The lurking crisis of sovereign debt including that of the USremains a huge potential problem for the capital markets and the USeconomy as well as real estate values. Value is always a functionof potential return and net present value of the future cash flowsincluding, and most important, the terminal value at sale orrefinance. For the past two years, and going forward for at leastmost of this year, the interest rates prevailing in the US andother major economies is artificially low. At the same time many ofthe major economies, and many smaller ones, continue to build upincreasing deficits. The US deficit if ramping up at an alarmingrate and there is absolutely no leadership from the White House todeal with this. It is now so serious that a bipartisan group of 64senators had to write a public letter to the president to getinvolved. Instead he lets Harry Reid fight any budget reductionsand stonewall any progress on this issue.

What does all this mean for the capital markets and real estatevalues? The world cannot continue to have increasingdeficits, more fiscal and monetary stimulus, and inflation of oiland food prices, and not have increases in interest rates. Rateswill rise by next year. Just look at the yield curve. In time manycountries, including the US will be forced to raise rates to dealwith inflation and to attract capital to fund these deficits. Themagnitude of the federal capital needs, plus the magnitude of stateand local government needs, the $3 trillion unfunded liabilities ofthe state and municipal pensions, will drive up rates and will alsocause some level of crowding out of private capital. Taxes at alllevels of government have to rise. Fees of all sorts will have torise. Combine this with the clear intent of Elizabeth Warren andObama to clamp down on banks and to materially squeeze profits outof all types of consumer lending and you will force the banks toraise rates on commercial lending to make up for these profitreductions. Lastly, lending underwriting for real estate willcontinue to be restrictive for quite awhile for the secondary typeassets in secondary locations. That means to get financing to payoff maturing loans, borrowers will pay higher rates.

Over the next eighteen months rates will rise, and will continueto rise thereafter. Given the growing and unsustainable deficits atthe sovereign level in the US and other nations, at some point inthe next couple of years we will hit a tipping point if Obama andHarry Reid do not start to agree on fixing the problem. PrimeMinister Cameron has shown real political leadership by tacklingthe issue head on and taking great pressure to do what is requiredlong term. Governor walker and other governors like Christie aredoing the same in the face of massive efforts by unions to stopthem and to continue the old way of over paying teachers and othergovernment worker, and way over promising on pensions.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.