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HFF, Inc. · IPO:  S-1/A · On 1/16/07

Filed On 1/16/07, 9:55pm ET   ·   Accession Number 893220-7-50   ·   SEC File 333-138579

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 1/17/07  HFF, Inc.                         S-1/A                  2:1.6M                                   Bowne - Bop/FA

Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amendment No.5 to Form S-1                          HTML   1.19M 
 2: EX-23.1     Consent of Ernst & Young LLP                        HTML      6K 


S-1/A   —   Amendment No.5 to Form S-1
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Prospectus Summary
"Risk Factors
"Forward-Looking Statements
"Trademarks
"Organizational Structure
"Use of Proceeds
"Dividend Policy
"Capitalization
"Dilution
"Unaudited Pro Forma Financial Information
"Selected Historical Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operation
"The Commercial Real Estate Industry
"Business
"Management
"Principal Stockholders
"Certain Relationships and Related Party Transactions
"Description of Capital Stock
"Shares Eligible for Future Sale
"Material U.S. Federal Tax Considerations for Non-U.S. Holders of Class A Common Stock
"Underwriting
"Legal Matters
"Experts
"Where You Can Find More Information
"Index to Financial Statements
"Industry and Market Data
"Table of Contents

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Table of Contents

As filed with the Securities and Exchange Commission on January 17, 2007.
Registration No. 333-138579
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
 
Amendment No. 5
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
HFF, Inc.
(Exact name of Registrant as specified in its charter)
 
         
Delaware   6500   51-0610340
(State or Other Jurisdiction
of Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
 
 
 
429 Fourth Avenue
Suite 200
Pittsburgh, PA 15219
(412) 281-8714
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
 
 
John H. Pelusi, Jr.
Chief Executive Officer
429 Fourth Avenue
Suite 200
Pittsburgh, PA 15219
(412) 281-8714
(Name, address including zip code, and telephone number,
including area code, of agent for service)
 
 
 
 
Copies to:
 
     
James A. Lebovitz, Esq.
Brian D. Short, Esq.
Dechert LLP
2929 Arch Street
Philadelphia, PA 19104-2808
(215) 994-4000
  Alan D. Schnitzer, Esq.
Joshua Ford Bonnie, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017-3954
(212) 455-2000
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
    Proposed Maximum
     
Title of Each Class of
    Amount to be
    Offering Price
    Aggregate Offering
    Amount of
Securities to be Registered     Registered(1)     Per Share     Price(2)(3)     Registration Fee(4)
Class A Common Stock, par value $0.01 per share     16,445,000     $17.00     $279,565,000     $30,000
                         
 
(1) Includes 2,145,000 shares subject to the underwriters’ option to purchase additional shares.
 
(2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(a) under the Securities Act based on an estimate of the proposed maximum aggregate offering price.
 
(3) Includes shares subject to the underwriters’ option to purchase additional shares.
 
(4) This amount has previously been paid.
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 



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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED JANUARY 17, 2007
 
14,300,000 Shares
 
(HFF LOGO)
 
Class A Common Stock
 
 
 
This is an initial public offering of Class A common stock of HFF, Inc.
 
All of the 14,300,000 shares of Class A common stock are being sold by HFF, Inc.
 
Prior to this offering, there has been no market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $15.00 and $17.00 per share.
 
We have applied to list our Class A common stock on the New York Stock Exchange under the symbol “HF.” See “Underwriting” for a discussion of the factors to be considered in determining the initial public offering price.
 
Investing in our Class A common stock involves significant risks. See “Risk Factors” beginning on page 15 to read about factors you should consider before buying shares of our Class A common stock.
 
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
 
                 
    Per Share     Total  
 
Initial public offering price
  $           $        
Underwriting discount
  $       $    
Proceeds, before expenses, to HFF, Inc. 
  $       $  
 
To the extent that the underwriters sell more than 14,300,000 shares of our Class A common stock, the underwriters have the option to purchase up to an additional 2,145,000 shares of Class A common stock from HFF, Inc. at the public offering price less the underwriting discount.
 
 
 
 
The underwriters expect to deliver the shares of Class A common stock in New York, New York on          , 2007.
 
 
 
Goldman, Sachs & Co. Morgan Stanley
 
 
 
Banc of America Securities LLC Wachovia Securities
 
JPMorgan Lehman Brothers
 
 
 
 
Prospectus dated          , 2007.



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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. Before making an investment decision, you should read the entire prospectus carefully, including the section entitled “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
Unless we state otherwise, the terms “we,” “us,” “our,” “HFF,” and the “Company,” refer to HFF, Inc., a newly formed Delaware corporation, and its consolidated subsidiaries after giving effect to the reorganization transactions to be completed prior to the consummation of this offering as described in “Organizational Structure”; prior to the reorganization transactions, these terms refer to HFF Holdings (as such term is defined below) and its consolidated subsidiaries. Unless the context otherwise requires, references to (1) “HFF Holdings” refer solely to HFF Holdings LLC, a Delaware limited liability company that is currently the holding company for our consolidated subsidiaries, and not to any of its subsidiaries, (2) “HFF LP” refer to Holliday Fenoglio Fowler, L.P., a Texas limited partnership, (3) “HFF Securities” refer to HFF Securities L.P., a Delaware limited partnership and registered broker-dealer, (4) “Holliday GP” refer to Holliday GP Corp., a Delaware corporation and the general partner of HFF LP and HFF Securities, (5) “HoldCo LLC” refer to HFF Partnership Holdings LLC, a Delaware limited liability company and a wholly-owned subsidiary of HFF, Inc. and (6) “Holdings Sub” refer to HFF LP Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of HFF Holdings. Our business operations are conducted by HFF LP and HFF Securities which are sometimes referred to in this prospectus as the “Operating Partnerships.” Unless we state otherwise, the information in this prospectus gives effect to the reorganization transactions described in “Organizational Structure.” The term “Predecessor” refers to HFF LP prior to its acquisition from Lend Lease by HFF Holdings on June 16, 2003. The term “‘Successor” refers to HFF Holdings after the date of such acquisition.
 
HFF
 
We are a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry based on transaction volume and are one of the largest private full-service commercial real estate financial intermediaries in the country. We operate out of 18 offices nationwide with more than 130 transaction professionals and approximately 270 support associates. In 2005, we advised on approximately $32 billion of completed commercial real estate transactions, more than a 40% increase compared to the approximately $22 billion of completed transactions we advised on in 2004.
 
Our fully-integrated national capital markets platform, coupled with our knowledge of the commercial real estate markets, allows us to effectively act as a “one-stop shop” for our clients, providing a broad array of capital markets services including:
 
  •  Debt placement;
 
  •  Investment sales;
 
  •  Structured finance;
 
  •  Private equity, investment banking and advisory services;
 
  •  Note sale and note sales advisory services; and
 
  •  Commercial loan servicing.
 
Substantially all of our revenues are in the form of capital market services fees collected from our clients, usually negotiated on a transaction-by-transaction basis. We believe that our multiple product offerings, diverse client mix, expertise in a wide range of property types and our national platform create a stable and diversified revenue stream. Furthermore, we believe our business mix, operational expertise and the leveragability of our platform have enabled us to achieve profit margins that are among the highest of our public company peers. Our revenues and net income were $205.8 million and $46.8 million, respectively, for the year ended December 31, 2005, compared to $143.7 million and $28.1 million, respectively, for the year ended December 31, 2004. For the


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nine months ended September 30, 2006, our revenues and net income were $156.5 million and $31.7 million, respectively.
 
We have established strong relationships with our clients. Our clients are both users of capital, such as property owners, and providers of capital, such as lenders and equity investors. Many of our clients act as both users and providers of capital in different transactions, which enables us to leverage our existing relationships and execute multiple transactions across multiple services with the same clients.
 
We believe we have a reputation for high ethical standards, dedicated teamwork and a strong focus on serving the interests of our clients. We take a long-term view of our business and client relationships, and our culture and philosophy are firmly centered on putting the client’s interests first. Furthermore, through their ownership of HFF Holdings, approximately 40 of our senior transaction professionals will in the aggregate own a majority interest in the Operating Partnerships following this offering. We believe this further aligns their individual interests with those of the Company.
 
Our Competitive Strengths
 
We attribute our success and distinctiveness to our ability to leverage a number of key competitive strengths, including:
 
  •  People, Expertise and Culture.  We and our predecessor companies have been in the commercial real estate business for over 25 years, and our transaction professionals have significant expertise and long-standing relationships with our clients. The transaction history accumulated among our transaction professionals ensures a high degree of market knowledge on a macro level, intimate knowledge of local commercial real estate markets, long-term relationships with the most active investors, and a comprehensive understanding of capital markets products. In addition, our culture is governed by our commitment to high ethical standards, putting the client’s interest first and treating clients and our own associates fairly and with respect.
 
  •  Integrated Capital Markets Services Platform.  In the increasingly competitive commercial real estate and capital markets industry, we believe our key differentiator is our ability to analyze all commercial real estate product types and markets as well as our ability to provide clients with comprehensive analysis, advice and execution expertise on all types of debt and equity capital markets solutions.
 
  •  Independent Objective Advice.  Unlike many of our competitors, we do not currently offer services that compete with services provided by our clients such as leasing or property management, nor do we currently engage in principal capital investing activities. This allows us to offer independent objective advice to our clients.
 
  •  Extensive Cross-Selling Opportunities.  As some participants in the commercial real estate market are frequently buyers, sellers, lenders and borrowers at various times, our relationships with these participants across all aspects of their business provides us with multiple revenue opportunities throughout the life cycle of their commercial real estate investments. In addition, we often provide more than one service in a particular transaction, such as in an investment sale or note sale assignment where we not only represent the seller of a commercial real estate investment but also represent the buyer in arranging acquisition financing.
 
  •  Broad and Deep Network of Relationships.  We have developed broad and deep-standing relationships with the users and providers of capital in the industry and have completed multiple transactions for many of the top institutional commercial real estate investors in the U.S. Importantly, our transaction professionals, analysts and closing specialists foster relationships with their respective counterparts within each client’s organization. This provides, in our opinion, a deeper relationship with our firm relative to our competitors.
 
  •  Proprietary Transaction Database.  We believe that the extensive volume of commercial real estate transactions that we advise on throughout the U.S. and across multiple property types and capital market service lines provides our transaction professionals with valuable, real-time market information. We maintain a proprietary database on over 4,800 clients as well as databases that track key terms and provisions of all closed and pending transactions for which we are involved as well as historic and current


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  flows and the pricing of debt, structured finance, investment sales, note sales and equity transactions. We believe this information strengthens our competitive position by enhancing the advice we provide to clients and improving the probability of successfully closing a transaction.
 
Our Strategic Growth Plan
 
We seek to improve our market position by focusing on the following strategic growth initiatives:
 
  •  Expand Our Geographic Footprint.  We believe that opportunities exist to establish and increase our presence in several key domestic and, potentially, international markets. While our transaction professionals, located in 18 offices throughout the U.S., advised clients on transactions in 44 states (and the District of Columbia) and in more than 500 cities in 2005, there are a number of major metropolitan areas where we do not maintain an office, and we have no overseas offices. We expect to achieve future strategic geographic expansion through a combination of recruitment of key transaction professionals, organic growth and possible acquisitions of smaller local and regional firms across all services in both new and existing markets. However, in all cases our strategic growth will be focused on serving our clients’ interests and predicated on finding the most experienced professionals in the market who have the highest integrity, work ethic and reputation, while fitting into our culture and sharing our philosophy and the way we conduct our business.
 
  •  Increase Market Share Across Each of Our Services.  We have achieved significant growth in each of the services we provide through our integrated capital markets platform. We believe that we have the opportunity to continue to increase our market share in each of the various services we provide to our clients by penetrating deeper into our national, regional and local client relationships. We also intend to increase our market share by selectively hiring transaction professionals in our existing offices and in new locations, predicated on finding the most experienced professionals in the market who have the highest integrity, work ethic and reputation, while fitting into our culture and sharing our philosophy and the way we conduct our business.
 
  •  Continue to Capitalize on Cross-Selling Opportunities.  Participants in the commercial real estate market increasingly are buyers, sellers, lenders and borrowers at various times. We believe our relationships with all of these participants across all aspects of their businesses provide us with multiple revenue opportunities throughout the lifecycle of their commercial real estate investments. Our clients typically execute transactions throughout the U.S. utilizing the wide spectrum of our services. By maintaining close relationships with these clients, we intend to continue to generate significant repeat business across all of our business lines.
 
Selected Risk Factors
 
We face a number of competitive challenges and potential risks. See “Risk Factors” for a discussion of the factors you should consider before buying shares of our Class A common stock. Some of the more significant challenges and risks include:
 
  •  General Economic Conditions and Commercial Real Estate Market Conditions.  Negative economic conditions, changes in interest rates, disruptions in capital markets, and declines in the demand for commercial real estate and related services in international or domestic markets or in significant markets in which we do business could have a material adverse effect on our business, results of operations and/or financial condition.
 
  •  Retention of Qualified and Experienced Transaction Professionals and Employees.  Our most important asset is our people, and our continued success is highly dependent upon the efforts of our transaction professionals and other important associates, including our analysts and production coordinators as well as our key servicing and company overhead support associates. Our transaction professionals generate a significant majority of our revenues. If any of these key transaction professionals or other important associates leave, or if we are unable to attract other qualified transaction professionals, our business, financial condition and results of operations may suffer.


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  •  Preservation of Our Business Philosophy and Culture.  We are deeply committed to maintaining our business philosophy and culture. The effects of becoming a public company, including potential changes in our compensation structure, could adversely affect our culture.
 
  •  Control by HFF Holdings of the voting power in HFF, Inc.  After the offering, HFF Holdings will have a number of votes in HFF, Inc. that is equal to the total number of shares of Class A common stock for which the partnership units that HFF Holdings holds in the Operating Partnerships are exchangeable. As a result, because HFF Holdings will have a majority of the voting power in HFF, Inc., following the offering HFF Holdings will have the ability to elect all of the members of our board of directors and thereby to control our management and affairs.
 
  •  Tax Benefits.  Although we expect our structure to produce significant tax benefits as a result of the initial sale to us of interests in the Operating Partnerships and subsequent exchanges of interests in the Operating Partnerships, we will be required to pay HFF Holdings for 85% of those tax benefits. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement as a result of timing discrepancies or otherwise.
 
  •  Transformation into a public company.  Our business has historically operated as a privately-owned company, and we expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded common stock. Additionally, the demands associated with being a public company may disrupt regular operations of our business by diverting attention of some of our most active senior transaction professionals away from revenue producing activities to management and administrative oversight.
 
 
HFF, Inc. was incorporated in Delaware in November, 2006. Our principal executive offices are located at 429 Fourth Avenue, Suite 200, Pittsburgh, Pennsylvania 15219, and our telephone number is (412) 281-8714.


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Organizational Structure
 
Prior to the closing of this offering, we will effect the reorganization described in “Organizational Structure” beginning on page 29. The diagram below depicts our current organizational structure:
 
Current Organizational Structure
 
(FLOW CHART)
 
 
(a) Approximately 40 of our senior transaction professionals.


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Following the reorganization and this offering, HFF, Inc. will be a holding company and hold partnership units in the Operating Partnerships and all of the outstanding shares of Holliday GP. As the owner of Holliday GP, the sole general partner of the Operating Partnerships, HFF, Inc. will operate and control all of the business and affairs of the Operating Partnerships. HFF, Inc. will consolidate the financial results of the Operating Partnerships, and the ownership interest of HFF Holdings in the Operating Partnerships will be treated as a minority interest in HFF, Inc.’s consolidated financial statements. HFF Holdings and HFF, Inc., through their wholly-owned subsidiaries, will be the only limited partners of the Operating Partnerships after this offering. The diagram below depicts our organizational structure immediately following this offering.
 
Post – IPO Organizational Structure
 
(FLOW CHART)
 
(a) Approximately 40 of our senior transaction professionals.


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Immediately following this offering, HFF, Inc. will hold partnership units in the Operating Partnerships representing approximately 39% of the total number of partnership units of each of the Operating Partnerships, or approximately 45% if the underwriters exercise in full their option to purchase additional shares, and HFF Holdings will hold partnership units in the Operating Partnerships representing approximately 61% of the total number of partnership units of each of the Operating Partnerships, or approximately 55% if the underwriters exercise in full their option to purchase additional shares. Accordingly, immediately following this offering, public stockholders will own approximately 39% of the equity in our business and HFF Holdings will own approximately 61% of the equity in our business. If the underwriters exercise in full their option to purchase additional shares, immediately following this offering, public stockholders will own approximately 45% of the equity in our business and HFF Holdings will own approximately 55% of the equity in our business. In addition, our public stockholders will have approximately 39% of the voting power in HFF, Inc., or approximately 45% if the underwriters exercise in full their option to purchase additional shares, and HFF Holdings will have approximately 61% of the voting power in HFF, Inc., or approximately 55% if the underwriters exercise in full their option to purchase additional shares.


