Domain Gateway Austin, TX. Not For Use In Ohio

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1 Domain Gateway Austin, TX Not For Use In Ohio This is neither an offer to sell nor a solicitation of an offer to buy shares of KBS Real Estate Investment Trust III, Inc. ( KBS REIT III ); offering is only made by prospectus ( This information must be preceded or accompanied by a prospectus in order to understand fully all of the implications and risks of the offering. Neither the Attorney General of the State of New York nor any other state regulators have passed on or endorsed the merits of this offering. Any representation to the contrary is unlawful. Investing in KBS REIT III includes significant risks. These risks include, but are not limited to: the possibility of losing your entire investment; no guarantees regarding future performance; upon sale or distribution of assets you may receive less than your initial investment; fluctuation of the value of the assets owned by KBS REIT III; lack of a public market for shares of KBS REIT III; limited liquidity; limited transferability; reliance on KBS Capital Advisors LLC, KBS REIT III s advisor, to select and manage assets; payment of significant fees; and various economic factors that may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Shares of KBS REIT III are not suitable for all investors. Please see additional risk factors on back page.

2 Domain Gateway Austin, TX We fully intend to operate KBS REIT III in the same disciplined manner and with the same level of service we extend to our public and corporate pension fund clients. Charles J. Schreiber Jr., CEO KBS Capital Advisors KBS REIT III

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4 The Role of Real Estate in Your Portfolio Income Stream One of the most popular features of real estate is its ability to produce income. Some income-producing properties may fluctuate more than others, in both value and the amount of income they produce, but may have greater potential to provide higher cash flow in the future. Other properties are designed to perform differently and carry less risk. In the end, the consistency of a property s monthly net income depends on numerous factors including lease terms, physical condition, tenant quality and expenses. Intrinsic Value Every parcel of real estate has some intrinsic value, and in certain markets (i.e., Manhattan, San Francisco), the values can increase significantly. For some properties, the improvements represent most of the value, while in other locations the value of the building is inconsequential compared to the underlying land. Although some investments can drop in value to virtual worthlessness, investment real estate typically has a base value that can survive, for example, a natural disaster, the departure of tenants or a change in zoning. Investment Diversification Real diversification requires mixing assets that fundamentally behave differently from the broader stock market. We call this non-correlation. * Historically, real estate investing has proven to be an effective way to achieve non-correlation with the overall stock market. Think of real estate as a completely different basket for an important portion of the eggs in your portfolio. Inflation Hedge Hedging inflation involves investing in assets that are less likely to be eroded by increased cost of living. It is generally accepted that real estate assets are better positioned to keep up with inflation than many other investments because landlords can pass on increased expenses in the form of rent increases. On the other hand, as with other investments, any inflation that occurs can diminish the real value of those investments and the income they produce. Therefore, comparatively, real estate may play a part in helping to preserve the real value of your portfolio. *KBS REIT III expects to establish an estimated value per share not based on the price to acquire a share in its primary offering or a follow-on public offering after the completion of its offering stage. KBS REIT III will consider its offering stage complete when it is no longer publicly offering equity securities through this offering or through follow-on public offerings and has not done so for 18 months. KBS REIT III generally expects to update the estimated value per share every 12 to 18 months thereafter. The actual values of KBS REIT III s shares may or may not correlate with the stock market. Past performance is no guarantee of future results. Diversification does not ensure a profit or protect against a loss in a declining market. 4 KBS REIT III

5 Office Opportunity Role of Real Estate Top Tier Tenants KBS REIT III seeks to acquire institutional Class A office buildings anchored by credit-rated tenants, which are typically nationwide companies with sound financial balance sheets and strong credit. Professional Management Class A properties are the most prestigious with a definite market presence. These properties are managed by the highest-quality management firms, and KBS REIT III s advisor strives to hire only the best managers in each individual market. Mature Properties with High Occupancies The primary focus of KBS REIT III s equity acquisition strategy is to buy highly occupied (+80%) buildings. This approach supports the REIT s income and capital preservation objectives. Consistent Cash Flow In addition to the above factors, consistent revenue comes from a proper blend of near-, mid- and long-term leases across the portfolio. Too many short-term leases can create excessive tenant turnover, which disrupts income and generates additional costs. DELIVERY OF NEW OFFICE SPACE Decrease in new office space, as illustrated in the chart below, may create a supply/demand opportunity in near future Millions Square Feet Record Lows * 2013* Source: CoStar Year-End 2011 National Office Market Report * Projected KBS REIT III 5

