermuda and LSREF and LSREF Bermuda includes both projected investment level IRRs for investments closed to date as well as a deemed 25% investment level IRR for capital Fund VI and LSF VI Bermuda, and LSREF and LSREF Bermuda includes both projected investment level IRRs for investments closed to date, as well as a deemed 25% investment level IRR for capital expected to be invested in future investments that have not yet closed.

9

LONE STAR TRACK RECORDCOMMERCIAL REAL ESTATE INVESTMENTS

as of June 30, 2010

Projected Invested Partnership Equity Vintage ($ in millions) %

LSREF 2008 22.37% $1,878.0 100.00%

Fund VI 2008 32.67% $568.0 8.21%

Projected Gross IRR

Invested Partnership Equity Vintage Year

Fund V 2004 -0.07% $3,570.9 55.75%

Fund IV 2002 63.39% $1,957.7 38.88%

Fund III 2000 37.32% $1,233.9 48.79%$ ,

Fund II 1999 22.93% $1,268.1 95.60%

Fund I 1997 18.88% $405.7 76.82%

Brazos 1995 38 35% $252 0 100 00%

Note: The Projected Gross IRRs shown in the chart above are presented prior to the deduction of the carried interest, management fees and expenses charged directly to the respective fund. Such fees and expenses will reduce the returns experienced by investors in the Fund The projections are subject to change and are not representative of the actual gross amounts received with respect to such investments For a full

Brazos 1995 38.35% $252.0 100.00%

Combined Funds 30.07% $11,134.3 44.77%

10

will reduce the returns experienced by investors in the Fund. The projections are subject to change and are not representative of the actual gross amounts received with respect to such investments. For a full description of the carried interest, management fees and other expenses of the Fund, see the Confidential Private Placement Memorandum of the respective Fund. Past performance is not an indication of future results. Lone Star has, on a retrospective basis, presented prior investments that conform to the proposed investment objective of the Funds, which exclude Fund VII type investments.

LONE STAR COMMERCIAL REAL ESTATE INVESTMENTSESTATE INVESTMENTS

Note: The Projected Gross IRRs noted in the graph set forth above are presented on an investment by investment basis and are prior to deduction of the carried interest, management fees and expenses charged directly to the respective fund. Such fees and expenses will reduce the returns experienced by investors in the Funds. The projections are subject to change and are not representative of the actual gross amounts received with respect to such investments. For a full description of the carried interest, management fees and other expenses of the Funds, see the Confidential Private Placement Memorandum of the respective

11

received with respect to such investments. For a full description of the carried interest, management fees and other expenses of the Funds, see the Confidential Private Placement Memorandum of the respective Fund. Past performance is not an indication of future results. Lone Star has, on a retrospective basis, presented prior investments that conform to the proposed investment objectives of the Funds, which exclude Fund VII type investments. Investments designated as “liquidating” are those held by a Lone Star fund for liquidation in accordance with such investment’s business plan.

LONE STAR REAL ESTATE FUND II ORGANIZATION CHARTORGANIZATION CHART

John P. Grayken

Takehisa TakamatsuJapan

Andre CollinNorth America

Olivier BrahinEurope

Origination Origination Origination


7 Investment Professionals


12

WORLDWIDE ORIGINATION AND OPERATING CAPACITY

Lone Star Hudson Total

U.S. 43 351 394

Japan 20 239 259

Europe 125 290 415

Bermuda 3 - 3

TOTAL 191 880 1 071TOTAL 191 880 1,071

13

LONE STAR REAL ESTATE FUND II TERMSLONE STAR REAL ESTATE FUND II TERMS

General Partner Commitment: • 1% of total commitments

Highlights of Structure: • Preferred Return based on LP commitment amount:≥ $300 million† 10%≥ $150 million to < $300 million ∞ 9%< $150 million 8%

† Or an aggregate of ≥ $400 million to LSF VII and LSREF II combined† Or an aggregate of ≥ $400 million to LSF VII and LSREF II combined∞ Or an aggregate of ≥ $200 million to LSF VII and LSREF II combined

• Catch-up Provision: 80%/20% LP/GP split up to a 13% return 50%/50% LP/GP split after a 13% return up to a 20% return80%/20% LP/GP split thereafter

• Management Fees on LP commitment amount:

During Commitment Period*≥ $300 million† 90 bps≥ $150 million to < $300 million ∞ 105 bps$ $ p< $150 million 120 bps


Post Commitment Period** 45 bps all LP’s* F b d itt d t d it l

14

* Fee based on committed, unreturned capital** Fee based on outstanding invested capital

APPENDIXAPPENDIX

Hudson Advisors

15

HUDSON ADVISORSHUDSON ADVISORS

• Formed in 1993, Hudson Advisors LLC (“Hudson Advisors”), is a globally integratedI l l 900 f i l ld id h

Hudson Regional Officesasset management company. It employs nearly 900 professionals worldwide whopossess significant skills in managing and restructuring real estate and under-performing assets, including corporate liquidations and financial asset restructurings.

• Hudson Advisors is headquartered in Dallas, Texas and has affiliate offices in NewYork, London, Frankfurt, Munich, Paris and Tokyo.