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The Offering
 
Class A common stock offered by us
14,300,000 shares
 
Common stock to be outstanding after the offering
 
  Class A common stock
14,300,000 shares (or 36,800,000 shares if HFF Holdings exchanges all of its partnership units in the Operating Partnerships for newly-issued shares of Class A common stock)
 
  Class B common stock
1 share
 
Option to purchase additional shares
If the underwriters sell more shares than the total number set forth above, the underwriters have an option to buy up to an additional 2,145,000 shares from us to cover such sales. They may exercise that option for 30 days.
 
Use of proceeds
We estimate that our net proceeds from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $209.0 million, or approximately $240.9 million if the underwriters exercise in full their option to purchase additional shares. We will use these proceeds, as well as any proceeds received from the exercise of the underwriters’ option to purchase additional shares, to purchase from HFF Holdings all of the shares of Holliday GP and partnership units representing approximately 39% of each of the Operating Partnerships, or partnership units representing approximately 45% of each of the Operating Partnerships if the underwriters exercise in full their option to purchase additional shares. HFF Holdings will use approximately $56.3 million of the sale proceeds to repay all outstanding borrowings under HFF LP’s credit agreement, based on amounts outstanding under the credit agreement on January 1, 2007. Accordingly, we will not retain any of the proceeds from this offering.
 
Voting rights
Each share of our Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.
 
HFF Holdings will be issued one share of our Class B common stock. Class B common stock has no economic rights but will entitle the holder to a number of votes that is equal to the total number of shares of Class A common stock for which the partnership units that HFF Holdings holds in the Operating Partnerships as of the relevant record date for the HFF, Inc. stockholder action are exchangeable.
 
See “Description of Capital Stock.”
 
Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.
 
Dividends
We do not currently intend to pay a quarterly cash dividend. If we do declare a dividend in the future, the Class B common stock will not be entitled to dividend rights.
 
HFF, Inc. will be a holding company and will have no material assets other than its ownership of partnership units in the Operating Partnerships. If we declare a dividend at some point in the future, we intend to cause the Operating Partnerships to make distributions to HFF, Inc. in an amount sufficient to cover any such dividends. If the Operating Partnerships make such distributions, HFF Holdings will be


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entitled to ratably receive equivalent distributions on its partnership units in the Operating Partnerships.
 
New York Stock Exchange symbol
HF
 
Risk factors
Please read “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.
 
 
Class A common stock outstanding and other information based thereon in this prospectus does not reflect:
 
  •  2,145,000 shares of Class A common stock issuable upon exercise of the underwriters’ option to purchase additional shares;
 
  •  210,940 shares of our Class A common stock that will underlie awards we expect to grant under our proposed stock incentive plan at the time of this offering. A $1.00 increase (decrease) in the assumed offering price of $16.00 per share would decrease (increase) the amount of shares underlying these awards by approximately 15,000 shares. See “Management — Omnibus Incentive Compensation Plan;” and
 
  •  3,289,060 additional shares of our Class A common stock expected to be available for future grant under our proposed stock incentive plan after the consummation of this offering. See “Management — Omnibus Incentive Compensation Plan.”
 
Unless we specifically state otherwise, all information in this prospectus assumes that our Class A common stock will be sold at $16.00 per share (the midpoint of the price range on the cover of this prospectus).


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Summary Consolidated Financial Data
 
The following tables present summary consolidated financial data as of and for the dates and periods indicated for HFF Holdings. We derived the summary consolidated financial data set forth below as of and for the years ended December 31, 2005 and 2004 and as of and for the nine months ended September 30, 2006 from the audited consolidated financial statements of HFF Holdings, which have been audited by Ernst & Young LLP, our independent registered public accounting firm, and are included elsewhere in this prospectus. We derived the summary consolidated financial data set forth below for the nine months ended September 30, 2005 from the unaudited consolidated financial statements of HFF Holdings, which are included elsewhere in this prospectus.
 
The summarized unaudited pro forma financial data as of September 30, 2006 and for the year ended December 31, 2005 and the nine months ended September 30, 2006 have been prepared to give pro forma effect to all of the reorganization transactions described in “Organizational Structure” and the sale of shares in this offering, and the application of the net proceeds from this offering, as if they had been completed as of January 1, 2005 with respect to the unaudited condensed consolidated pro forma statements of income and as of September 30, 2006 with respect to the unaudited pro forma statement of financial condition data. This data is subject, and gives effect, to the assumptions and adjustments described in the notes accompanying the unaudited pro forma financial statements included elsewhere in this prospectus. The summary unaudited pro forma financial data is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the reorganization transactions and this offering been consummated on the dates indicated, and do not purport to be indicative of statements of financial condition data or results of operations as of any future date or for any future period.
 
The summary consolidated financial data presented below is not indicative of our results for any future period. In management’s opinion, the unaudited information has been prepared on substantially the same basis as the consolidated financial statements appearing elsewhere in this prospectus and includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the unaudited consolidated data. The summary consolidated financial data set forth below should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus, “Unaudited Pro Forma Financial Information,” “Selected Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”


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                            Pro Forma(a)  
          Nine Months
          Nine Months
 
    Year Ended
    Ended
    Year Ended
    Ended
 
    December 31,     September 30,     December 31,     September 30,  
    2004     2005     2005     2006     2005     2006  
                (unaudited)           (unaudited)     (unaudited)  
    (In thousands, except per share data)  
 
Statement of Income Data
                                               
Revenues
                                               
Capital markets services revenue
  $ 142,192     $ 203,457     $ 135,983     $ 153,586     $ 203,457     $ 153,586  
Interest on mortgage notes receivable
          412       65       662       412       662  
Other
    1,499       1,979       1,251       2,289       1,979       2,289  
                                                 
Total revenues
    143,691       205,848       137,299       156,537       205,848       156,537  
Operating expenses
                                               
Cost of services
    85,778       119,106       81,026       89,340       119,106       89,340  
Personnel
    9,107       14,369       8,874       10,460       14,936       10,648  
Occupancy
    5,047       5,357       4,034       4,629       5,357       4,629  
Travel and entertainment
    3,617       5,067       3,221       3,842       5,067       3,842  
Supplies, research and printing
    2,933       5,089       3,690       4,800       5,089       4,800  
Insurance
    1,500       2,470       1,883       2,265       1,459       1,056  
Professional fees
    871       1,201       1,012       1,979       1,101       1,295  
Depreciation and amortization
    2,506       2,735       1,988       2,039       2,595       1,946  
Other operating
    3,441       3,483       2,532       3,270       3,417       3,288  
Interest on warehouse line of credit
          409       60       676       409       676  
                                                 
Total operating expenses
    114,800       159,286       108,320       123,300       158,536       121,520  
                                                 
Operating income
    28,891       46,562       28,979       33,237       47,312       35,017  
Interest and other income
    317       1,267       675       1,394       274       369  
Interest expense
    (406 )     (271 )     (220 )     (2,377 )     (80 )     (47 )
                                                 
Income before minority interest and income taxes
    28,802       47,558       29,434       32,254       47,506       35,339  
Minority interest
                            29,026       21,592  
                                                 
Income before taxes
    28,802       47,558       29,434       32,254       18,480       13,747  
Income tax expense(b)
    728       715       433       557       7,392       5,499  
                                                 
Net income
  $ 28,074     $ 46,843     $ 29,001     $ 31,697       11,088       8,248  
                                                 
Pro forma basic net income per share of Class A common stock(c)
                                  $ 0.77     $ 0.58  
Pro forma diluted net income per share of Class A common stock(c)
                                  $ 0.77     $ 0.57  
Pro forma basic weighted average shares of Class A common stock(c)
                                    14,313       14,313  
Pro forma diluted weighted average shares of Class A common stock(c)
                                    14,329       14,368  
 


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                            Pro Forma(a)  
          Nine Months
          Nine Months
 
    Year Ended
    Ended
    Year Ended
    Ended
 
    December 31,     September 30,     December 31,     September 30,  
    2004     2005     2005     2006     2005     2006  
    (Dollars in thousands)  
 
Other Financial and Operational Data: (Unaudited)
                                               
EBITDA(d)
  $ 31,714     $ 50,564     $ 31,642     $ 36,670     $ 50,181     $ 37,332  
EBITDA margin
    22.1 %     24.6 %     23.0 %     23.4 %     24.4 %     23.8 %
Transaction volume by service(e):
                                               
Debt placement and structured finance
  $ 16,567,740     $ 23,914,648     $ 16,175,033     $ 16,738,793                  
Investment sales
  $ 5,549,781     $ 7,606,145     $ 5,038,859     $ 6,454,221                  
Note sale and note sales advisory services
  $ 189,963     $ 93,900     $ 74,400     $ 0                  
Private equity, investment banking and advisory services
        $ 165,400     $ 112,000     $ 1,020,000                  
Total
  $ 22,307,484     $ 31,780,093     $ 21,400,292     $ 24,213,014                  
Number of transactions
    1,004       1,472       1,014       914                  
Servicing portfolio balance
  $ 13,040,524     $ 14,889,963     $ 14,169,055     $ 16,399,388                  
Transaction professionals
    118       131       130       139                  
Total number of employees
    328       380       366       408                  
 
                                 
                As of
 
    December 31,     September 30,     September 30, 2006  
    2004     2005     2006     Pro Forma(a)  
                      (Unaudited)  
    (In thousands)  
 
Balance Sheet Data:
                               
Cash and cash equivalents
  $ 41,301     $ 59,595     $ 55,224     $ 12,381  
Total assets
    56,090       89,941       112,851       175,168  
Long term debt (including current portion)
    7,644       272       57,690       190  
Total liabilities
    18,978       29,903       120,952       153,521  
Minority interest
                      13,226  
Stockholders’/members’ equity (deficiency)
    37,112       60,038       (8,101 )     8,421  
 
 
(a) See “Unaudited Pro Forma Financial Information.”
 
(b) We have historically operated as two limited liability companies (HFF Holdings and Holdings Sub), a corporation (Holliday GP) and two limited partnerships (HFF LP and HFF Securities), which two partnerships we refer to as the Operating Partnerships. As a result, our income has been subject to limited U.S. federal income taxes, and our income and expenses have been passed through and reported on the individual tax returns of the members of HFF Holdings. Income taxes shown on our consolidated statements of income are attributable to taxes incurred at the state and local level. Following this offering, HFF, Inc. will be subject to additional entity-level taxes that will be reflected in our consolidated financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Key Financial Measures and Indicators — Costs and Expenses — Income Tax Expense” and “Unaudited Pro Forma Financial Information.”

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(c) For the purposes of the HFF, Inc. pro forma net income per share of Class A common stock calculation, the weighted average shares of Class A common stock outstanding, basic and diluted, are calculated based on:
 
                                 
    Year Ended
    Nine Months Ended
 
    December 31, 2005
    September 30, 2006
 
    Pro Forma     Pro Forma  
    (unaudited)     (unaudited)  
    Basic     Diluted     Basic     Diluted  
 
HFF, Inc. shares of Class A common stock
                       
New shares from offering
    14,300       14,300       14,300       14,300  
Restricted stock units
    13       29       13       68  
Weighted average shares of Class A common stock outstanding
    14,313       14,329       14,313       14,368  
 
The partnership units of Operating Partnerships exchangeable into shares of Class A common stock pursuant to the Exchange Right are not included in the calculation of weighted average shares of Class A common stock outstanding as they are anti-dilutive.
 
HFF, Inc. pro forma basic and net diluted net income per share of Class A common stock are calculated as follows:
 
                                 
          Nine Months
 
    Year Ended
    Ended
 
    December 31,
    September 30,
 
    2005
    2006
 
    Pro Forma     Pro Forma  
    (unaudited)     (unaudited)  
    Basic     Diluted     Basic     Diluted  
 
Basic and Diluted Net Income Per Share
                               
Net income available to holders of shares of Class A common stock
  $ 11,088     $ 11,088     $ 8,248     $ 8,248  
Basic and diluted weighted average shares of Class A common stock outstanding
    14,313       14,329       14,313       14,368  
Basic and diluted net income per share of Class A common stock
  $ 0.77     $ 0.77     $ 0.58     $ 0.57  
 
The share of Class B common stock has no right to receive dividends or distributions from HFF, Inc. The share of Class B common stock does not share in the earnings of HFF, Inc. and no earnings are allocable to such class. Accordingly, pro forma basic and diluted net income per share of Class B common stock have not been presented.
 
(d) We define EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization, and income reported to the minority interest. We use EBITDA in our business operations to, among other things, evaluate the performance of our business, develop budgets and measure our performance against those budgets. We also believe that analysts and investors use EBITDA as a supplemental measure to evaluate a company’s overall operating performance. However, EBITDA has material limitations as an analytical tool and you should not consider this in isolation, or as a substitute for analysis of our results as reported under GAAP. We find it as a useful tool to assist us in evaluating performance because it eliminates items related to capital structure and taxes. The items that we have eliminated from net income in determining EBITDA are interest expense, income taxes, depreciation of fixed assets, amortization of intangible assets and income reported to the minority interest. However, some of these eliminated items are significant to our business. For example, (i) interest expense is a necessary element of our costs and ability to generate revenue because we incur interest expense related to any outstanding indebtedness, (ii) payment of income taxes is a necessary element of our costs, (iii) depreciation is a necessary element of our costs and (iv) income reported to minority interest based upon HFF Holding’s ownership interest in the Operating Partnerships. Any measure that eliminates components of our capital structure and costs associated with carrying significant amounts of fixed assets on our balance sheet has material limitations as a performance measure. In light of the foregoing limitations, we do not rely solely on EBITDA as a performance measure and also consider our GAAP results. EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with GAAP. Because EBITDA is not


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calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.
 
Set forth below is an unaudited reconciliation of net income (loss) to EBITDA for the periods presented.
 
                                                 
                            Pro Forma(a)  
    For the Year Ended
    Nine Months Ended
    Year Ended
    Nine Months
 
    December 31,     September 30,     December 31,     September 30,  
    2004     2005     2005     2006     2005     2006  
    (In thousands, except per share data)  
 
Net income
  $ 28,074     $ 46,843     $ 29,001     $ 31,697     $ 11,088     $ 8,248  
Income tax expense
    728       715       433       557       7,392       5,499  
Interest expense
    406       271       220       2,377       80       47  
Depreciation and amortization
    2,506       2,735       1,988       2,039       2,595       1,946  
Minority interest
                            29,026       21,592  
                                                 
EBITDA
    31,714       50,564       31,642       36,670       50,181       37,332  
                                                 
 
(e) HFF estimates derived from internal database.


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RISK FACTORS
 
The purchase of our Class A common stock involves a high degree of risk. The risks described below comprise the material risks of which we are aware. You should consider these risks carefully before making a decision to invest in our Class A common stock. In addition, there may be risks of which we are currently unaware, or that we currently regard as immaterial based on the information available to us, that later prove to be material. These risks may adversely affect our business, financial condition and operating results. As a result, the trading price of our Class A common stock could decline and you could lose some or all of your investment.
 
Risks Related to Our Business
 
General economic conditions and commercial real estate market conditions, both globally and
domestically, can have a negative impact on our business.
 
We have experienced in past years, and expect in the future to be negatively impacted by, periods of economic slowdowns, recessions and disruptions in the capital markets, including international, national, regional and local markets, and corresponding declines in the demand for commercial real estate and related services, within one or more of the markets in which we operate. Historically, commercial real estate markets, and in particular the U.S. commercial real estate market, have tended to be cyclical and related to the condition of the economy as a whole and to the perceptions of the market participants as to the relevant economic outlook. Negative economic conditions, changes in interest rates, disruptions in capital markets and declines in the demand for commercial real estate and related services in international or domestic markets or in significant markets in which we do business could have a material adverse effect on our business, results of operations and/or financial condition, including as a result of the following factors.
 
For example:
 
  •  Slowdowns in economic activity could cause tenant demand for space to decline, which would adversely affect the operation and income of commercial real estate properties and thereby affect investor demand and the supply of capital for debt and equity investments in commercial real estate.
 
  •  Declines in the regional or local demand for commercial real estate, or significant disruptions in other segments of the real estate market, could adversely affect our results of operations. During 2005, approximately 19%, 14%, 9% and 10% of our capital market services revenues was derived from transactions involving commercial real estate located in Texas, California, Florida and the region consisting of the District of Columbia, Maryland and Virginia, respectively. As a result, a significant portion of our business is dependent on the economic conditions in general and the markets for commercial real estate in these areas, which, like other commercial real estate markets, have experienced price volatility or economic downturns in the past.
 
  •  Significant fluctuations in interest rates as well as steady and protracted increases or decreases of interest rates could adversely effect the operation and income of commercial real estate properties as well as the demand from investors for commercial real estate investments. Both of these events could adversely affect investor demand and the supply of capital for debt and equity investments in commercial real estate. In particular, increased interest rates may reduce the number of acquisitions, dispositions and loan originations, as well as the respective transaction volumes, which could also adversely affect our servicing revenue. All of the above could cause prices to decrease due to the reduced amount of financing available as well as the increased cost of obtaining financing and could lead to a decrease in purchase and sale activity.
 