6 What is a REIT? What is a REIT? A REIT is a company that buys and manages a portfolio of real estate and real estate-related assets. A REIT can have thousands of investors, and this combined purchasing power can give a REIT the potential to buy institutional-class properties and extensive portfolios of real estate and real estate-related assets. With investments in several properties, REIT stockholders can own indirect interests in assets diversified across geography, asset class and tenant type. Most REITs offer the opportunity to invest for as little as a few thousand dollars. Per IRS rules, a REIT must pass at least 90 percent of its income to the stockholders. By complying with this and other regulations, REITs avoid being taxed at the corporate level, thus eliminating the dreaded double taxation that occurs in other corporations. What are the potential benefits of REIT ownership? Generally, REITs offer these benefits to investors: Income Growth potential IRA eligibility How does a REIT pay its investors? Typically, REIT investors derive income/gains from two sources: Periodic distributions of REIT income declared monthly or quarterly* Increase in share price at time of liquidation or increase in value of portfolio assets upon sale* Favorable tax treatment Professional asset management *There are no guarantees that KBS REIT III will pay distributions or that its portfolio or shares will increase in value. Past performance of an investment is no guarantee of future results. What happens during the life cycle of a non-traded REIT? A new non-traded REIT offering has three distinct, overlapping phases: Capital Raising/Acquisition Operation Liquidation** During the capital raising/acquisition phase, a new non-traded REIT typically receives funds from investors and uses them to acquire real estate and real estate-related assets. In the operation phase, the REIT closes the offering to new investors and spends multiple years managing its real estate portfolio. Finally, at the liquidation phase, the investors reach the end of the REIT life cycle. In addition to having received income over the years, stockholders at liquidation likely will (1) receive cash distributions from the sale of assets of the REIT or (2) participate in a listing of the REIT (traded on an exchange). ** There are no guarantees that a liquidation of KBS REIT III s assets will be effected during the anticipated liquidation stage. If there is no market to liquidate assets, KBS REIT III shareholders may have to hold their investment in KBS REIT III shares for an indefinite period of time or until all of the REIT s assets can be liquidated. Additionally, upon the liquidation of the REIT s assets, there is no guarantee that investors will recognize an increase in the value of their investment in KBS REIT III. 6 KBS REIT III