HudsonEurope

LondonFrankfurtMunich

Paris

DallasNew York

Hudson Americas

Hudson Japan

Tokyo

, , , , y

• Hudson Advisors principally handles the management, restructuring, and servicingof assets acquired by Lone Star, including asset management, underwriting, realestate due diligence and valuation, operating company oversight, management ofmortgage backed securities portfolios, financing, accounting and reporting, income

d li d i h d i i kHudson Global Support

Luxembourg~290 Professionals~140 Professionals~240 Professionals

Specialty Management Firms Owned by Previous Funds

and property tax compliance, currency and interest rate hedging, risk management,and information technology development and systems support. Hudson Advisors isa rated primary and special servicer by Fitch Ratings.

• Hudson’s management fee structure is approved in advance by the limited partnerswithin the limited partnership agreement of each fund.

ppDallas / Washington D.C.

~200 Professionals

Manages operations for all hotel and other hospitality assets

owned by the Lone Star Funds in Japan.

LSF IV

Manages operations for all golf course properties owned by the Lone Star

Funds in Japan.

LSF III & LSF IV

Manages collection, modification, and

reporting activities for residential whole loan

portfolios.

LSF VI

t t e ted pa t e s p ag ee e t o eac u d.

• In the course of making investments, previous Lone Star Funds have acquired orcreated certain specialty management companies to service various assets requiringspecific management expertise. While these specialty companies manage the day today activities of these investments, Hudson Advisors manages the business plans forh d d h h l f d d l

16

the investments and provides these organizations with a capital focused discipline.

HUDSON ADVISORS

Lone Star Funds Hudson Advisors

HUDSON ADVISORS

The Investment Process Division of Responsibility:

Investment Strategy

Deal Sourcing

Indicative Pricing

Benefits of the Dedicated Asset Management Model

Exclusive Relationship: Through its exclusive arrangementwith Hudson, Lone Star can be assured that the managementof its assets recei es dedicated focus and attentiong

Due Diligence / Underwriting

Transaction Structuring


Field Work & Data Mining

Anc

of its assets receives dedicated focus and attention.

Privacy of Information: Critical proprietary buy-side andsell-side information is (subject to certain legal restrictions)regularly exchanged between Lone Star and Hudson,eliminating the risk of a costly confidentiality breach to acompetitor.


IC Presentation

Closing & Financing

A t B i Pl

cillary ServicesScale / Cost Control: Because of its large scale and broad-based expertise, Lone Star’s asset management costs areconsistently and significantly lower than comparable thirdparty servicers.

Alignment of Interests: Through the HudCo Co-InvestmentProgram, Lone Star provides incentives to key employees to

Outsourced to HudsonPursuant to Lone Star’s Approval

Augment Business Plan

Manage Assets until Liquidation

Liquidate Assets

ensure an alignment of interests between Lone Star andHudson. This is difficult to achieve on a 3rd party basiswhere the manager seeks rich, long dated fee streams.

17

Periodic Investment Review Periodic Investment Review

This presentation does not constitute an offer of securities in any existing or to be formed issuer or a solicitation of an offer to purchase any such securities byany person Offers of securities will only be made by delivery of a Confidential Private Placement Memorandumany person. Offers of securities will only be made by delivery of a Confidential Private Placement Memorandum.

The information in this presentation has been presented for informational purposes only. Although the information has been obtained from sources whichLone Star deems to be reliable, all of which is subject to change, no representation or warranty is made as to its accuracy or completeness. In preparing thispresentation, Lone Star has relied upon and assumed, without independent verification, the accuracy and completeness of all information available frompublic sources or which was otherwise reviewed by it.

The data presented herein is as of June 30, 2010, unless noted otherwise, and may be outdated. The data is based upon or derived from the historical trackrecord of Lone Star and its affiliates, and is not indicative of the future portfolio composition of the Funds. Certain persons previously associated with LoneStar participated in the transactions that comprise the historical track record and will not be associated with Lone Star with respect to the Funds or theirinvestments. Not all of the past investments would be suitable for the Funds. In addition, the risk profile of the investments made by Lone Star and itsaffiliates may have changed, which may affect comparability. Past performance is not an indication of future results and no representation orwarranty is made as to the returns which may be experienced by investors in either Fund. An investment in the Funds is speculative andinvolves a substantial risk of loss including loss of principal The returns presented are calculated in US dollars and for non US dollar investmentsinvolves a substantial risk of loss including loss of principal. The returns presented are calculated in US dollars and, for non-US dollar investments,contain a component of foreign exchange impact. No assumptions are made about future exchange rate fluctuations. Such fluctuations may have an adverseeffect on the value, price or income return of the investment. You should conduct your own analysis as to the expected rate of return.

An investment of this nature would be highly speculative and subject to a high degree of risk. The most significant of such risks include lack of liquidity,economic conditions, and real estate risks (including the effect of bankruptcy). An investor should consider such risks in their entirety. This presentationwas prepared exclusively for the benefit and internal use of those persons to whom it is presented by representatives of Lone Star Real Estate Partners II, L.P.p p y f f f p p y p f(the “General Partner”) in order to indicate, on a preliminary basis, the feasibility of a possible investment and does not carry any right of publication ordisclosure to any other party.

This presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by representatives of theGeneral Partner. Any reproduction or distribution of this presentation, in whole or in part, and any disclosure of its contents or use of any informationherein for any purpose other than considering an investment is prohibited.

18

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