  •  Significant disruptions or changes in capital market flows, regardless of their duration, could adversely affect the supply and/or demand for capital from investors for commercial real estate investments. In particular, while commercial real estate is now viewed as an accepted asset class for portfolio diversification, if this perception changes there could be a significant reduction in the amount of debt and equity capital available in the commercial real estate sector.
 
These and other types of events could lead to a general decline in transaction activity, which would likely lead to a reduction in fees and commissions relating to such transactions, as well as a significant reduction in our loan servicing activities as a result of increased delinquencies and the lack of additional loans that we would have


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otherwise added to our servicing portfolio. These effects would likely cause us to realize lower revenues from our transaction service fees, including debt placement fees and investment sales commissions, which fees usually are tied to the transaction value and are payable upon the successful completion of a particular transaction, and from our loan servicing revenues due to reduced financing and refinancing transactions as well as higher delinquencies.
 
If we are unable to retain and attract qualified and experienced transaction professionals and associates, our growth may be limited and our business and operating results could suffer.
 
Our most important asset is our people, and our continued success is highly dependent upon the efforts of our transaction professionals and other associates, including our analysts and production coordinators as well as our key servicing and company overhead support associates. Our transaction professionals generate a significant majority of our revenues. If any of these key transaction professionals or other important associates leave, or if we lose a significant number of transaction professionals, or if we are unable to attract other qualified transaction professionals, our business, financial condition and results of operations may suffer. We have experienced in the past, and expect to experience in the future, the negative impact of the inability to retain and attract associates, analysts and experienced transaction professionals. Additionally, such events may have a disproportionate adverse effect to our operations if they occur in geographic areas where substantial amounts of our capital market services revenues are generated. See “— General Economic Conditions and Commercial Real Estate Market Conditions.”
 
As part of our transformation to a public company, we may also face additional retention pressures as a result of reductions in distributions from HFF Holdings to approximately 40 of our most valuable transaction professionals who are the members of HFF Holdings. Following the termination of their employment contracts and expiration of their lock-ups, we may not be able to retain these members of HFF Holdings. Even if we are able to retain them, we may not be able to retain them at compensation levels that will allow us to achieve our target ratio of compensation expense-to-operating revenue. Following this offering, we intend to use a combination of cash compensation, equity, equity-based incentives and other employee benefits rather than solely cash compensation to motivate and retain our transaction professionals. Our compensation mechanisms as a public company may not be effective, especially if the market price of our Class A common stock declines.
 
In addition, our competitors may attempt to recruit our transaction professionals. The employment arrangements, non-competition agreements and retention agreements we have entered into with respect to the members of HFF Holdings or may enter into with our key associates may not prevent our transaction professionals and other key associates from resigning or competing against us. See “Management — Employment Agreements.” Any such arrangements and agreements will expire after a certain period of time, at which point each such person would be free to compete against us and solicit our clients and employees.
 
A significant component of our growth has also occurred through the recruiting and hiring of key experienced transaction professionals. Any future growth through recruiting these professionals will be partially dependent upon the continued availability of attractive candidates fitting the culture of our firm at advantageous terms and conditions. However, individuals whom we would like to hire may not be available upon advantageous terms and conditions. In addition, the hiring of new personnel involve risks that the persons acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of persons acquired will prove incorrect.
 
Our business could be hurt if we are unable to retain our business philosophy and partnership culture as a result of becoming a public company, and efforts to retain our philosophy and culture could adversely affect our ability to maintain and grow our business.
 
We are deeply committed to maintaining this philosophy and culture which we have built. Our Mission and Vision Statement defines our business philosophy as well as the emphasis that we place on our clients, our people and our culture. We seek to reinforce to each of our associates our commitment to our clients, our culture and values by sharing with everyone in the firm what is expected from each of them. We strive to maintain a work environment that reinforces our owner-operator culture and the collaboration, motivation, alignment of interests and sense of ownership and reward those associates based on their value-added performance who adhere to this culture. The effects of becoming a public company, including potential changes in our compensation structure, could adversely


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affect this culture. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain this culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations.
 
In addition, in an effort to preserve our strong partnership culture, our process for hiring new transaction professionals is lengthy and highly selective. In the past, we have interviewed a significant number of individuals for each transaction professional that we hired, and we have in the past and may in the future subordinate our growth plans to our objective of hiring transaction professionals whom we think will adhere to and contribute to our culture. Our ability to maintain and grow our business could suffer if we are not able to identify, hire and retain new transaction professionals meeting our high standards, which could negatively impact our business, financial condition and results of operations.
 
We have numerous significant competitors and potential future competitors, some of which may have greater resources than we do, and we may not be able to continue to compete effectively.
 
We compete across a variety of businesses within the commercial real estate industry. In general, with respect to each of our businesses, we cannot give assurance that we will be able to continue to compete effectively or maintain our current fee arrangements or margin levels or that we will not encounter increased competition. Each of the services we provide to our clients is highly competitive on an international, national, regional and local level. Depending on the product or service, we face competition from, including but not limited to, commercial real estate service providers, private owners and developers, institutional lenders, insurance companies, investment banking firms and investment managers, some of whom are clients and many of whom may have greater financial resources than we do. In addition, future changes in laws and regulations could lead to the entry of other competitors. Many of our competitors are local, regional, national or international firms. Although some are substantially smaller than we are, some of these competitors are larger on a local, regional, national or international basis. We may face increased competition from even stronger competitors in the future due to a trend toward consolidation. In recent years, there has been substantial consolidation and convergence among companies in our industry. We are also subject to competition from other large national and multi-national firms as well as regional and local firms that have similar service competencies to ours. Our existing and future competitors may choose to undercut our fees, increase the levels of compensation they are willing to pay to their employees and either recruit our employees or cause us to increase our level of compensation necessary to retain our own employees or recruit new employees. These occurrences could cause our revenue to decrease or negatively impact our target ratio of compensation-to-operating revenue, both of which could have an adverse effect on our business, financial condition and results of operations.
 
We could be adversely affected if the Terrorism Risk Insurance Act of 2002 is not renewed beyond 2007, or is adversely amended, or if insurance for other natural or manmade disasters is interrupted or constrained.
 
Our business could be adversely affected if the Terrorism Risk Insurance Act of 2002, or TRIA, is not renewed beyond 2007, or is adversely amended, or if insurance for other natural and manmade disasters is interrupted or constrained. In response to the tightening of supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attack, the Terrorism Risk Insurance Act of 2002 was enacted to ensure the availability of commercial insurance coverage for terrorist acts in the United States. This law established a federal assistance program through the end of 2005 to help the commercial property and casualty insurance industry cover claims related to future terrorism-related losses and required that coverage for terrorist acts be offered by insurers. Although TRIA recently has been amended and extended through 2007, it is possible that TRIA will not be renewed beyond 2007, or could be adversely amended, which could adversely affect the commercial real estate markets and capital markets if a material subsequent event occurred. Lenders generally require owners of commercial real estate to maintain terrorism insurance. In the event TRIA is not renewed, terrorism insurance may become difficult or impossible to obtain. Natural disasters such as Katrina and the lack of commercially available wind damage and flood insurance could also have a negative impact on the acquisition, disposition and financing of the commercial properties in certain areas. Any of these events could result in a general decline in acquisition, disposition and financing activities, which could lead to a reduction in our fees for arranging such transactions as well as a reduction in


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our loan servicing activities due to increased delinquencies and lack of additional loans that we would have otherwise added to our portfolio, all of which could adversely affect our business, financial condition and results of operation.
 
We have experienced significant growth over the past several years, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources.
 
We expect our significant growth to continue, which could place additional demands on our resources and increase our expenses. Our future growth will depend, among other things, on our ability to successfully identify experienced transaction professionals to join our firm. It may take years for us to determine whether new transaction professionals will be profitable or effective. During that time, we may incur significant expenses and expend significant time and resources toward training, integration and business development. If we are unable to hire and retain profitable transaction professionals, we will not be able to implement our growth strategy, which could adversely affect our business, financial condition and results of operations.
 
Sustaining our growth will also require us to commit additional management, operational and financial resources to maintain appropriate operational and financial systems to adequately support expansion. There can be no assurance that we will be able to manage our expanding operations effectively or that we will be able to maintain or accelerate our growth, and any failure to do so could adversely affect our ability to generate revenue and control our expenses which could adversely affect our business, financial condition and results of operations.
 
If we acquire companies in the future, we may experience high transaction and integration costs, the integration process may be disruptive to our business and the acquired businesses may not perform
as we expect.
 
Future acquisitions and any necessary related financings may involve significant transaction-related expenses. Transaction-related expenditures include severance costs, lease termination costs, transaction costs, deferred financing costs, possible regulatory costs and merger-related costs, among others. We may also experience difficulties in integrating operations and accounting systems acquired from other companies. These challenges include the diversion of management’s attention from the regular operations of our business and the potential loss of our key clients, our key associates or those of the acquired operations, each of which could harm our financial condition and results of operation. We believe that most acquisitions will initially have an adverse impact on revenues, expenses, operating income and net income. Acquisitions also frequently involve significant costs related to integrating information technology, accounting, reporting and management services and rationalizing personnel levels. If we are unable to fully integrate the accounting, reporting and other systems of the businesses we acquire, we may not be able to effectively manage them and our financial results may be materially affected. Moreover, the integration process itself may be disruptive to our business as it requires coordination of geographically diverse organizations and implementation of new accounting and information technology systems.
 
In addition, acquisitions of businesses involve risks that the businesses acquired will not perform in accordance with expectations, that the expected synergies associated with acquisitions will not be achieved and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect, which could have an adverse affect on our business, financial condition and results of operations.
 
A failure to appropriately deal with actual or perceived conflicts of interest could adversely affect
our businesses.
 
Outside of our people, our reputation is one of our most important assets. As we have expanded the scope of our businesses and our client base, we increasingly have to address potential actual or perceived conflicts of interest relating to the capital market services we provide to our existing and potential clients. For example, conflicts may arise between our position as an advisor to both the buyer and seller in commercial real estate sales transactions or in instances when a potential buyer requests that we represent it in securing the necessary capital to acquire an asset we are selling for another client. In addition, certain of our employees hold interests in real property as well as invest in pools of funds outside of their capacity as our employees, and their individual interests could be perceived to or actually conflict with the interests of our clients. While we have attempted to adopt various policies, controls and procedures to address or limit actual or perceived conflicts, these policies and procedures may not be adequate or


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carry attendant costs and may not be adhered to by our employees. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged and cause us to lose existing clients or fail to gain new clients if we fail, or appear to fail, to deal appropriately with conflicts of interest, which could have an adverse affect on our business, financial condition and results of operations.
 
A majority of our revenue is derived from capital market services transaction fees, which are not
long-term contracted sources of revenue and are subject to intense competition, and declines in those engagements could have a material adverse effect on our financial condition and results of operations.
 
We historically have earned over 90% of our revenue from capital market services transaction fees. We expect that we will continue to rely heavily on capital market services transaction fees for a substantial portion of our revenue for the foreseeable future. A decline in our engagements or in the value of the commercial real estate we sell or finance could significantly decrease our capital market services revenues which would adversely affect our business, financial condition and results of operations. In addition, we operate in a highly competitive environment where typically there are no long-term contracted sources of revenue; each revenue-generating engagement typically is separately awarded and negotiated on a transaction-by-transaction basis, and the inability to continue to be paid for services at the current levels or the loss of clients would adversely affect our business, financial condition and results of operation.
 
Our business could be hurt if we are unable to obtain additional capital.
 
Prior to the closing of this offering, substantially all of the Operating Partnerships’ cash will be distributed to the members of HFF Holdings. As a result, we will have little cash and the cash that we generate from our operations may be insufficient to fund our working capital needs. Although we have received a commitment letter from Bank of America, N.A. for a new $40 million line of credit to be put in place contemperaneously with the consummation of this offering, we cannot guarantee that this line of credit will be put in place at such time or at all. If we are unable to obtain sufficient additional financing, we will be required to fund our short-term liquidity requirements solely from our operations, which may not be sufficient for our capital needs or may be inadequate to maintain or grow our business, which could adversely affect our business, financial condition and results of operation.
 
Additional indebtedness may make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures.
 
Prior to the closing of this offering, substantially all of the Operating Partnerships’ cash will be distributed to members of HFF Holdings and, other than our line of credit, which we hope to increase, and any loans outstanding under the arrangement with Red Mortgage Capital, Inc. used in connection with the Freddie Mac loans we originate and then sell to Freddie Mac, we will have almost no indebtedness. Even though we will have limited indebtedness, we will have little cash and the cash that we generate from our operations may be insufficient to fund our working capital or our on-going capital needs. As a result, we may require additional financing to fund our on-going capital needs as well as to fund our working capital needs. Any additional indebtedness that we incur will make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures.
 
The level of our indebtedness could have important consequences, including:
 
  •  a substantial portion of our cash flow from operations will be dedicated to debt service and may not be available for other purposes;
 
  •  making it more difficult for us to satisfy our obligations;
 
  •  limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
  •  obtaining financing in the future for working capital, capital expenditures and general corporate purposes, including acquisitions, and may impede our ability to secure favorable lease terms;
 
  •  making us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures;


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  •  making it more difficult to continue to fund our strategic growth initiatives and retain and attract key individuals; and
 
  •  placing us at a competitive disadvantage compared to our competitors with less debt and greater financial resources.
 
Our future cash flow may not be sufficient to meet our obligations and commitments. If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets, operations or seeking to raise additional debt or equity capital or terminating significant numbers of key associates. These actions may not be effected on a timely basis or on satisfactory terms or at all, and these actions may not enable us to continue to satisfy our capital requirements. As a result, we may not be able to maintain or accelerate our growth, and any failure to do so could adversely affect our ability to generate revenue and control our expenses, which could adversely affect our business, financial condition and results of operations.
 
Significant fluctuations in our revenues and net income may make it difficult for us to achieve steady earnings growth on a quarterly or an annual basis, which may make the comparison between periods difficult and may cause the price of our Class A common stock to decline.
 
We have experienced and continue to experience significant fluctuations in revenues and net income as a result of many factors, including the timing of transactions, the commencement and termination of contracts, revenue mix and the timing of additional selling, general and administrative expenses to support new business activities. We provide many of our services without written contracts or pursuant to contracts that are terminable at will. Consequently, many of our clients can terminate or significantly reduce their relationships with us on very short notice for any reason.
 
We plan our capital and operating expenditures based on our expectations of future revenues and, if revenues are below expectations in any given quarter or year, we may be unable to adjust capital or operating expenditures in a timely manner to compensate for any unexpected revenue shortfall, which could have an immediate material adverse effect on our business, financial condition and results of operation.
 
Our results of operation vary significantly among quarters during each calendar year, which makes comparisons of our quarterly results difficult.
 
A significant portion of our revenue is seasonal. Historically, this seasonality has caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first six months of the year and higher in the second half of the year. This variance among periods during each calendar year makes comparison between such periods difficult, and it also makes the comparison of the same periods during different calendar years difficult as well. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Seasonality.”
 
Employee misconduct, which is difficult to detect and deter, could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm.
 
If our associates engage in misconduct, our business could be adversely affected. For example, our business often requires that we deal with confidential matters of great significance to our clients. It is not always possible to deter employee misconduct, and the precautions we take to deter and prevent this activity may not be effective in all cases. If our associates were improperly to use or disclose confidential information provided by our clients, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position and current client relationships and significantly impair our ability to attract future clients, which could adversely affect our business, financial condition and results of operation.


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Compliance failures and changes in regulation could result in an increase in our compliance costs or subject us to sanctions or litigation.
 
A number of our services are subject to regulation, including by the Securities and Exchange Commission, National Association of Securities Dealers, Inc. (the (“NASD”) and state real estate commissions and securities regulators. Our failure to comply or have complied with applicable laws or regulations could result in fines, suspensions of personnel or other sanctions, including revocation of the registration of us or any of our subsidiaries as a commercial real estate broker or broker-dealer. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation and cause us to lose existing clients or significantly impair our ability to gain new clients. Our broker-dealer operations are subject to periodic examination by the Securities and Exchange Commission and the NASD. Because the Reorganization Transactions will result in HFF, Inc. acquiring a greater than 25% equity interest in HFF Securities, a registered broker-dealer, HFF Securities has filed an application with the NASD for approval of the change of control that is deemed to result from such transactions. Prior to the effective date of our Registration Statement on Form S-1 of which this prospectus is a part, HFF Securities will have complied with the NASD requirements to provide advance notice of, and apply for approval of, the deemed change of control and will be permitted under the rules of the NASD to complete the Reorganization Transactions. However, in connection with the application for a change of control, the NASD may identify deficiencies in the procedures and practices of HFF Securities and may require HFF Securities to take remedial action. The NASD may also identify significant violations of law, rules or regulations, resulting in formal disciplinary action and the imposition of sanctions, including potentially the revocation of HFF Securities’ registration as a broker-dealer. We cannot predict the outcome of any such examinations or processes, and any negative regulatory action may have a significant and material adverse affect on our company. In addition, it is possible that the regulatory scrutiny of, and litigation in connection with, conflicts of interest will make our clients less willing to enter into transactions in which such a conflict may occur, and will adversely affect our businesses as well as significantly impair our ability to gain new clients, which could adversely affect our business, financial condition and results of operation.
 