7 Las Cimas IV, Austin, TX REITs: Both real estate and securities REITs, both traded and non-traded, operate as real estate investments as well as securities. As the chart below indicates, the performance of real estate investments can vary considerably, depending on whether the investment is an individual, directly-owned real estate property, or shares in a REIT. Directly-owned institutional real estate properties, for example, behave differently than the stock of traded REITs, whose performance more closely matches the broader stock market. Before investing in a REIT, be sure to ask your advisor about distribution yields, price fluctuation, stock market correlation, hold periods and liquidity. These factors, among others, should be considered when contemplating a real estate securities investment. What is a REIT? Comparison of annual returns: Direct Real Estate, Traded REITs and S&P 500* 30% 20% 10% 0% -10% Non-traded: A security whose shares do not have a public market-and therefore is illiquid- but whose price is not impacted by daily trading activity.* *The initial price of a non-traded REIT is artificially set and not required to be revalued until 18 months after the REIT has closed its offering. Offerings can be extended by the board of directors. Once closed the REIT must revalue its shares 18 months after closing and every 18 months there- after using an acceptable industry accounting methodology % -30% -40% NCREIF National Property Index S&P 500 Index FTSE NAREIT Composite Index Sources: NCREIF, Standard & Poor s, FTSE NAREIT, KBS Capital Markets Group *The NCREIF National Property Index ( NPI ) is an index of quarterly returns on an unleveraged basis reported by institutional investors on individual investment grade commercial properties owned by those investors and is not a measure of non-traded REIT performance. The NPI is based on appraisals and does not reflect the same market volatility as the FTSE NAREIT Composite Index which is based on transactions in the marketplace. NPI does not reflect management fees and other investment entity fees and expenses that are typical of non-traded REITs. These fees and expenses lower returns. KBS REIT III s management considers the NPI to be an appropriate and accepted index for the purpose of evaluating real estate risk levels against the risk levels of other types of investments. Indices are not available for direct investment. Comparisons shown are for illustrative purposes only and do not represent specific investments. There are significant differences between the NPI and KBS REIT III. KBS REIT III differs from the NPI since approximately 20% to 40% of REIT III s holdings consist of real estate-related assets while the NPI index is a measure of performance of equity commercial real estate. KBS REIT III uses debt; KBS REIT III requires the payment of up-front and other fees that typically exceed those institutional programs, and also incurs expenses related to being a public company; and the cost of an investment in KBS REIT III may not be based solely on the appraised value of underlying properties. The NPI shows gross returns at the property level and does not reflect the impact of management and other investment-entity fees and expenses as well as those associated with raising capital, which lowers returns. It is not expected that investments in KBS REIT III will reflect the returns of the NPI. Past performance does not guarantee future results. The S&P 500 is a market-value weighted index of 500 stocks representing the stock market in general. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are not managed and one cannot invest directly in an index. The FTSE NAREIT Composite Index is an unmanaged index consisting of approximately 200 REIT stocks. The FTSE NAREIT Composite Index excludes brokerage commissions or other fees. KBS REIT III 7

8 Why KBS? Proven Real Estate Operating Firm* KBS is an SEC Registered Investment Advisor founded in 1992 by industry leaders Peter Bren and Charles J. Schreiber, Jr. KBS has provided direct real estate investments on behalf of large institutional clients such as public and private pension plans, endowments, foundations, sovereign wealth funds and five non-traded real estate investment trusts, including KBS REIT III. Why KBS? Large institutional investors have selected KBS because the senior staff is comprised of real estate professionals with extensive hands-on real estate experience. KBS provides a unique strategic debt investment program headed by Keith Hall and Peter McMillan, veteran finance executives with over 50 years of collective structured debt and capital markets experience. KBS has invested in, managed or owned over $15.4 billion in 1,527 assets nationwide (collectively encompassing over million square feet). KBS has sold 535 assets since inception. Fourteen investment funds totaling over 42.5 million square feet of real estate have gone full-cycle. WESTERN REGION Regional President, Acquisition Officers HISTORICAL ACTIVITY* Total Invested Capital: $3.68 Billion Total Assets 280** Total Sq. Ft.: 21.9 Million Total Sold: $1.74 Billion Total Held: $2.16 Billion CENTRAL REGION Regional President, Acquisition Officers HISTORICAL ACTIVITY* Total Invested Capital: $4.60 Billion Total Assets: 336** Total Sq. Ft.: 39.0 Million Total Sold: $1.61 Billion Total Held: $2.93 Billion EASTERN REGION Regional President, Acquisition Officers HISTORICAL ACTIVITY* Total Invested Capital: $5.64 Billion Total Assets: 773** Total Sq. Ft.: 50.3 Million Total Sold: $2.43 Billion Total Held: $3.56 Billion NEW YORK SAN FRANCISCO CHICAGO WASHINGTON DC LOS ANGELES NEWPORT BEACH DALLAS ATLANTA MORTGAGES, CMBS AND DEBT INVESTMENTS HISTORICAL ACTIVITY* Total Invested Capital: $1.49 Billion KBS OFFICES KBS TARGET MARKET Total Assets: 138 Total Sold: $0.93 Billion Total Held: $0.68 Billion *Information for all public and private KBS entities and not specific to KBS REIT III. All data as of March 31, Square footage does not include collateral securing real estate-related assets. Total invested capital represents purchase price (including acquisition fees and closings costs) plus subsequent capital expenditures for equity assets or subsequent loan draws for debt assets. Total sold represents sales prices of sold assets or total payoffs of debt assets. **Some of these assets were acquired as a result of foreclosure or other transfer pursuant to settlement agreements in which borrowers under certain real estaterelated assets transferred the collateral securing those assets to the KBS entity which was the lender in satisfaction of borrower s obligations.

