INFLATION’S IMPACT IN THE 1970’S WINNERS BORROWERS INVESTORS IN REAL ESTATE INDIVIDUALS WITH HIGH SKILLS AND/OR JOB MOBILITY INDIVIDUALS EMPLOYED IN GROWTH AND HIGH-TECHNOLOGY INDUSTRIES MOST GOVERNMENT TAX COLLECTORS LOSERS LENDERS INVESTORS IN FINANCIAL ASSETS INDIVIDUALS WITH FIXED INCOME AND/OR NO JOB MOBILITY INDIVIDUALS IN MATURE AND/OR ENERGY-INEFFICIENT INDUSTRIES MOST TAXPAYERS AND SAVERS

THE WEALTH TRANSFER EFFECTS OF INFLATION

EFFECTS OF INFLATION ON EXISTING-PROPERTY ECONOMICS

WHY MAY INFLATION AFFECT EXISTING AND NEW-DEVELOPMENT REAL ESTATE DIFFERENTLY? SHORT-RUN IMPACT COSTS OF FINANCING COSTS OF GOODS AND SERVICES INTERMEDIATE IMPACT VACANCY RATES FALL RENTS INCREASE LONGER RUN IMPACT EXCESS DEMAND NEW INCENTIVES TO DEVELOP CYCLICAL SWING BACK (MAY OCCUR)

THREE ELEMENTS TO PROTECT REAL ESTATE PARCELS FROM CYCLICAL VAGARIES: STRENGTH OF REAL ESTATE MARKET NATURE OF LEASE CONTRACTS FINANCING RATES AND TERMS

GRAPH FROM III-56

IMPACT OF INFLATION, BY LAND USE URBAN LAND AGRICULTURAL AND FOREST LAND RESIDENTIAL PARCELS - OWNER - OCCUPANT UNITS - MULTI-FAMILY PARCELS COMMERCIAL SPACE

INFLATION AND MACRO-CYCLES AND REAL ESTATE INVESTMENT STRATEGIES LONG CYCLES WENZLICK CASE SHORT CYCLES CONSTRUCTION CYCLES MORTGAGE AVAILABILITY CYCLES OTHER CYCLES URBAN AREA / CITY CYCLES NEIGHBORHOOD CYCLES PROPERTY-SPECIFIC CYCLES NEW CONCEPT / OVERKILL HOT MARKET / OVERKILL

EXHIBIT 7-10

ECONOMIC RISKS RELATE TO THE EXTENT INFLATION IS PROPERLY ANTICIPATED VERSUS UNANTICIPATED

IMPORTANT INFLATION RELATED CONCEPTS ANTICIPATED VS. UNANTICIPATED INFLATION RELATIVE REAL RATE OF RETURN AMONG VARIOUS ASSETS - REAL ECONOMICS - TAX EFFECTS

EXCEL CHARTS

EXPECTED INFLATION, REAL AND NOMINAL INTEREST RATES, AND CAPITAL MARKET EQUILIBRIUM A CHANGE IN THE EXPECTED RATE OF INFLATION MAY CHANGE THE REAL RATE OF INTEREST CHANNELS FOR THE CHANGE IN THE REAL RATE OF INTEREST ARE: - INCOME SAVINGS EFFECTS - WEALTH EFFECTS NOTE: THERE MAY BE DIFFERENCES IN SHORT RUN VERSUS LONG RUN IMPACTS OF CHANGES IN INFLATION.

INFLATION AND THE AFTER TAX REAL RATE OF INTEREST

LENDER RETURN UNDER INFLATION: EXAMPLE ASSUME: DESIRE 2% REAL RETURN AFTER TAXES IF NOMINAL RATE IS 12% AND THE EXPECTED INFLATION RATE IS 10%, WHAT IS THE REAL RETURN FOR THE LENDER? LENDER IS IN 50% TAX BRACKET

INFLATION AND DEPRECIATION: THE FIRM NET AFTER TAX REAL REVENUE FROM INVESTMENT PROJECT = (1 - TAX RATE) X (SALES REVENUE - PRODUCTION COSTS) NOTE: GENERAL INFLATION HAS NO REAL IMPACT IN PRINCIPLE! BRACKET CREEP CHANGES CONCLUSION DEPRECIATION EFFECT ALTERS INCENTIVE TO INVEST In sum, the firm will require a lower real rate of return (i.e., and cost of financing) if high inflation persists. Hence, as inflation increases, nominal interest rates must rise less than the change in the inflation rate.

INFLATION AND THE AFTER-TAX REAL RATE OF INTEREST INSERT

INFLATION AND DEPRECIATION INSERT