In addition, we may be adversely affected as a result of new or revised legislation or regulations imposed by the Securities and Exchange Commission, other United States or state or local governmental regulatory authorities or self-regulatory organizations that supervise the financial and commercial real estate markets.
 
Risks Related to Our Organizational Structure
 
Our only material asset after completion of this offering will be our units in the Operating Partnerships, and we are accordingly dependent upon distributions from the Operating Partnerships to pay our expenses, taxes and dividends (if and when declared by our board of directors).
 
HFF, Inc. will be a holding company and will have no material assets other than its ownership of partnership units in the Operating Partnerships. HFF, Inc. has no independent means of generating revenue. We intend to cause the Operating Partnerships to make distributions to its partners in an amount sufficient to cover all expenses, applicable taxes payable and dividends, if any, declared by our board of directors. To the extent that HFF, Inc. needs funds, and the Operating Partnerships are restricted from making such distributions under applicable law or regulation or under any present or future debt covenants, or are otherwise unable to provide such funds, it could materially adversely affect our business, liquidity, financial condition and results of operation.
 
We will be required to pay HFF Holdings for most of the benefits relating to any additional tax depreciation or amortization deductions we may claim as a result of the tax basis step-up we receive in connection with this offering, subsequent sales of our common stock and related transactions with HFF Holdings.
 
As described in “Organizational Structure”, partnership units in HFF LP and HFF Securities held by Holdings Sub, a wholly-owned subsidiary of HFF Holdings, will be sold to HoldCo LLC, our wholly-owned subsidiary, for cash raised in the initial public offering. In the future, partnership units in HFF LP and HFF Securities held by HFF Holdings may be exchanged by HFF Holdings for shares of our Class A common stock. The initial sale and subsequent exchanges are expected to result in increases in the tax basis of the assets of HFF LP and HFF Securities


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that would be allocated to HFF, Inc. These increases in tax basis would likely reduce the amount of tax that we would otherwise be required to pay in the future depending on the amount, character and timing of our taxable income, but there can be no assurances that such treatment will continue in the future.
 
HFF, Inc. intends to enter into a tax receivable agreement with HFF Holdings that will provide for the payment by HFF, Inc. to HFF Holdings of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of these increases in tax basis and as a result of certain other tax benefits arising from our entering into the tax receivable agreement and making payments under that agreement. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF Securities as a result of the initial sale and later exchanges and had we not entered into the tax receivable agreement. The term of the tax receivable agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or expired, including the tax benefits derived from future exchanges.
 
While the actual amount and timing of payments under the tax receivable agreement will depend upon a number of factors, including the amount and timing of taxable income we generate in the future, the value of our individual assets, the portion of our payments under the tax receivable agreement constituting imputed interest and increases in the tax basis of our assets resulting in payments to HFF Holdings, we expect that the payments that may be made to HFF Holdings will be substantial. Assuming no material changes in the relevant tax law and that we earn significant taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that future payments to HFF Holdings in respect of the initial sale to aggregate $90.4 million and range from approximately $4.1 million to $10.6 million per year over the next 15 years. Future payments to HFF Holdings in respect of subsequent exchanges would be in addition to these amounts and are expected to be substantial. The payments under the tax receivable agreement are not conditioned upon HFF Holdings’ or its affiliates’ continued ownership of us. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement as a result of timing discrepancies or otherwise.
 
In addition, although we are not aware of any issue that would cause the Internal Revenue Service, or IRS, to challenge the tax basis increases or other benefits arising under the tax receivable agreement, HFF Holdings will not reimburse us for any payments previously made if such basis increases or other benefits were later not allowed. As a result, in such circumstances we could make payments to HFF Holdings under the tax receivable agreement in excess of our actual cash tax savings.
 
If HFF, Inc. was deemed an “investment company” under the Investment Company Act of 1940 as a result of its ownership of the Operating Partnerships, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
 
If HFF, Inc. were to cease participation in the management of the Operating Partnerships, its interest in the Operating Partnerships could be deemed an “investment security” for purposes of the Investment Company Act. Generally, a person is deemed to be an “investment company” if it owns investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, absent an applicable exemption. Following this offering, HFF, Inc. will have no material assets other than its equity interest in the Operating Partnerships and Holliday GP. A determination that this interest was an investment security could result in HFF, Inc. being an investment company under the Investment Company Act and becoming subject to the registration and other requirements of the Investment Company Act. HFF, Inc. will not be deemed an investment company because it will manage the Operating Partnerships through its wholly owned subsidiary, Holliday GP. Holliday GP is the sole general partner of each of the Operating Partnerships.
 
The 1940 Act and the rules thereunder contain detailed parameters for the organization and operations of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, prohibit the issuance of stock options, and impose certain governance requirements. We intend to conduct our operations so that HFF, Inc. will not


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be deemed to be an investment company under the 1940 Act. However, if anything were to happen which would cause HFF, Inc. to be deemed to be an investment company under the 1940 Act, we could, among other things, be required to substantially change the manner in which we conduct our operations either to avoid being required to register as an investment company or to register as an investment company. If we were required to register as an investment company under the 1940 Act, we would be subject to substantial regulation with respect to, among other things, our capital structure (including our ability to use leverage), management, operations, ability to transact business with affiliated persons as defined in the 1940 Act (including our subsidiaries), portfolio composition (including restrictions with respect to diversification and industry concentrations) and ability to compensate key employees. These restrictions and limitations could make it impractical for us to continue our business as currently conducted, impair our agreements and arrangements and materially adversely affect our business, financial condition and results of operations.
 
Risks Related to Our Class A Common Stock and this Offering
 
Control by HFF Holdings of the voting power in HFF, Inc. may give rise to conflicts of interests and may prevent new investors from influencing significant corporate decisions.
 
Our certificate of incorporation provides that the holders of our Class B common stock (other than HFF, Inc. or any of its subsidiaries) will be entitled to a number of votes that is equal to the total number of shares of Class A common stock for which the partnership units that HFF Holdings holds in the Operating Partnerships are exchangeable.
 
Accordingly, immediately following this offering, HFF Holdings will have approximately 61% of the voting power in HFF, Inc. As a result, because HFF Holdings will have a majority of the voting power in HFF, Inc. and our certificate of incorporation will not provide for cumulative voting, HFF Holdings will have the ability to elect all of the members of our board of directors and thereby to control our management and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends. In addition, HFF Holdings will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. We cannot assure you that the interests of HFF Holdings and its members will not conflict with your interests.
 
The concentration of ownership could deprive our Class A stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might ultimately affect the market price of our Class A common stock. As a result of the control exercised by HFF Holdings over us, we cannot assure you that we would not have received more favorable terms from an unaffiliated party in our agreements with HFF Holdings. For additional information regarding the share ownership of, and our relationships with, HFF Holdings and its members, you should read the information under the headings “Principal Stockholders” and “Certain Relationships and Related Party Transactions.”
 
In addition, the HFF LP and HFF Securities Profit Participation Bonus Plans may only be amended or terminated with the written approval of all of the limited partners and general partners of each Operating Partnership. Accordingly, so long as HFF Holdings continues to hold any partnership units in the Operating Partnerships, the consent of HFF Holdings will required to amend or terminate these plans. This could prevent our board of directors or management from amending or terminating these plans. For a detailed description of these plans, you should read the information under the heading “Management — Profit Participation Bonus Plan.”
 
Transformation into a public company may increase our costs and disrupt the regular operations of
our business.
 
This offering will have a significant transformative effect on us. Our business has historically operated as a privately-owned company, and we expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded common stock. We will also incur costs which we have not previously incurred, including, but not limited to, costs and expenses for directors fees, increased directors and officers insurance, investor relations fees, expenses for compliance with the Sarbanes-Oxley Act and new rules implemented by the Securities and Exchange Commission and the New York Stock Exchange, and various other costs of a


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public company. On an annual basis, we estimate that we will incur costs of more than $3 million per year as a result of becoming a publicly-traded company. Since we have not operated as a public company before, there can be no assurance that this estimate is accurate and our actual costs may be significantly higher.
 
We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as amended, as well as rules implemented by the SEC and the NYSE. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time-consuming and costly. These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage, and therefore could have an adverse impact on our ability to recruit and bring on a qualified independent board. We cannot predict or estimate the amount of additional costs we may incur as a result of these requirements or the timing of such costs.
 
The individuals who now constitute our management have never had responsibility for managing a publicly-traded company, and we may experience difficulty attracting and retaining qualified individuals to serve on our board of directors or as executive officers. The additional demands associated with being a public company may disrupt regular operations of our business by diverting attention of some of our most active senior transaction professionals away from revenue producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities with clients and increasing difficulty in retaining transaction professionals and managing and growing our businesses, the occurrence of any of which could harm our business, financial condition and results of operations.
 
Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
 
We will evaluate our internal controls over financial reporting in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002, as amended, and rules and regulations of the SEC thereunder, which we refer to as “Section 404.” The process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could harm our reputation and cause us to lose existing clients or fail to gain new clients and otherwise negatively affect our results of operations. While our management has not identified any material weaknesses in our internal controls over financial reporting, management has identified reportable conditions involving, among other things, the documentation of and adherence to certain accounting policy and financial reporting matters and management and governance of information systems, which could have an adverse effect on our business, financial condition or results of operations if not remediated timely.


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The historical and pro forma financial information in this prospectus may make it difficult to accurately predict our costs of operations in the future.
 
The historical financial information in this prospectus does not reflect the added costs we expect to incur as a public company or the resulting changes that will occur in our capital structure and operations. In preparing our pro forma financial information we have given effect to, among other items, the reorganization transactions described in “Organizational Structure,” a deduction and charge to earnings of estimated taxes based on an estimated tax rate (which may be different from our actual tax rate in the future), and the cash distribution of pre-incorporation profits to members of HFF Holdings. The estimates we used in our pro forma financial information may not be similar to our actual experience as a public company. For more information on our historical financial information and pro forma financial information, see “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined financial statements included elsewhere in this prospectus.
 
You will experience immediate and substantial dilution.
 
The price you pay for shares of our Class A common stock sold in this offering is substantially higher than our net tangible book value per share, after giving effect to this offering. Assuming an initial public offering price for our Class A common stock of $16.00 per share (the midpoint of the initial public offering price range indicated on the cover of this prospectus), you will incur immediate dilution in net tangible book value per share of $15.94. Dilution is the difference between the offering price per share and the net tangible book value per share of our Class A common stock immediately after the offering. See “Dilution.”
 
Because all of the proceeds from this offering will be used to purchase partnership units in each of the Operating Partnerships and to repay outstanding debt, we will not have any of the proceeds from this offering available to invest in our business.
 
We estimate that our proceeds from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $209.0 million, or $240.9 million if the underwriters exercise in full their option to purchase additional shares. We intend to use all of the net proceeds from this offering (including any proceeds received pursuant to the underwriters’ option to purchase additional shares) to purchase partnership units in each of the Operating Partnerships and repay all outstanding borrowings under HFF LP’s credit agreement. Accordingly, we will not retain any of the proceeds from this offering and such proceeds will not be available to us to invest in and grow our business. See “Use of Proceeds.”
 
We may be required to make payments to the underwriters if participants in our reserved share program fail to pay for and accept shares which were subject to properly confirmed orders.
 
At our request, the underwriters have reserved for sale to our employees, directors and families of employees and directors at the initial public offering price up to 5% of the shares being offered by this prospectus. We do not know if any of our employees, directors, families of employees and directors will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. If all of these reserved shares are not purchased, the underwriters will offer the remainder to the general public on the same terms as the other shares offered by this prospectus. In connection with the sale of these reserved shares, we have agreed to indemnify the underwriters against certain liabilities, including those that may be caused by the failure of the participants in the reserved share program to pay for and accept delivery of the shares of Class A common stock which were subject to a properly confirmed agreement to purchase. As a result, we may be required to make payments to the underwriters if participants in the reserved share program fail to pay for and accept delivery of the shares of Class A common stock which were subject to a properly confirmed agreement to purchase and, as a result, we must indemnify the underwriters for such failure.


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There may not be an active trading market for shares of our Class A common stock, which may cause our Class A common stock to trade at a discount from its initial public offering price and make it difficult to sell the shares you purchase.
 
Prior to this offering, there has been no public trading market for shares of our Class A common stock. It is possible that, after this offering, an active trading market will not develop or continue, which would make it difficult for you to sell your shares of Class A common stock at an attractive price or at all. The initial public offering price per share of our Class A common stock will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which the shares of our Class A common stock will trade in the public market after this offering.
 
If securities analysts do not publish research or reports about our business or if they downgrade our
company or our sector, the price of our Class A common stock could decline.
 
The trading market for our Class A common stock will depend in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our company or our industry, or the stock of any of our competitors, the price of our Class A common stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause the price of our Class A common stock to decline.
 
Our share price may decline due to the large number of shares eligible for future sale and for exchange.
 
The market price of our Class A common stock could decline as a result of sales of a large number of shares of Class A common stock in the market after the offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After the consummation of this offering, we will have 14,300,000 outstanding shares of Class A common stock. This number is comprised of the shares of our Class A common stock we are selling in this offering, which may be resold immediately in the public market. See “Shares Eligible for Future Sale.”
 
We have agreed with the underwriters not to dispose of or hedge any of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock, subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the underwriters. Subject to these agreements, we may issue and sell in the future additional shares of Class A common stock.
 
In addition, HFF Holdings will, at the time of this offering, own 22,500,000 partnership units in each of the Operating Partnerships. Our amended and restated certificate of incorporation will allow the exchange of partnership units in the Operating Partnerships (other than those held by us) for shares of our Class A common stock on the basis of two partnership units (one in each Operating Partnership) for one share of Class A common stock, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. HFF Holdings has agreed with the underwriters not to dispose of or hedge any of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock (including partnership units in the Operating Partnerships), subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the underwriters. After the expiration of the 180-day lock-up period, the shares of Class A common stock issuable upon exchange of the partnership units in the Operating Partnerships will be eligible for resale from time to time, subject to certain contractual and Securities Act restrictions. Pursuant to contractual provisions and subject to certain exceptions, HFF Holdings will be restricted from exchanging partnership units for Class A common stock for two years. After two years, HFF Holdings will have the right to exchange 25% of its partnership units, with an additional 25% becoming available for exchange each year thereafter. However, these contractual provisions may be waived, amended or terminated by the members of Holdings LLC following consultation with our Board of Directors.
 
HFF Holdings has entered into a registration rights agreement with us. Under that agreement, after the expiration of the 180-day lock-up period, HFF Holdings will have the ability to cause us to register the shares of our Class A common stock it could acquire upon exchange of its partnership units in the Operating Partnerships.


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The market price of our Class A common stock may be volatile, which could cause the value of your investment to decline or subject us to litigation.
 
Our stock price will be affected by a number of factors, including quarterly and annual variations in our results and those of our competitors; changes to the competitive landscape; estimates and projections by the investment community; the arrival or departure of key personnel, especially the retirement or departure of key senior transaction professionals and management, including members of HFF Holdings; the introduction of new services by us or our competitors; and acquisitions, strategic alliances or joint ventures involving us or our competitors. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general global and domestic economic, market or political conditions, could reduce the market price of our Class A common stock. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our Class A common stock could decrease significantly. You may be unable to resell your shares of our Class A common stock at or above the initial public offering price.
 
When the market price of a company’s common stock drops significantly, stockholders sometimes institute securities class action lawsuits against the company. A securities class action lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources from our business.
 
Anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change
in control.
 
Our certificate of incorporation and by-laws may delay or prevent a merger or acquisition that a stockholder may consider favorable by permitting our board of directors to issue one or more series of preferred stock, requiring advance notice for stockholder proposals and nominations, providing for a classified board of directors, providing for super-majority votes of stockholders for the amendment of the bylaws and certificate of incorporation, and placing limitations on convening stockholder meetings and not permitting written consents of stockholders. In addition, we are subject to provisions of the Delaware General Corporation Law that restrict certain business combinations with interested stockholders. These provisions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price. See “Description of Capital Stock.”


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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
 
INDUSTRY AND MARKET DATA
 
In this prospectus, we rely on and refer to information and statistics regarding economic conditions and trends, our market and our market share in the sectors of that market in which we compete. In particular, we have obtained general industry information and statistics from Real Capital Analytics, Mortgage Bankers Association, Commercial Mortgage Alert, Kingsley Associates, Institutional Real Estate Inc., and Pension Real Estate Association. We believe that these sources of information and estimates are reliable and accurate, but we have not independently verified them.
 
Although some of the companies that compete in our markets are publicly held as of the date of this prospectus, many are not. Accordingly, no current publicly available information is available with respect to our relative market strength or competitive position. Our statements about our relative market strength and competitive position in this prospectus are based on our management’s belief, internal studies and our management’s knowledge of industry trends.
 