9 KBS INSTITUTIONAL INVESTORS The list below includes some of the largest investors (based on dollar amount invested) in KBS private real estate funds. None of the institutional investors named below has endorsed the offering of any KBS-sponsored REIT or purchased shares of any KBS-sponsored REIT. By including their names, we do not suggest that any of these investors approved of the services provided by KBS affiliates. The names are included only for purposes of your evaluation of the experience and reputation of KBS affiliates and their team of real estate professionals. BASF CORPORATION PENSION TRUST PUBLIC EMPLOYEES RETIREMENT ASSOCIATION OF COLORADO BLUE CROSS/BLUE SHIELD ASSOCIATE NATIONAL RETIREMENT TRUST SCHOOL EMPLOYEES RETIREMENT BOARD OF OHIO DESERET MUTUAL STATE OF WISCONSIN INVESTMENT BOARD HOWARD HUGHES MEDICAL INSTITUTE IBM RETIREMENT TRUST THE STATE OF MICHIGAN THE ROCKEFELLER FOUNDATION Why KBS? ILLINOIS STATE BOARD OF INVESTMENT VIRGINIA RETIREMENT SYSTEM PEW MEMORIAL TRUST PACIFIC LIFE INSURANCE COMPANY OMAHA SCHOOL EMPLOYEES RETIREMENT SYSTEM U.S. STEEL RETIREMENT PLAN TRUST TEACHERS RETIREMENT SYSTEM OF THE STATE OF ILLINOIS EVANGELICAL LUTHERAN CHURCH OF AMERICA BOARD OF PENSIONS KBS REIT III 9

10 Hybrid Strategy Why a Hybrid Approach? KBS REIT III employs a unique hybrid investment strategy, focused on both equity and debt investments. KBS REIT III s management expects that, once all of the proceeds from its offering have been invested, approximately 60% to 80% of invested capital will be invested in core real estate assets while the remaining 20% to 40% will be invested in potentially higher-yielding structured debt investments. This strategy is intended to provide increased risk management as well as broad portfolio diversification by property type, geographic region, investment size and risk. The objectives of KBS REIT III are preservation and return of capital, attractive and stable income and long-term growth. Capital Preservation Income Growth KBS REIT III Strategy The buildings pictured are assets owned by other KBS-sponsored REITs and are shown to provide the investor with a representation of the types of properties KBS REIT III may purchase. ALIGNED INTEREST Our advisor, KBS Capital Advisors, will not receive any of its net cash flow-based incentive fee until the KBS REIT III s investors have received together as a collective group, aggregate distributions sufficient to provide: (1) a 100% return of their net invested capital; and (2) an 8% per year cumulative, non-compounded return of such investment. In other words, our advisor doesn t receive additional funds until our investors receive additional funds.* *KBS Capital Advisors will receive substantial fees prior to the calculation of the net cash flows regardless of whether or not the 8% cumulative non-compounded return rate is reached. 10 KBS REIT III

11 OWN 70% LOAN 30% CLASS A CORE EQUITY ACQUISITIONS Industrial and Office Credit-rated Tenants Professional Management Mature Properties with High Occupancies Consistent Cash Flow FIRST MORTGAGES Steady Income Stream Senior Priority Opportunity for Growth on Discounted Debt STRUCTURED DEBT B-notes, Bridge loan and Subordinated debt: Higher Yield Potential Risk-adjusted Returns Flexible Capital Structure KBS REIT III Strategy Equity KEY TERMS for Understanding Debt Structure Equity: The hypothetical value of the ownership interest in a property as a net of its market price minus all debt. B-Notes: Subset of first mortgage loans that typically offer major inter-creditor and control rights in the event of foreclosure. First Mortgage: A senior loan collateralized by real property; has priority over all other liens except those imposed by law. B-Notes Debt First Mortgage Flow of Payments KBS REIT III 11