TRADEMARKS
 
We have proprietary rights to the trademarks HFF® and HFFS®. Other trademarks appearing in this prospectus are the property of their respective owners.


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ORGANIZATIONAL STRUCTURE
 
Reorganization Transactions
 
HFF, Inc. was formed in November 2006 for purposes of this offering. HFF, Inc. has not engaged in any business or other activities except in connection with its formation and the Reorganization Transactions.
 
Upon the consummation of this offering, HFF, Inc. will contribute the net proceeds raised in this offering to HoldCo LLC, its wholly-owned subsidiary. In consideration for the net proceeds from this offering and one share of Class B common stock, HFF Holdings will sell all of the shares of Holliday GP, which is the sole general partner of each of the Operating Partnerships, and approximately 39% of the partnership units in each of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP), or approximately 45% of the partnership units in each of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP) if the underwriters exercise in full their option to purchase additional shares, to HoldCo LLC. HFF Holdings will use approximately $56.3 million of the sale proceeds to repay all outstanding borrowings under HFF LP’s credit agreement. Accordingly, we will not retain any of the proceeds from this offering. In addition to cash, HFF Holdings will also receive an exchange right that will permit HFF Holdings to exchange interests in the Operating Partnerships for shares of our Class A common stock (the “Exchange Right”) and rights under a tax receivable agreement between HFF, Inc. and HFF Holdings (the “TRA”).
 
The Exchange Right will entitle HFF Holdings to exchange, at permitted times, two partnership units, one in each Operating Partnership, for a share of Class A common stock. HFF Holdings will also receive rights under the TRA to receive payments from HFF, Inc. for 85% of the tax benefits attributable to the basis step-up for tax purposes derived from the initial sale by HFF Holdings of its interests in the Operating Partnerships. In addition, subsequent exchanges of partnership units in the Operating Partnerships for Class A common stock upon exercise of the Exchange Right will also result in tax basis step-ups, and the TRA will entitle HFF Holdings to 85% of the tax benefits resulting from these exchanges.
 
The purchase of shares of Holliday GP and partnership units in each of the Operating Partnerships will be treated as a reorganization under common control for financial reporting purposes. Accordingly, the net assets of HFF Holdings purchased by HFF, Inc. will be reported in the consolidated financial statement of HFF, Inc. at HFF Holdings’ historical cost.
 
Effect of the Reorganization Transactions
 
As a result of the transactions described above, which we collectively refer to as the “Reorganization Transactions,” immediately following this offering:
 
  •  HFF, Inc., through HoldCo LLC, will become the sole stockholder of Holliday GP and control the Operating Partnerships;
 
  •  HFF Holdings will hold one share of our Class B common stock and 22,500,000 partnership units in each of the Operating Partnerships (or 20,355,000 partnership units in each of the Operating Partnerships if the underwriters exercise in full their options to purchase additional shares). HFF, Inc. will hold 14,300,000 partnership units in each of the Operating Partnerships (or 16,445,000 partnership units in each of the Operating Partnerships if the underwriters exercise in full their option to purchase additional shares);
 
  •  our public stockholders will collectively own 14,300,000 shares of Class A common stock (or 16,445,000 shares if the underwriters exercise in full their option to purchase additional shares); and
 
  •  our public stockholders will collectively have approximately 39% of the voting power in HFF, Inc. (or approximately 45% if the underwriters exercise in full their option to purchase additional shares) and, through its holdings of our Class B common stock, HFF Holdings will have approximately 61% of the voting power in HFF, Inc. (or approximately 55% if the underwriters exercise in full their option to purchase additional shares). See “Description of Capital Stock”.
 
There will be certain restrictions on the right of HFF Holdings to exchange into and sell Class A common stock. It is expected that these restrictions will be in effect for two years, and after two years HFF Holdings will have the right


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to sell 25% of the Class A common stock that it is entitled to, with an additional 25% becoming available for sale each year thereafter, so that after five years, the restrictions on HFF Holdings will have fully expired. However, these contractual provisions may be waived, amended or terminated by us. See “Shares Eligible for Future Sale — Lock-up Arrangements.”
 
Holding Company Structure
 
Following the reorganization and this offering, HFF, Inc. will be a holding company and its sole assets will be, through its wholly-owned subsidiary HoldCo LLC, partnership units in the Operating Partnerships and all of the outstanding shares of Holliday GP.
 
As the sole stockholder of Holliday GP, the sole general partner of the Operating Partnerships, HFF, Inc. will operate and control all of the business and affairs of the Operating Partnerships. HFF, Inc. will consolidate the financial results of the Operating Partnerships and the ownership interest of HFF Holdings in the Operating Partnerships will be treated as a minority interest in HFF, Inc’s consolidated financial statements. HFF Holdings through its wholly-owned subsidiary, Holdings Sub, and HFF, Inc., through its wholly-owned subsidiaries HoldCo LLC and Holliday GP, will be the only partners of the Operating Partnerships after this offering.
 
The holders of partnership units in the Operating Partnerships, including HFF Holdings and HFF, Inc., will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Operating Partnerships. In the case of HFF Holdings such taxes will be incurred principally by the members of HFF Holdings. Net profits and net losses of the Operating Partnerships will generally be allocated to its partners pro rata in accordance with their respective partnership units. Because HFF, Inc. will own approximately 39% of the total partnership units in each of the Operating Partnerships, including partnership units held through Holliday GP (or approximately 45% if the underwriters exercise in full their option to purchase additional shares), HFF, Inc. will be allocated approximately 39% of the net profits and net losses of the Operating Partnerships (or approximately 45% if the underwriters exercise in full their option to purchase additional shares). The remaining net profits and net losses will be allocated to HFF Holdings. These percentages are subject to change, including upon an exchange of partnership units to shares of our Class A common stock and upon issuance of additional shares to the public. The partnership agreements of the Operating Partnerships will provide for cash distributions to the holders of partnership units of the Operating Partnerships if HFF, Inc. determines that the taxable income of the Operating Partnerships will give rise to taxable income for its partners. In accordance with the partnership agreements, we intend to cause the Operating Partnerships to make cash distributions to the holders of partnership units of the Operating Partnerships for purposes of funding their tax obligations (or in the case of HFF Holdings principally its members’ tax obligations) in respect of the income of the Operating Partnerships that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the Operating Partnerships allocable to such holder of partnership units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident of New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). If we had effected the Reorganization Transactions on January 1, 2006, this assumed tax rate for 2006 would have been approximately 46%.
 
After this offering, the Operating Partnerships also intend to make distributions to HFF, Inc. in order to pay expenses, taxes and fund dividends the board of directors of HFF, Inc. may declare on the Class A common stock, if any. If HFF, Inc. declares such dividends, HFF Holdings will be entitled to receive equivalent distributions pro rata based on its partnership units in the Operating Partnerships.


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USE OF PROCEEDS
 
We estimate that our net proceeds from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $209.0 million, or approximately $240.9 million if the underwriters exercise in full their option to purchase additional shares. We will use these proceeds, as well as any proceeds received from the exercise of the underwriters’ option to purchase additional shares, to purchase from HFF Holdings all of the shares of Holliday GP and partnership units representing approximately 39% of each of the Operating Partnerships, or partnership units representing 45% of each of the Operating Partnerships if the underwriters exercise in full their option to purchase additional shares. HFF Holdings will use approximately $56.3 million of the sale proceeds to repay all outstanding borrowings under HFF LP’s credit agreement. Accordingly, we will not retain any of the proceeds from this offering.
 
At our request, the underwriters have reserved for sale to our employees, directors and families of employees and directors at the initial public offering price up to 5% of the shares being offered by this prospectus. See “Underwriting” for more information. In connection with the sale of these reserved shares, we have agreed to indemnify the underwriters against certain liabilities, including those that may be caused by the failure of the participants in the reserved share program to pay for and accept delivery of the shares of Class A common stock which were subject to a properly confirmed agreement to purchase. As a result, we may be required to make payments to the underwriters if participants in the reserved share program fail to pay for and accept delivery of the shares of Class A common stock which were subject to a properly confirmed agreement to purchase and, as a result, we must indemnify the underwriters for such failure.
 
HFF LP’s credit agreement consists of a senior secured term loan facility in an aggregate amount of $60 million and a senior secured revolving credit facility in an aggregate amount of $20 million. Borrowings under the credit agreement bear interest at the applicable thirty-day London Interbank Offered Rate, or LIBOR rate (5.32% at September 30, 2006), plus 250 basis points. We have the option to convert revolving credit borrowings, subject to certain restrictions, to Base Rate Notes which bear interest at the Base Rate (defined as the greater of (a) the federal funds rate (5.34% at September 30, 2006) plus 50 basis points, and the (b) prime rate, as determined pursuant to the credit agreement (8.25% at September 30, 2006)), plus 150 basis points. As of September 30, 2006, we had outstanding borrowings of approximately $57,500,000 under our term loan facility bearing interest at a weighted average rate of approximately 7.7% and no borrowings under our revolving credit facility. As of January 1, 2007, we had outstanding borrowings of approximately $56,273,000 under our term loan facility bearing interest at a weighted average rate of approximately 7.7% and no outstanding borrowings under our revolving credit facility. The credit agreement matures on March 29, 2010, subject to our option to extend the maturity date an additional 12 months upon the satisfaction of certain conditions set forth in the credit agreement. Proceeds from these borrowings have been used for distribution payments to the members of HFF Holdings.
 
An affiliate of Banc of America Securities LLC is the lender under our credit agreement and, based on an initial public offering price per share of $16.00 and assuming no exercise of the underwriters’ option to purchase additional shares, will receive approximately 26.9% of the proceeds of this offering of shares of Class A common stock used to repay those borrowings. See “Underwriting.”
 
DIVIDEND POLICY
 
We currently do not intend to pay cash dividends on our Class A common stock. If we do declare a dividend at some point in the future, the Class B common stock will not be entitled to dividend rights. The declaration and payment of any future dividends will be at the sole discretion of our board of directors.
 
HFF, Inc. will be a holding company and will have no material assets other than its ownership of partnership units in the Operating Partnerships. If we declare a dividend at some point in the future, we intend to cause the Operating Partnerships to make distributions to HFF, Inc. in an amount sufficient to cover any such dividends. If the Operating Partnerships make such distributions, HFF Holdings will be entitled to ratably receive equivalent distributions on its partnership units in the Operating Partnerships.


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CAPITALIZATION
 
The following table sets forth the consolidated cash and cash equivalents and capitalization of HFF Holdings as of September 30, 2006 on an actual basis and of HFF, Inc. on a pro forma basis giving effect to the Reorganization Transactions as described in “Organizational Structure” and to reflect our sale of 14,300,000 shares of our Class A common stock in this offering, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us and our use of the proceeds as described in “Use of Proceeds.”
 
This table should be read in conjunction with “Organizational Structure,” “Unaudited Pro Forma Financial Information,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.
 
                 
    As of September 30, 2006  
    Actual     Pro Forma  
          (unaudited)  
    (In thousands)  
 
Cash and cash equivalents
  $ 55,224     $ 12,381  
                 
         
Capital leases
    190       190  
Term note payable
    57,500        
Minority interest
          13,226  
Stockholders’/members’ equity:
               
Members’ (deficiency) equity
    (8,101 )      
Class A common stock, par value $.01 per share, 175,000,000 shares authorized; 36,800,000 shares issued and outstanding, as adjusted for this offering
          143  
Class B common stock, par value $.01 per share, 1 shares authorized; 1 share issued and outstanding, as adjusted for this offering
          0  
Additional paid-in capital
          8,278  
Retained earnings
           
Total stockholders/members’ (deficiency) equity
    (8,101 )     8,421  
                 
Total capitalization(a)
  $ 49,589     $ 21,837  
                 
 
 
(a) A $1.00 increase (decrease) in the assumed initial public offering price $16.00 per share would increase (decrease) total capitalization by $1,050,000, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.


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DILUTION
 
If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock after this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the book value per share attributable to the existing equity holders.
 
Our pro forma net tangible book value as of September 30, 2006 was approximately $(57,741,000), or $(1.57) per share of our Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, in each case, after giving effect to the Reorganization Transactions and assuming that HFF Holdings exchanges all of its interests in the Operating Partnerships for newly-issued shares of our Class A common stock on the basis of two partnership units, one of each Operating Partnership, for one share of Class A common stock.
 
After giving effect to the sale of 14,300,000 shares of Class A common stock in this offering at an assumed initial public offering price of $16.00 per share (the midpoint of the price range on the cover of this prospectus) and the payoff of all outstanding borrowings under HFF LP’s credit agreement and the tax receivable agreement, our pro forma net tangible book value would have been $2,029,000, or $0.06 per share. This represents an immediate increase in net tangible book value (or a decrease in net tangible book deficit) of $1.63 per share to existing equityholders and an immediate dilution in net tangible book value of $15.94 per share to new investors.
 
The following table illustrates this dilution on a per share basis assuming the underwriters do not exercise their option to purchase additional shares:
 
                 
Assumed initial public offering price per share
          $ 16.00  
Pro forma net tangible book value per share as of September 30, 2006
  $ (1.57 )        
Increase in pro forma net tangible book value per share attributable to new investors
  $ 1.63          
                 
Pro forma net tangible book value per share after the offering
          $ 0.06  
                 
Dilution in pro forma net tangible book value per share to new investors (a)
          $ 15.94  
                 
 
(a) A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) our adjusted net tangible book value per share after this offering by approximately $0.01 as a result of the impact of the tax receivable agreement, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. We will not retain any of the proceeds from this offering.
 
If the underwriters’ overallotment option is exercised in full the pro forma net tangible book value per share of Class A common stock, after giving effect to the Reorganization Transactions, would be approximately $0.03 per share and the dilution in pro forma net tangible book value per share to new investors would be $15.97 per share.
 
The following table summarizes, on the same pro forma basis as of September 30, 2006, the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share paid by the existing equityholders and by new investors purchasing shares in this offering, assuming that HFF Holdings exchanged all of its partnership units in the Operating Partnerships for shares of our Class A common stock on the basis of two partnership units, one of each Operating Partnership, for one share of Class A common stock (in thousands, except per share data):
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Amount     Percent     per Share  
 
Existing equity holders
    22,500       61.1 %   $       %   $  
New investors(a)
    14,300       38.9       228,800       100       16.00  
                                         
Total
    36,800       100 %   $ 228,800       100 %        
                                         
 
(a) A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) the total consideration paid by new investors by $14,300,000, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.


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UNAUDITED PRO FORMA FINANCIAL INFORMATION
 
The following unaudited condensed consolidated pro forma statements of income for the year ended December 31, 2005 and the nine months ended September 30, 2006 and the unaudited pro forma consolidated balance sheet as of September 30, 2006 present our consolidated results of operations and financial position to give pro forma effect to all of the Reorganization Transactions described in “Organizational Structure” and the sale of shares in this offering (excluding shares issuable upon exercise of the underwriters’ option to purchase additional shares, if any), and the application of the net proceeds from this offering, as if all such transactions had been completed as of January 1, 2005 with respect to the unaudited condensed consolidated pro forma statements of income and as of September 30, 2006 with respect to the unaudited pro forma balance sheet data. The unaudited pro forma consolidated financial statements reflect pro forma adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. We have made, in our opinion, all adjustments that are necessary to present fairly the pro forma financial data.
 
The pro forma adjustments principally give effect to the following items:
 
  •  the Reorganization Transactions described in “Organizational Structure,” including the elimination of the financial results of HFF Holdings and Holdings Sub from the historical audited consolidated financial statements, which are included elsewhere in this prospectus;
 
  •  cash distributions of pre-incorporation profits to members of HFF Holdings. The net assets purchased by HFF, Inc. will be reported in the consolidated statements of HFF, Inc. at historical cost;
 
  •  this offering and the use of a portion of the proceeds to repay outstanding borrowings as described in “Use Of Proceeds;”
 
  •  the provision for corporate income taxes;
 
  •  the tax receivable agreement we will enter into with HFF Holdings; and
 
  •  the awards we expect to grant under our proposed stock incentive plan at the time of this offering. See “Management — Omnibus Incentive Compensation Plan.”
 
We will account for the income tax effects and corresponding tax receivable agreement effects as a result of the initial purchase and the sale of units of the Operating Partnerships in connection with the Reorganization Transactions and future exchanges of Operating Partnership units for our Class A shares as follows:
 
  •  we will recognize an increase in our deferred tax asset for the estimated income tax effects of the increase in the tax basis of the assets owned by the Operating Parternships, based on enacted tax rates at the date of the transaction;
 
  •  we will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent we estimate that we will not realize the benefit based on a more likely than not standard, we will reduce the deferred tax asset with a valuation allowance; and
 
  •  we will record 85% of the estimated amount of the increase in deferred tax assets, net of any valuation allowance, as a liability to HFF Holdings under the tax receivable agreement and the remaining 15% of the increase in deferred tax assets directly in additional paid-in capital in stockholders’ equity.
 
Therefore, at the date of the Reorganization Transactions, on a cumulative basis the net effect of accounting for income taxes and the tax receivable agreement on our financial statements will be a net increase in shareholders’ equity of 15% of the estimated realizable tax benefit. All of the effects of changes in any of our estimates after the date of any exchange will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.
 
The unaudited pro forma financial data is presented for informational purposes only and should not be considered indicative of actual results of operations that would have been achieved had the Reorganization Transactions and this offering been consummated on the dates indicated, and do not purport to be indicative of statements of financial condition data or results of operations as of any future date or for any future period.


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Unaudited Pro Forma Combined Income Statement

                                         
    Year Ended December 31, 2005  
    (in thousands, except per share data)  
          Adjustments for
          Adjustments
       
    Historical     Reorganization     Post-Reorganization     for Offering     Pro Forma  
 
Revenues
                                       
Capital markets services revenue
  $ 203,457             $ 203,457             $ 203,457  
Interest on mortgage notes receivable
    412               412               412  
Other
    1,979               1,979               1,979  
                                         
Total revenue
    205,848             205,848             205,848  
Expenses
                                       
Cost of services
    119,106               119,106               119,106  
Personnel
    14,369       (350 )(a)     14,019       917 (c)     14,936  
Occupancy
    5,357               5,357               5,357  
Travel and entertainment
    5,067               5,067               5,067  
Supplies, research, and printing
    5,089               5,089               5,089  
Insurance
    2,470       (1,011 )(a)     1,459               1,459  
Professional fees
    1,201       (100 )(a)     1,101               1,101  
Depreciation and amortization
    2,735       (140 )(a)     2,595               2,595  
Interest on warehouse line of credit
    409               409               409  
Other operating
    3,483       (66 )(a)     3,417               3,417  
                                         
Total expenses
    159,286       (1,667 )     157,619       917       158,536  
Operating income
    46,562       1,667       48,229       (917 )     47,312  
Interest and other income
    1,267       (993 )(a)     274               274  
Interest expense
    (271 )     191 (a)     (80 )             (80 )
                                         
Income before minority interest and income taxes
    47,558       865       48,423       (917 )     47,506  
Minority interest
                        29,026 (e)     29,026  
                                         
Income before income taxes
    47,558       865       48,423       (29,943 )     18,480  
Provision for income taxes
    715       (427 )(b)     288       7,104 (f)     7,392  
                                         
Net income
  $ 46,843       1,292       48,135       (37,047 )     11,088  
                                         
Weighted average shares of Class A common stock:
                                       
Basic
                                    14,313 (g)
Diluted
                                    14,329 (g)
Net income per share of Class A common stock:
                                       
Basic
                                  $ 0.77 (g)
Diluted
                                  $ 0.77 (g)


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Unaudited Pro Forma Combined Income Statement

                                         
    Nine Months Ended September 30, 2006  
    (in thousands, except per share data)  
          Adjustments for
          Adjustments
       
    Historical     Reorganization     Post-Reorganization     for Offering     Pro Forma  
 
Revenues
                                       
Capital markets services revenue
  $ 153,586             $ 153,586             $ 153,586  
Interest on mortgage notes receivable
    662               662               662  
Other
    2,289               2,289               2,289  
                                         
Total revenue
    156,537               156,537               156,537  
Expenses
                                       
Cost of services
    89,340               89,340               89,340  
Personnel
    10,460       (350 )(a)     10,110       538 (c)     10,648  
Occupancy
    4,629               4,629               4,629  
Travel and entertainment
    3,842               3,842               3,842  
Supplies, research, and printing
    4,800               4,800               4,800  
Insurance
    2,265       (1,209 )(a)     1,056               1,056  
Professional fees
    1,979       (684) (a)     1,295               1,295  
Depreciation and amortization
    2,039               2,039       (93) (d)     1,946  
Interest on warehouse line of credit
    676               676               676  
Other operating
    3,270       18 (a)     3,288               3,288  
                                         
Total expenses
    123,300       (2,225)       121,075       445       121,520  
Operating income
    33,237       2,225       35,462       (445)       35,017  
Interest and other income
    1,394       (1,025) (a)     369               369  
Interest expense
    (2,377)               (2,377)       2,330 (d)     (47)  
                                         
Income before minority interest and income taxes
    32,254       1,200       33,454       1,885       35,339  
Minority interest
                        21,592 (e)     21,592  
                                         
Income before income taxes
    32,254       1,200       33,454       (19,707)       13,747  
Provision for income taxes
    557       (344 )(b)     213       5,286 (f)     5,499  
                                         
Net income
  $ 31,697       1,544     $ 33,241     $ (24,993)     $ 8,248  
                                         
Weighted average shares of Class A common stock:
                                       
Basic
                                    14,313 (g)
Diluted
                                    14,368 (g)
Net income per share of Class A common stock:
                                       
Basic
                                  $ 0.58 (g)
Diluted
                                  $ 0.57 (g)


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Notes to Unaudited Pro Forma Combined Income Statements
 
(a) Adjustment reflects the elimination of the historical results of operations of HFF Holdings and Holdings Sub as these entities will not be included in the consolidated results of HFF, Inc. as a result of this offering and the Reorganization Transactions. See “Organizational Structure — Reorganization Transactions.” For the year ended December 31, 2005, this adjustment reflects $1,011,000 death and disability insurance premiums on individual members of HFF Holdings, $656,000 of other operating costs, $993,000 of interest income, and $191,000 of interest expense on outstanding debt. For the nine months ended September 30, 2006, this adjustment reflects $1,209,000 of death and disability insurance premiums, $1,016,000 of other operating costs, and $1,025,000 of interest income.
 
(b) Adjustment reflects the tax impact associated with the Reorganization Transactions. The entities that formed HFF Holdings have been limited liability companies, partnerships, and a corporation. The income of the limited liability companies and partnerships of HFF Holdings has not been subject to U.S. federal and state income taxes. The adjustment reflects taxes attributable to business and corporate income taxes in various jurisdictions.
 
(c) Represents non-cash compensation expense in the form of restricted stock awards and stock options. See “Omnibus Incentive Compensation Plan.”
 
(d) Adjustment reflects $93,000 and $2,330,000 for the nine months ended September 30, 2006 for the amortization of deferred financing costs and the interest expense, respectively, associated with the outstanding borrowings that will be repayed as a result of this offering. See “Use of Proceeds”.
 
(e) Reflects an adjustment to record the 61.1% minority interest ownership of HFF Holdings. Following the Reorganization Transactions, as the sole stockholder of Holliday GP, the sole general partner of the Operating Partnerships, HFF, Inc. will operate and control all of the business affairs of the Operating Partnerships. HFF, Inc. will consolidate the financial results of the Operating Partnerships and Holliday GP. HFF Holdings and HFF, Inc., through its wholly-owned subsidiaries HoldCo, LLC and Holliday GP, will be the only partners of the Operating Partnerships following this offering. HFF Holdings, through its ownership of Class B common stock will have no economic rights in HFF, Inc. but will hold the majority of our voting power. Accordingly, HFF, Inc. will consolidate the Operating Partnerships and Holliday GP and will record a minority interest for the economic interest of HFF Holdings in the Operating Partnerships.
 
(f) Adjustment to reflect a pro forma provision for income taxes at an effective tax rate of 40.0% for the year ended December 31, 2005 and the nine months ended September 30, 2006.
 
(g) For purposes of the HFF, Inc. pro forma net income per share of Class A common stock calculation, the weighted average shares outstanding of Class A common stock, basic and diluted, are calculated as follows (in thousands):
 
                                 
    Year Ended
    Nine Months Ended
 
    December 31, 2005
    September 30, 2006
 
    Pro Forma     Pro Forma  
    Basic     Diluted     Basic     Diluted  
 
HFF, Inc. shares of Class A common stock
                           
New shares from offering
    14,300       14,300       14,300       14,300  
Restricted stock units
    13       29       13       68  
Weighted average shares of Class A common stock outstanding
    14,313       14,329       14,313       14,368  
 
The partnership units of Operating Partnerships exchangeable into shares of Class A common stock pursuant to the Exchange Right are not included in the calculation of weighted average shares of Class A common stock outstanding as they are anti-dilutive.


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HFF, Inc. pro forma basic and net diluted net income per share of Class A common stock are calculated as follows (in thousands, except per share data):
 
                                 
    Year Ended
    Nine Months Ended
 
    December 31,2005
    September 30, 2006
 
    Pro Forma     Pro Forma  
    Basic     Diluted     Basic     Diluted  
 
Basic and Diluted Net Income Per Share
                               
Net income available to holders of shares of Class A common stock
  $ 11,088     $ 11,088     $ 8,248     $ 8,248  
Basic and diluted weighted average shares of Class A common stock outstanding
    14,313       14,329       14,313       14,368  
Basic and diluted net income per share of Class A common stock
  $ 0.77     $ 0.77     $ 0.58     $ 0.57  
 
The share of Class B common stock has no right to receive dividends of HFF, Inc. The share of Class B common stock does not share in the earnings of HFF, Inc. and no earnings are allocable to such class. Accordingly, pro forma basic and diluted net income per share of Class B common stock have not been presented.


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Unaudited Pro Forma Consolidated Balance Sheet

                                         
    As of September 30, 2006  
    (in thousands, except per share data)  
          Adjustments for
          Adjustments
       
    Historical     Reorganization     Post-Reorganization     for Offering     Pro Forma  
Assets
Current assets:
                                       
Cash and cash equivalents
  $ 55,224       (42,843 )(a)(b)   $ 12,381       (c)(d)(e)   $ 12,381  
Restricted cash
    280               280               280  
Accounts receivable
    1,701       1,373 (a)     3,074               3,074  
Mortgage notes receivable
    39,550               39,550               39,550  
Prepaid expenses and other current assets
    3,853       (1,488 )(a)     2,365       (477 )(f)     1,888  
                                         
Total current assets
    100,608       (42,958 )     57,650       (477 )     57,173  
Property and equipment, net
    4,903               4,903               4,903  
Goodwill
    3,712               3,712               3,712  
Intangible assets, net
    3,328               3,328       (648 )(d)     2,680  
Deferred tax asset
                        106,400 (h)     106,400  
Other noncurrent assets
    300               300               300  
                                         
Total assets
  $ 112,851       (42,958)       69,893     $ 105,275     $ 175,168  
                                         
 
Liabilities
Current liabilities:
                                       
Current portion of long-term debt
  $ 17,094               17,094       (16,960 )(d)     134  
Warehouse line of credit
    39,550               39,550               39,550  
Accrued compensation and related taxes
    17,888               17,888               17,888  
Accounts payable
    933               933               933  
Other current liabilities
    1,914       (98 )(a)     1,816       (13 )(d)     1,803  
Income taxes payable
                                 
                                         
Total current liabilities
    77,379       (98 )     77,281       (16,973 )     60,308  
Deferred rent credit
    2,606               2,606               2,606  
Other long-term liabilities
    371       (260 )(a)     111               111  
Long-term debt, less current portion
    40,596               40,596       (40,540) (d)     56  
Due to HFF Holdings under tax receivable agreement
                        90,440 (h)     90,440  
                                         
Total liabilities
    120,952       (358 )     120,594       32,927       153,521  
                                         
Minority interest
                        13,226 (g)     13,226  
                                         
Stockholders’/Members’ Equity (Deficit)
                                       
Members’ equity (deficit)
    (8,101 )     (42,600 )(a)(b)     (50,701)       50,701 (g)      
                              143 (c)     143  
Class A common stock, $0.01 par value per share, 175,000,000 shares authorized: 36,800,000 shares issued and outstanding, actual and as adjusted for this offering
                                   
Class B common stock, $0.01 par value per share, 1 share authorized: 1 share issued and outstanding, actual and as adjusted for this offering
                                       
Additional paid in capital
                            8,278 (c)(d)(e)(f)(g)(h)     8,278  
Retained earnings
                                   
                                         
Total stockholders/members’ equity
    (8,101 )     (42,600)       (50,701)       59,122       8,421  
                                         
Total liabilities and stockholders’/members’ equity
  $ 112,851       (42,958)     $ 69,893     $ 105,275     $ 175,168  
                                         


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Notes to Unaudited Pro Forma Consolidated Balance Sheet
 
(a) Adjustment reflects the elimination of the cash, accounts receivable, prepaid expenses and other current assets, and other current and long-term liabilities of HFF Holdings and Holdings Sub, as these entities will not be included in the consolidated results of HFF, Inc. as a result of this offering and the Reorganization Transactions. See “Organizational Structure — Reorganization Transactions.”
 
(b) Reflects the anticipated cash distributions of pre-offering profits to the members of HFF Holdings. This adjustment, as reflected, is estimated to be $0 at September 30, 2006. The actual amount of the distribution will be funded with available cash, subject to maintenance of minimum working capital requirements of the Operating Partnerships.
 
(c) Reflects net proceeds from the sale by us of 14,300,000 shares of Class A common stock at the initial public offering price of $16.00 per share of Class A common stock, after deducting underwriting discounts, commissions, and estimated offering expenses.
 
(d) Reflects repayment of outstanding term notes using net proceeds from this offering. Adjustment reflects the elimination of $57,500,000 of current and long-term debt, $13,000 of related accrued interest payable, and $648,000 of the unamortized balance of deferred financing costs associated with the term notes.
 
(e) Represents our purchase from HFF Holdings of the partnership units representing 38.9% of each of the Operating Partnerships using net proceeds from this offering. See “Use Of Proceeds.”
 
(f) Reflects the elimination of direct costs incurred through September 30, 2006 in connection with this offering.
 
(g) Reflects a minority interest adjustment for the 61.1% of the total number of partnership units of each of the Operating Partnerships held by HFF Holdings following this offering.
 
(h) Reflects the adjustment to give effect to the tax receivable agreement with HFF Holdings and the tax effects of changes in the tax bases of assets and liabilities resulting in the recognition of deferred tax assets. The “Tax Receivable Agreement” is described in further detail in “Certain Relationships and Related Party Transactions.”


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SELECTED HISTORICAL FINANCIAL DATA
 
The following tables present our selected consolidated financial data as of and for the dates and periods indicated. We derived the selected historical consolidated financial data set forth below as of December 31, 2003, 2004 and 2005 and for the period from June 16, 2003 through December 31, 2003 and for the years ended December 31, 2004 and 2005 and as of and for the nine months ended September 30, 2006 from our audited consolidated financial statements, which have been audited by Ernst & Young LLP, our independent registered public accounting firm, and, except for the consolidated statement of income for the period from June 16, 2003 through December 31, 2003, are included elsewhere in this prospectus. We derived the selected historical consolidated financial data set forth below as of and for the nine months ended September 30, 2005 from our unaudited interim consolidated financial statements which are included elsewhere in this prospectus. We derived the selected historical consolidated financial data set forth below as of December 31, 2003, 2002 and 2001, and for the period from January 1, 2003 through June 15, 2003 and for the years ended December 31, 2002 and 2001 from our unaudited consolidated financial information not included elsewhere in this prospectus.
 