12 Income and Long-term Growth Q: How does KBS attempt to generate both income and long-term growth for its non-traded REITs? A: Quality assets, knowledgeable people, and the delivery of these five key factors: 1. Dollars in the Ground Among the lowest-fee non-traded REITs in the United States, KBS REIT III puts more of its investors dollars in the ground than most other programs. Lower up-front fees translate into more of the REIT s capital invested in the portfolio and working for investors.* In particular, KBS REIT III distinguishes itself from other non-traded REITs by reducing costs in three key areas: Income and Growth No Internal Property Management Fee KBS REIT III uses only the best suited third-party regional property managers. Furthermore, this service is done without any mark-up. Many sponsors markup the charges for this service. This approach results in a substantial cost savings. No Financing Coordination Fee In addition to acquisition and asset management fees, some non-traded REIT sponsors charge investors an additional fee for every mortgage or other loan placed on a piece of property the REIT owns or will own. KBS believes such fees are unjustifiable and duplicative of the fees already collected to originate such loans. Asset Management Fees KBS REIT III s advisor charges a 0.75% asset management fee. Some non-traded REIT sponsors collect much higher fees to manage assets in their portfolios. KBS Capital Advisor applies the same management standards to the REIT portfolios it manages as it does to the portfolios of its pension fund properties.** 2. Capitalization Rates and Purchase Prices For income-producing properties, price ranges are driven largely by capitalization rates. KBS REIT III looks for properties with capitalization rates that will support the targeted distributions to its investors while also fitting the desired risk profile of the portfolio. As a large-volume purchaser, KBS can potentially negotiate purchase prices that may result in a more advantageous capitalization rate than can other buyers. Today s typical capitalization rates are higher (translation: property prices are lower) than in recent years, which suggests KBS REIT III may be buying at the right time, especially if overall capitalization rates come back down in the near future (translation: property prices are higher). *2011 Summer Stanger Report. **Refers to all KBS entities. 12 KBS REIT III

13 KBS Corporate Office Newport Beach, CA 3. Lease Terms and Rent Roll All things being equal, a REIT portfolio with enhanced lease terms between the owners and higher-quality tenants likely will perform better than programs with less attractive lease structures. KBS affiliates have always pursued building portfolios of diversified, quality tenants with a desirably staggered schedule of lease expirations, a policy KBS REIT III will continue to implement. 4. Loan Terms and Leverage Due to their relative financial strength and purchasing power, KBS affiliates enjoy preferred loan terms for their properties. Once it has invested the proceeds from its offering, KBS REIT III s debt financing and other liabilities will be between 35% and 65% of the cost of its tangible assets, giving KBS REIT III the flexibility to achieve the ideal risk-reward balance necessary to optimize return to investors and to obtain advantageous loan terms across its leveraged portfolio. 5. Cash Flow and Distribution Coverage The primary objective of KBS REIT III is to provide income for its investors while preserving capital and ultimately creating an opportunity for principal growth. In order to provide distributions that do not erode the potential for appreciation, a REIT must generate sufficient earnings early enough in its life-cycle to adequately cover the amount of its distributions. The philosophy of KBS REIT III is not to pay distributions to investors from offering proceeds. However, KBS has paid and may in the future pay distributions from sources other than cash flow from operations, including debt financing. KBS REIT III is committed to covering its distributions to investors from its cash flows from operations and seeks to achieve this via its unique hybrid investment strategy.* *KBS REIT III may incur debt causing its total liabilities to exceed 75% of the cost of its tangible assets with the approval from the conflicts committee of its board of directors. Income and Growth KBS REIT III 13