The summary consolidated financial data presented below is not indicative of our results for any future period. In management’s opinion, the unaudited information has been prepared on substantially the same basis as the consolidated financial statements appearing elsewhere in this prospectus and includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the unaudited consolidated data. The summary consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and related notes, “Unaudited Pro Forma Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
 
                                                                   
    Predecessor (a)       Successor  
    For the Year Ended
                  For the Year Ended
    Nine Months Ended
 
    December 31,     1/1/03-
      6/16/03-
    December 31,     September 30  
    2001     2002     6/15/03       12/31/03     2004     2005     2005     2006  
    (unaudited)     (unaudited)     (unaudited)                         (unaudited)        
    (In thousands, except per share data)       (In thousands, except per share data)  
Statement of Income Data
                                                                 
Revenues
                                                                 
Capital markets services revenue
  $ 77,561     $ 84,297     $ 36,626       $ 71,735     $ 142,192     $ 203,457     $ 135,983     $ 153,586  
Interest on mortgage notes receivable
                                    412       65       662  
Other
          364       99         739       1,499       1,979       1,251       2,289  
                                                                   
Total revenues
    77,561       84,661       36,725         72,474       143,691       205,848       137,299       156,537  
Operating expenses
                                                                 
Cost of services
    55,336       59,637       26,289         43,370       85,778       119,106       81,026       89,340  
Personnel
    3,949       2,574       (807 )       5,148       9,107       14,369       8,874       10,460  
Occupancy
    4,731       5,716       2,465         2,824       5,047       5,357       4,034       4,629  
Travel and entertainment
    2,473       2,673       1,575         1,466       3,617       5,067       3,221       3,842  
Supplies, research & printing
    1,618       2,757       929         1,227       2,933       5,089       3,690       4,800  
Insurance
          265       38         777       1,500       2,470       1,883       2,265  
Professional fees
    425       541       206         634       871       1,201       1,012       1,979  
Depreciation and amortization
    256       350       203         1,598       2,506       2,735       1,988       2,039  
Other operating
    4,930       4,145       1,563         1,763       3,441       3,483       2,532       3,270  
Interest on warehouse line of credit
                                      409       60       676  
                                                                   
Total operating expenses
    73,718       78,658       32,461         58,807       114,800       159,286       108,320       123,300  
                                                                   
Operating income
    3,843       6,003       4,264         13,667       28,891       46,562       28,979       33,237  
Interest and other income
                        97       317       1,267       675       1,394  
Interest expense
                        (234 )     (406 )     (271 )     (220 )     (2,377 )
                                                                   
Income before taxes
    3,843       6,003       4,264         13,529       28,802       47,558       29,434       32,254  
Income tax expense(b)
                              728       715       433       557  
                                                                   
Net income
  $ 3,843     $ 6,003       4,264         13,529     $ 28,074     $ 46,843     $ 29,001     $ 31,697  
                                                                   
Pro forma basic net income per share of Class A common stock(c)
                                            $ 0.77             $ 0.58  
Pro forma diluted net income per share of Class A common stock(c)
                                            $ 0.77             $ 0.57  
Pro forma basic weighted average shares of Class A common stock(c)
                                              14,313               14,313  
Pro forma diluted weighted average shares of Class A common stock(c)
                                              14,329               14,368  


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    As of December 31,     As of September 30,        
    2001(a)     2002(a)     2003     2004     2005     2006        
    (unaudited)     (unaudited)                                
    (dollars in thousands)        
 
Balance Sheet Data
                                                       
Total assets
  $ 45,590     $ 44,430     $ 40,499     $ 56,090     $ 89,941     $ 112,851          
Long term debt
  $     $     $ 10,048     $ 7,644     $ 272     $ 57,690          
Total liabilities
  $ 7,326     $ 11,749     $ 19,970     $ 18,978     $ 29,903     $ 120,952          
 
 
(a) The financial information for the period from January 1, 2001 through June 15, 2003 is derived from unaudited financial information and general ledger reports provided by HFF LP’s parent company at that time. Prior to June 15, 2003, HFF LP was an indirect wholly-owned subsidiary of Lend Lease, an Australian company with a June 30 fiscal year. The acquisition of HFF LP on June 16, 2003 by HFF Holdings created a new basis of accounting and, accordingly, the financial information for the periods through December 31, 2003 are not comparable to recent periods and comparisons of those periods to recent periods may not be accurate indicators of our relative financial performance.
 
(b) We have historically operated as two limited liability companies (HFF Holdings and Holdings Sub), a corporation (Holliday GP) and two limited partnerships (HFF LP and HFF Securities), which two partnerships we refer to as the Operating Partnerships. As a result, our income has been subject to limited U.S. federal income taxes, and our income and expenses have been passed through and reported on the individual tax returns of the members of HFF Holdings. Income taxes shown on our consolidated statements of income are attributable to taxes incurred at the state and local level. Following this offering, HFF, Inc. will be subject to additional entity-level taxes that will be reflected in our consolidated financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Key Financial Measures and Indicators — Costs and Expenses — Income Tax Expense” and “Unaudited Pro Forma Financial Information.”
 
(c) For the purposes of the HFF, Inc. pro forma net income per share of Class A common stock calculation, the weighted average of Class A common stock outstanding, basic and diluted, are calculated based on:
 
                                 
    Year Ended
    Nine Months Ended
 
    December 31, 2005
    September 30, 2006
 
    Pro Forma     Pro Forma  
    Basic     Diluted     Basic     Diluted  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
 
HFF, Inc. shares of Class A common stock
                       
New shares from offering
    14,300       14,300       14,300       14,300  
Restricted stock units
    13       29       13       68  
Weighted average shares of Class A common stock outstanding
    14,313       14,329       14,313       14,368  
 
The partnership units of the Operating Partnerships exchangeable into shares of Class A common stock pursuant to the Exchange Right are not included in the calculation of weighted average shares of Class A common stock outstanding as they are anti-dilutive.


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HFF, Inc. pro forma basic and net diluted net income per share of Class A common stock are calculated as follows:
 
                                 
    Year Ended
    Nine Months Ended
 
    December 31,
    September 30,
 
    2005
    2006
 
    Pro Forma     Pro Forma  
    (unaudited)     (unaudited)  
Basic and Diluted Net Income Per Share
  Basic     Diluted     Basic     Diluted  
 
Net income available to holders of shares of Class A common stock
  $ 11,088     $ 11,088     $ 8,248     $ 8,248  
Basic and diluted weighted average shares of Class A common stock outstanding
    14,313       14,329       14,313       14,368  
Basic and diluted net income per share of Class A common stock
  $ 0.77     $ 0.77     $ 0.58     $ 0.57  
 
The share of Class B common stock has no right to receive dividends of HFF, Inc. The share of Class B common stock does not share in the earnings of HFF, Inc. and no earnings are allocable to such class. Accordingly, pro forma basic and diluted net income per share of Class B common stock have not been presented.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
 
The following discussion should be read in conjunction with “Selected Historical Financial Data,” “Unaudited Pro Forma Financial Information” and the historical financial statements and the related notes thereto included elsewhere in this prospectus. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
Our Business
 
We are a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry based on transaction volume and are one of the largest private full-service commercial real estate financial intermediaries in the country. We operate out of 18 offices nationwide with more than 130 transaction professionals and approximately 270 support associates. In 2005, we advised on approximately $32 billion of completed commercial real estate transactions, more than a 40% increase compared to the approximately $22 billion of completed transactions we advised on in 2004.
 
Substantially all of our revenues are in the form of capital market services fees collected from our clients, usually negotiated on a transaction-by-transaction basis. We also earn fees from commercial loan servicing activities. We believe that our multiple product offerings, diverse client mix, expertise in a wide range of property types and national platform create a stable and diversified revenue stream. Furthermore, we believe our business mix, operational expertise and the leveragability of our platform have enabled us to achieve profit margins that are among the highest of our public company peers. Our revenues and net income were $205.8 million and $46.8 million, respectively, for the year ended December 31, 2005, compared to $143.7 million and $28.1 million, respectively, for the year ended December 31, 2004. For the nine months ended September 30, 2006, our revenues and net income were $156.5 million and $31.7 million, respectively.
 
Our business may be significantly affected by factors outside of our control, particularly including:
 
  •  Economic and commercial real estate market downturns.  Our business is dependent on international and domestic economic conditions and the demand for commercial real estate and related services in the markets in which we operate and even a regional economic downturn could adversely affect our business. A general decline in acquisition and disposition activity can lead to a reduction in fees and commission for arranging such transactions, as well as in fees and commissions for arranging financing for acquirers and property owners that are seeking to recapitalize their existing properties. Likewise, a general decline in commercial real estate investment activity can lead to a reduction in fees and commissions for arranging acquisitions, dispositions and financings for acquisitions as well as for recapitalizations for existing property owners as well as a significant reduction in our loan servicing activities, due to increased delinquencies and lack of additional loans that we would have otherwise added to our loan servicing portfolio, all of which would have an adverse effect on our business.
 
  •  Decreased investment allocation to commercial real estate class.  Allocations to commercial real estate as an asset class for investment portfolio diversification may decrease for a number of reasons beyond our control, including but not limited to poor performance of the asset class relative to other asset classes or superior performance of other asset classes when compared with continued good performance of the commercial real estate asset class. In addition, while commercial real estate is now viewed as an accepted and valid class for portfolio diversification, if this perception changes, there could be a significant reduction in the amount of debt and equity capital available in the commercial real estate sector.
 
  •  Fluctuations in interest rates.  Significant fluctuations in interest rates as well as steady and protracted movements of interest rates in one direction (increases or decreases) could adversely effect the operation and income of commercial real estate properties as well as the demand from investors for commercial real estate investments. Both of these events could adversely affect investor demand and the supply of capital for debt


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  and equity investments in commercial real estate. In particular, increased interest rates may cause prices to decrease due to the increased costs of obtaining financing and could lead to decreases in purchase and sale activities thereby reducing the amounts of investment sales and loan originations and related servicing fees. If our investment sales origination and servicing businesses are negatively impacted, it is likely that our other lines of business would also suffer due to the relationship among our various capital market services.
 
Other factors that may adversely affect our business are discussed under the heading “Forward-Looking Statements” and under the caption “Risk Factors” in this prospectus.
 
Key Financial Measures and Indicators
 
Revenues
 
Over 95% of our revenues are capital market service revenues. These capital market service revenues are in the form of fees collected from our clients, usually negotiated on a transaction-by-transaction basis, which includes origination fees, investment sales fees earned for brokering sales of commercial real estate, loan servicing fees and note sale and note sales advisory and other production fees. We also earn interest on mortgage notes receivable. For the nine months ended September 30, 2006, we had total revenues of approximately $156.5 million, of which approximately 98% were attributable to capital markets service revenue, 0.4% were attributable to interest on mortgage notes receivable and 1.6% were attributable to other revenue sources. For the year ended December 31, 2005, our total revenues equaled approximately $205.8 million, of which approximately 99% were generated by our capital markets services, 0.2% were attributable to interest on mortgage notes receivable and 0.8% were attributable to other revenue sources.
 
Total Revenues:
 
Capital markets services revenues.  We earn our capital markets services revenue through the following activities and sources:
 
  •  Origination fees.  Our origination fees are earned through the placement of debt, equity and structured financing. Debt placements represent the majority of our business, with approximately $22 billion of debt transaction volume in 2005. Fees earned by HFF Securities for discretionary and non-discretionary equity capital raises and other investment banking services are also included with capital market services revenue in our consolidated statements of income. We recognize origination revenues at the closing of the applicable financing and funding of capital, when such fees are generally collected.
 
  •  Investment sales fees.  We earn investment sales fees by acting as a broker for commercial real estate owners seeking to sell a property(ies) or an interest in a property(ies). We recognize investment sales revenues at the close and funding of the sale, when such fees are generally collected.
 
  •  Loan servicing fees.  We generate loan servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related loan servicing functions, activities and services. We also earn fees through escrow balances maintained as a result of required reserve accounts and tax and insurance escrows for the loans we service. We recognize loan servicing revenues at the time services are rendered, provided the loans are current and the debt service payments are actually made by the borrowers. We recognize the other fees related to escrows and other activities at the time the fees are paid.
 
  •  Note sale, note sales advisory and other production fees.  We generate note sale, note sales advisory and other production fees through assisting our clients in their efforts to sell all or portions of commercial real estate debt notes. We recognize note sale, note sales advisory and other production revenues at the close and funding of the capital to consummate sale, when such fees are generally collected.
 
Interest on mortgage notes receivable.  We recognize interest income on the accrual basis during the approximately one month holding period based on the contract interest rate in the loan that is to be purchased by Freddie Mac, provided that the debt service is paid by the borrower.
 
Other.  Our other revenues include expense reimbursements from clients related to out of pocket costs incurred, which reimbursements are considered revenue for accounting purposes.


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A substantial portion of our transactions are success based, with a small percentage including retainer fees (such retainer fees typically being included in a success-based fee upon the closing of a transaction). Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage (which varies by deal size and amount of work done at the time of breakage) of the fee we would have received had the transaction closed. The amount and timing of all of the fees paid vary by the type of transaction and are generally negotiated on a transaction-by-transaction basis.
 
Costs and Expenses
 
The largest components of our expenses are our operating expenses, which consist of cost of services, personnel expenses not directly attributable to providing services to our clients, occupancy expenses, travel and entertainment expenses, supplies, research and printing expenses and other expenses. For the nine months ended September 30, 2006, our total operating expenses were approximately $123.3 million. In addition, we incur non-operating expenses relating to interest expense and income tax expense.
 
Operating Expenses:
 
Cost of Services.  The largest portion of our expenses is cost of services. We consider personnel expenses directly attributable to providing services to our clients and certain purchased services to be directly attributable to the generation of our capital markets services revenue, and classify these expenses as cost of services in the consolidated statements of income. Personnel expenses include employee-related compensation and benefits. Most of our transaction professionals are paid commissions; however, there are some transaction professionals who are initially paid a salary with commissions credited against the salary. Analysts, who support transaction professionals in executing transactions, are paid a salary plus a discretionary bonus, which is usually calculated as a percentage of an analyst bonus pool or as direct bonuses for each transaction, depending on the policy of each regional office. All other employees receive a combination of salary and an incentive bonus based on performance, job function, individual office policy/profitability, and overall corporate profitability.
 
Personnel.  Personnel expenses include employee-related compensation and benefits that are not directly attributable to providing services to our clients. In addition, personnel expense includes profit participation bonuses in which offices or lines of business that generate profit margins of 14.5% or more are entitled to additional bonuses of 15% of net income from the office. The allocation of the profit participation and how it is shared within the office are determined by the office head with a review by the managing member of HFF Holdings. In 2005, total profit participation bonuses paid were approximately 18% of operating profit before the profit participation bonus.
 
Occupancy.  Occupancy expenses include rental expenses and other expenses related to our 18 offices nationwide.
 
Travel and entertainment.  Travel and entertainment expenses include travel and other entertainment expenses.
 
Supplies, research and printing.  Supplies, research and printing expenses represent expenses related to office supplies, market and other research (including expenses relating to our proprietary database) and printing.
 
Other.  The balance of our operating expenses include costs for insurance, professional fees, depreciation and amortization, interest on our warehouse line of credit and other operating expenses. We refer to all of these expenses below as “Other” expenses.
 
As a result of this offering, we will no longer be a privately-owned company and our costs for such items as insurance, accounting and legal advice will increase substantially relative to our historical costs for such services. We will also incur costs which we have not previously incurred for directors fees, increased directors and officers insurance, investor relations fees, expenses for compliance with the Sarbanes-Oxley Act and new rules implemented by the Securities and Exchange Commission and the New York Stock Exchange, and various other costs of a public company. On an annual basis, we estimate that we will incur costs of more than $3 million per year as a result of becoming a publicly-traded company. Since we have not operated as a public company before, there can be no guarantee that this estimate is accurate and our actual costs may be significantly higher. In addition, we expect to


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incur substantial one-time costs in meeting the legal and regulatory requirements of a public company, including Section 404 of the Sarbanes-Oxley Act.
 
Interest and Other Income:
 
Interest and other income consist primarily of interest earned from the investment of our cash and cash equivalents and short-term investments.
 
Interest Expense:
 
Interest expense represents the interest on our outstanding debt instruments, including indebtedness outstanding under our credit agreement.
 
Income Tax Expense:
 
We have historically operated as two limited liability companies (HFF Holdings and Holdings Sub), a corporation (Holliday GP) and two limited partnerships (HFF LP and HFF Securities, which two partnerships we refer to collectively as the Operating Partnerships). As a result, our income has been subject to limited U.S. federal corporate income taxes (that allocable to Holliday GP), and the remainder of our income and expenses have been passed through and reported on the individual tax returns of the members of HFF Holdings. Income taxes shown on our consolidated statements of income are attributable to taxes incurred at the state and local level.
 
Following this offering, the Operating Partnerships will continue to operate in the U.S. as partnerships for U.S. federal income tax purposes. In addition, however, HFF, Inc. will be subject to additional entity-level taxes that will be reflected in our consolidated financial statements. For information on the pro forma effective tax rate of HFF following the Reorganization Transactions, see note (e) in “Unaudited Pro Forma Financial Information—Notes to Unaudited Pro Forma Combined Income Statements.”
 
In accordance with the partnership agreements, we intend to cause the Operating Partnerships to make cash distributions to the holders of partnership units of the Operating Partnerships for purposes of funding their tax obligations in respect of the income of the Operating Partnerships that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the net taxable income of the Operating Partnerships allocable to such holder of partnership units multiplied by an assumed tax rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident of New York, New York (taking into account the nondeductibility of certain expenses and the character of our income). If we had effected the Reorganization Transactions on January 1, 2006, this assumed tax rate for 2006 would have been approximately 46%.
 
Minority Interest:
 
On a historical basis, we have not reflected any minority interest in our financial results. Following this offering, however, we will record significant minority interest relating to the ownership interest of HFF Holdings in the Operating Partnerships. As described in “Organizational Structure,” HoldCo LLC, a wholly-owned subsidiary of HFF, Inc., will own the sole general partner of the Operating Partnerships. Accordingly, although HFF, Inc. will have a minority economic interest in the Operating Partnerships, it will have a majority voting interest and control the management of the Operating Partnerships. The limited partners in the Operating Partnerships do not have kick-out rights or other substantive participating rights. As a result, HFF, Inc. will consolidate the Operating Partnerships and record a minority interest for the economic interest in the Operating Partnerships indirectly held by HFF Holdings.
 
Results of Operations
 
Following is a discussion of our results of operation for the nine months ended September 30, 2005 and 2006 and the two years ended December 31, 2004 and 2005. The tables included in the period comparisons below provide summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results.