14 REIT III Offering Overview Subscription Details Minimum investment $4, Price per share $10.00 Available for IRA investing? Yes Discounted price for reinvested distributions $9.50 Maximum primary offering $2 billion Initial closing date October 26, 2012 Investor ownership interest Common stock shares in KBS Real Estate Investment Trust III, Inc., a Maryland Corporation Key Investment Facts Investment holding period Monthly distributions Share redemption Portfolio profile Not predetermined. Anticipated sale of assets 4-7 years after purchase* Determined by Board of Directors Limited, with declining redemption discount over first three years** Primarily core office and industrial property and real estate-related assets 60% to 80% core, 20% to 40% real estate-related Diversified by geography, investment size and risk Target portfolio leverage 35-65%*** Suitability Standards For investors able to make a long-term investment with no need for liquidity Minimum financial resources: 1) Net worth of at least $250,000 or 2) Gross annual income of at least $70,000 and net worth of at least $70,000 (Many states have more stringent standards). Please refer to the Prospectus under Suitability Standards to verify that you meet the minimum suitability standards imposed by the state of your primary residence. Offering Overview *Economic and market conditions may influence KBS REIT III to hold its investments for different periods of time. The REIT may sell an asset before the end of the expected holding period if the REIT s management believes that market conditions and asset positioning have maximized its value to the REIT or the sale of the asset would otherwise be in the best interests of the REIT s stockholders. KBS REIT III intends to hold its real estate assets for an extended period, typically four to seven years, which the REIT s management believes is the optimal period to enable the REIT to capitalize on the potential for increased income and capital appreciation. The period that the REIT will hold its investments in real estate-related assets will vary depending on the type of asset, interest rates and other factors. The REIT may hold some of its investments in mortgage and other types of loans for four to seven years, though the REIT expects to hold some of its loan investments for two to three years. **Redemption of shares may be available through the REIT s share redemption program at the shares purchase price (unless an estimated value per share has been established) due to qualifying events such as death, disability or determination of incompetence of the stockholder. Otherwise, after a stockholder has held the shares for at least one year, redemption of shares is available at a percentage of the purchase price of the shares, depending on the length of time a stockholder has owned the shares, is limited to 5% of the REIT s weighted-average number of shares outstanding during the prior calendar year and is also limited to funds available from net proceeds from the sale of shares under the REIT s dividend reinvestment program during the prior calendar year. The share redemption program may be amended, suspended or terminated by the board of directors at any time. Please see prospectus for additional details on the share redemption program. ***See Loan Terms and Leverage on page 13 for additional information. 14 KBS REIT III

15 Offering Overview

16 KBS REIT III s organizational documents do not restrict it from paying distributions from any source and do not restrict the amount of distributions it may pay from any source, including offering proceeds. Distributions paid from sources other than current or accumulated earnings and profits may constitute a return of capital. A return of capital would reduce the amount KBS REIT III would have for investment, which could reduce an investor s return on investment. There are no guarantees that KBS REIT III will pay distributions. KBS Capital Advisors and its affiliates, and KBS REIT III s executive officers, some of its directors and other key professionals will face conflicts of interest, including significant conflicts created by the advisor s compensation arrangements with the REIT and other KBSsponsored programs and investors. KBS REIT III expects to use debt in connection with its investments, which increases the risk of loss associated with these investments and could hinder its ability to pay distributions to its stockholders or could decrease the value of its stockholders investments if income on, or the value of, the property securing the debt declines. KBS REIT III may make adjustments to its target portfolio based on real estate market conditions and investment opportunities, and it may change its targeted investments and investment guidelines at any time without the consent of its stockholders. Some of the real estate-related investments may have additional risk exposure, such as interest rate risk, default risk and decrease in property values, which could impact the value of the real estate-related investments. KBS REIT III elected to be taxed as a REIT beginning with the taxable year that ended December 31, Should KBS REIT III not qualify as a REIT, it will be subject to adverse tax consequences. Please refer to the prospectus for more detailed information regarding these consequences. Financial Professional Information: KBS Capital Markets Group LLC 660 Newport Center Drive, Suite 1200 Newport Beach, CA (866) KBS-4CMG ( ) Copyright 2012, KBS Capital Markets Group, LLC Securities distributed by KBS Capital Markets Group, LLC, Member FINRA & SIPC D