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Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 
                                                 
    For the Nine Months
             
    Ended
             
    September 30,              
    2005     2006     Total
    Total
 
          % of
          % of
    Dollar
    Percentage
 
    Dollars     Revenue     Dollars     Revenue     Change     Change  
    (Unaudited)                          
    (dollars in thousands, unless percentages)  
 
Revenues
                                               
Capital markets services revenue
  $ 135,983             $ 153,586             $ 17,603          
Interest on mortgage notes receivable
    65               662               597          
Other
    1,251               2,289               1,038          
                                                 
Total revenues
    137,299       100 %     156,537       100 %     19,238       14.0 %
Operating expenses
                                               
Cost of services
  $ 81,026       59.0 %   $ 89,340       57.1 %   $ 8,314       10.3 %
Personnel
    8,874       6.5 %     10,460       6.7 %     1,586       17.9 %
Occupancy
    4,034       2.9 %     4,629       3.0 %     595       14.7 %
Travel and entertainment
    3,221       2.3 %     3,842       2.5 %     621       19.3 %
Supplies, research and printing
    3,690       2.7 %     4,800       3.1 %     1,110       30.1 %
Other
    7,475       5.4 %     10,229       6.5 %     2,754       36.8 %
                                                 
Total operating expenses
    108,320       78.9 %     123,300       78.8 %     14,980       13.8 %
                                                 
Operating income
    28,979       21.1 %     33,237       21.2 %     4,258       14.7 %
Interest and other income
    675       NM       1,394       NM       719       NM  
Interest expense
    (220 )     NM       (2,377 )     NM       (2,157 )     NM  
                                                 
Income before taxes
    29,434       21.44 %     32,254       20.6 %     2,820       9.6 %
Income tax expense
    433       NM       557       NM       124       NM  
                                                 
Net income
  $ 29,001       21.1 %   $ 31,697       20.25 %   $ 2,696       9.3 %
                                                 
 
“NM” = Not Meaningful
 
Revenues.  Our total revenues were $156.5 million for the nine months ended September 30, 2006 compared to $137.3 million for the same period in 2005, an increase of $19.2 million, or 14.0%. Revenues increased primarily as a result of increased production.
 
  •  The revenues we generated from capital markets services for the nine months ended September 30, 2006 increased $17.6 million, or 12.9%, to $153.6 million from $136.0 million for the same nine months in 2005. The increase is primarily attributable to increased production.
 
  •  The revenues derived from interest on mortgage notes were $0.7 million for the nine months ended September 30, 2006 compared to $0.07 million for the same period in 2005, an increase of $0.63 million. Revenues increased primarily as a result of increased production of Freddie Mac loans.
 
  •  The other revenues we earned were $2.3 million for the nine months ended September 30, 2006 compared to $1.3 million for the same period in 2005, an increase of $1.0 million, or 76.9%. Other revenues increased primarily as a result of expense reimbursements on a larger number of transactions.
 
Total Operating Expenses.  Our total operating expenses were $123.3 million for the nine months ended September 30, 2006 compared to $108.3 million for the same period in 2005, an increase of $15.0 million, or 13.8%. Expenses increased primarily due to commissions on increased production.


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  •  The costs of services for the nine months ended September 30, 2006 increased $8.3 million, or 10.3%, to $89.3 million from $81.0 million for the same nine months in 2005. The increase is most significantly a result of commissions on increased capital market services provided for clients.
 
  •  The employee compensation and benefits expenses that are not directly attributable to providing services to our clients for the nine months ended September 30, 2006 increased $1.6 million, or 17.9%, to $10.5 million from $8.9 million for the same nine months in 2005. The increase is primarily related to a result of increased head count and increased profit participation bonus on higher profit.
 
  •  Occupancy, travel and entertainment, and supplies, research and printing expenses for the nine months ended September 30, 2006 increased $2.3 million, or 21.3%, to $13.3 million, respectively, for the same nine months in 2005. These increases are primarily due to increased production volume.
 
  •  Other expenses, including costs for insurance, professional fees, depreciation and amortization, interest on our warehouse line of credit and other operating expenses, were $10.2 million in the nine months ended September 30, 2006, an increase of $2.8 million, or 36.8%, versus $7.5 million in the nine months ended September 30, 2005. This increase is primarily related to increased insurance limits and increased Freddie Mac volume resulting in interest expense on our warehouse line.
 
Net Income.  Our net income for the nine months ended September 30, 2006 was $31.7 million, an increase of $2.7 million, or 9.3%, versus $29.0 million for the same fiscal period in 2005. We attribute this increase to several factors, with the more significant cause being an increase of operating income of $4.3 million. Other factors included:
 
  •  Interest and other income, partially offsetting the costs we incurred in these periods, increased $0.7 million, to $1.4 million versus $0.7 million earned in the nine months ended September 30, 2005. This increase is principally attributable to increased cash balances as a result of increased production.
 
  •  The interest expense we incurred in the nine months ended September 30, 2006 totaled $2.4 million, an increase of $2.2 million from $0.2 million of similar expenses incurred in the nine months ended September 30, 2005. This increase resulted from the term loan of $60 million funded in March 2006.
 
  •  Expenses from income tax increased $0.1 million, or 28.6%, to $0.6 million for the nine months ended September 30, 2006 from $0.4 million for the same period in 2005, principally as a result of increased net income.


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Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
 
                                                 
    For the Year
             
    Ended
             
    December 31,              
    2004     2005     Total
    Total
 
          % of
          % of
    Dollar
    Percentage
 
    Dollars     Revenue     Dollars     Revenue     Change     Change  
    (In thousands, unless percentages)  
 
Revenues
                                               
Capital markets services revenue
  $ 142,192             $ 203,457             $ 61,265          
Interest on mortgage notes receivable
                  412               412          
Other
    1,499               1,979               480          
                                                 
Total revenues
  $ 143,691       100 %   $ 205,848       100 %     62,157       43.3 %
Operating expenses
                                               
Cost of services
    85,778       59.7 %     119,106       57.9 %   $ 33,328       38.9 %
Personnel
    9,107       6.3 %     14,369       7.0 %     5,262       57.8 %
Occupancy
    5,047       3.5 %     5,357       2.6 %     310       6.1 %
Travel and entertainment
    3,617       2.5 %     5,067       2.5 %     1,450       40.1 %
Supplies, research and printing
    2,933       2.0 %     5,089       2.5 %     2,156       73.5 %
Other
    8,318       5.8 %     10,298       5.0 %     1,980       23.8 %
                                                 
Total operating expenses
    114,800       79.9 %     159,286       77.4 %     44,486       38.8 %
                                                 
Operating income
    28,891       20.1 %     46,562       22.6 %     17,671       61.2 %
Interest and other income
    317       NM       1,267       NM       950       NM  
Interest expense
    (406 )     NM       (271 )     NM       135       NM  
                                                 
Income before taxes
    28,802       20.0 %     47,558       23.1 %     18,756       65.1 %
Income tax expense
    728       NM       715       NM       (13 )     NM  
                                                 
Net income
  $ 28,074       19.5 %   $ 46,843       22.8 %   $ 18,769       66.9 %
                                                 
 
“NM” = Not Meaningful
 
Total Revenues.  Our total revenues were $205.8 million for the year ended December 31, 2005 compared to $143.7 million for 2004, an increase of $62.2 million, or 43.3%. Revenues increased primarily as a result of increased business volume across all capital market services transaction types.
 
  •  The revenues earned from our capital markets services for the year ended December 31, 2005 increased $61.3 million, or 43.1%, to $203.5 million from $142.2 million for the year ended December 31, 2004. The increase resulted from a number of factors, most significantly an increase in number of transactions as well as higher fees per transaction professional and an increase in the number of transaction professionals, a larger servicing portfolio and an increased focus on certain revenue sources that were not previously a main focus for the company including service fees from CMBS loans and expanding activity of HFF Securities.
 
  •  The revenues derived from interest on mortgage notes receivable were $0.4 million for the year ended December 31, 2005. No such revenue was recorded in 2004. We earn interest on mortgage notes receivable in connection with our loan servicing business and our participation in Freddie Mac’s Program Plus Seller Servicer program. HFF LP qualified for this program in December 2004; accordingly, we did not begin earning revenue derived from this program until 2005.
 
  •  Our other revenues increased $0.5 million to $2.0 million for the year ended December 31, 2005 compared with $1.5 million in 2004. Other revenues increased primarily as a result of expense reimbursements on a larger number of transactions.


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Total Operating Expenses.  Our total operating expenses were $159.3 million for the year ended December 31, 2005 compared to $114.8 million for the same period in 2004, an increase of $44.5 million, or 38.8%. Expenses increased primarily due to a $33.3 million increase in employee-compensation related costs of services and certain purchased services directly attributable to the generation of capital market services revenue, a $5.3 million increase in personnel expenses, a $0.3 million increase in occupancy expenses, a $1.5 million increase in travel and entertainment expenses and a $2.2 million increase in expenses related to supplies, research and printing.
 
  •  Our cost of services for the year ended December 31, 2005 was $119.1 million, which represented a $33.3 million, or 38.9%, increase over $85.8 million in similar expenses incurred in 2004. We attribute this increase primarily to increased commissions we paid in 2005, which increase was directly attributable to our increased capital market services revenue.
 
  •  Personnel expenses for 2005 increased $5.3 million, or 57.8%, to $14.4 million from $9.1 million for the year ended December 31, 2004. The increase was primarily a result of an increase in the profit participation bonus that is calculated based on the net income of each office.
 
  •  Our occupancy expenses were $5.4 million for 2005, which represented an increase of $0.3 million, or 6.1%, from $5.0 million in 2004. The primary reason for this increase was an increase in office space and operating leases to support our growth and expansion in several locations. Our travel and entertainment expenses increased $1.5 million, or 40.1%, to $5.1 million in 2005 from $3.6 million in 2004, while our supply, research and printing expenses increased $2.2, or 73.5% to $5.1 million for the year ended 2005 compared with $2.9 million in 2004.
 
  •  Other expenses were $10.3 million in the year ended December 31, 2005, an increase of $2.0 million, or 23.8%, versus $8.3 million in 2004. This increase was most significantly attributable to an increase of our occupancy, depreciation and amortization expenses.
 
Net Income.  Our net income increased $18.8 million, or 66.9%, to $46.8 million for the year ended December 31, 2005 versus $28.1 million in 2004. The primary reason underlying this increase was a $17.7 million increase in operating income, which was principally driven by increased business volume. Less significant factors included:
 
  •  Interest and other income increased $1.0 million to $1.3 million in the year ended 2005 compared with $0.3 million in 2004. This increase primarily arose as a consequence of higher cash balances resulting from increased net income.
 
  •  Our interest expense equaled $0.3 million in 2005, a decrease of $0.1 million from $0.4 million in the year ended December 31, 2004. This decrease was most significantly due to the payoff of certain indebtedness in 2005.
 
  •  Income tax expense incurred in each of 2005 and 2004 equaled $0.7 million.
 
Cash Flows
 
Our historical cash flows are primarily related to the timing of receipt of transaction fees, the timing of distributions to members of HFF Holdings and payment of bonuses to employees.
 
Nine Months Ended September 30, 2006
 
Cash and cash equivalents decreased $4.4 million in the nine month period ended September 30, 2006. Net cash of $16.3 million was provided by operating activities, including $31.7 million from net income. Cash of $2.1 million was used for investing in property and equipment. Financing activities used $18.6 million of cash primarily due to distributions to members of HFF Holdings of $99.9 million, which was partially offset by borrowings under our credit agreement of $60 million.


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2005
 
Cash and cash equivalents increased $18.3 million in the twelve month period ended December 31, 2005. Operating activities provided $36.4 million, primarily resulting from $46.8 million in net income partially offset by a $14.7 million increase in mortgage notes receivable. Cash of $1.4 million was used to invest in property and equipment. Financing activities used $16.7 million of cash primarily as a result of distributions to members of HFF Holdings of $23.8 million and the payoff of $7.5 million of indebtedness, which was partially offset by borrowing in 2005 of $14.7 million under our warehouse line of credit.
 
2004
 
Cash and cash equivalents increased $15.8 million in the twelve month period ended December 31, 2004. Cash of $31.6 million was provided by operating activities primarily due to $28.1 million from net income. Investing activities used $1.6 million to purchase property and equipment. Net cash used in financing activities was $14.1 million which was primarily related to distributions to members of HFF Holdings of $11.5 million.
 
Liquidity and Capital Resources
 
Our current assets typically have consisted primarily of cash and accounts receivable in relation to earned transaction fees. Cash distributions to members of HFF Holdings were generally made two times each year, although approximately 75% to 90% of the anticipated total annual distribution was distributed to members each January. Therefore, levels of cash on hand decrease significantly after the January distribution of cash to members of HFF Holdings, and gradually increase until year end. In connection with this offering, we will change our distribution policy as described below. Our liabilities have typically consisted of accounts payable and accrued compensation.
 
Over the nine month period ended September 30, 2006, we generated approximately $40.0 million of cash. Our short-term liquidity needs are typically related to compensation expenses and other operating expenses such as occupancy, supplies, marketing, professional fees and travel and entertainment. For the nine months ended September 30, 2006, we incurred approximately $123.3 million in total operating expenses. The majority of our operating expenses are variable, highly correlated to our revenue streams and dependent on the collection of transaction fees. During the nine month period ended September 30, 2006, approximately 67% of our operating expenses were variable expenses. Our liquidity needs related to our long term obligations are primarily related to our facility leases and long-term debt obligations. We believe that cash flows from operating activities will be sufficient to satisfy our long-term obligations. For the nine months ended September 30, 2006, we incurred approximately $4.6 million in occupancy expenses and approximately $2.4 million in interest expense.
 
Our cash flow generated from operations historically has been sufficient to enable us to meet our objectives. Assuming current conditions remain unchanged and our pipeline remains strong, and we collect revenues on a consistent basis during the first several months immediately following the offering (as we will not retain any of the proceeds of this offering), we believe that cash flows from operating activities should be sufficient for us to fund our current obligations for the next 12 months and beyond. In addition, we maintain and intend to continue to maintain lines of credit that can be utilized should the need arise. In the course of the past several years, we have entered into financing arrangements designed to strengthen our liquidity. Our current principal financing arrangements are described below.
 
On March 29, 2006, we entered into an $80.0 million credit agreement with Bank of America, N.A. that matures on March 29, 2010, subject to our option to extend the maturity date an additional 12 months upon the satisfaction of certain conditions set forth in the credit agreement. The agreement consists of a senior secured term loan facility in an aggregate amount of $60.0 million and a senior secured revolving credit facility in an aggregate amount of $20.0 million. Borrowings under the credit agreement bear interest at the applicable thirty-day London Interbank Offered Rate, or LIBOR (5.32% at September 30, 2006), plus 250 basis points. We have the option to convert revolving credit borrowings, subject to certain restrictions, to Base Rate Notes which bear interest at the Base Rate (defined as the greater of (a) the federal funds rate (5.34% at September 30, 2006) plus 50 basis points, and the (b) prime rate, as determined pursuant to the credit agreement (8.25% at September 30, 2006)), plus 150 basis points. As of September 30, 2006, we had outstanding borrowings of $57.5 million under our term loan facility bearing interest at a weighted average rate of 7.7% and no outstanding borrowings under our revolving credit facility. We recognized approximately $1 million of debt issuance cost and $2.4 million of interest expense for the


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nine months ended September 30, 2006. The proceeds from these term loan facility borrowings have been used for distribution payments to the members of HFF Holdings and for working capital purposes. A portion of the proceeds from this offering will be used to repay all outstanding borrowing under the term loan facility and the revolving credit facility, if any amounts are outstanding under the revolving credit facility. As a result of this offering, all amounts outstanding under this facility, including the $20.0 million line of credit, will become immediately due and payable upon the offering. Although we have received a commitment letter from Bank of America, N.A. for a new $40 million line of credit to be put in place contemperaneously with the consummation of this offering, we cannot guarantee that this line of credit will be put in place at such time or at all. In the event we are not able to secure this line of credit on satisfactory terms, we may attempt to secure financing through other sources and, in the meantime, we would attempt to manage our business so that our cash flows from operations are sufficient to meet our working capital needs.
 
In 2005, we entered into an uncommitted financing arrangement with Red Mortgage Capital, Inc. to fund our Freddie Mac loan closings. Pursuant to this arrangement, Red Mortgage Capital funds multifamily Freddie Mac loan closings on a transaction-by-transaction basis, with each loan being separately collateralized by a loan and mortgage on a multifamily property that is ultimately purchased by Freddie Mac. Red Mortgage Capital documents each funding with standard agreements, including a Letter Agreement Regarding Participation Interest, a Participation and Servicing Agreement and a Participation Certificate. Each of these documents generally remains unchanged from transaction to transaction with the exception of the exhibit which outlines the specific terms of the loan. As of September 30, 2006, we had outstanding borrowing of $39.6 million under this arrangement and a corresponding amount of mortgage notes receivable. Borrowings under this arrangement generally bear interest at the thirty day LIBOR rate plus 75 basis points, although rates may be negotiated to a lower amount if the rate associated with the underlying Freddie Mac loan does not cover the default rate. There is no assurance that Red Mortgage Capital will continue to accommodate lower rates, and may actually increase our rates in the future. As a result of this offering, we believe all amounts outstanding under this arrangement will become immediately due and payable, and although we intend to negotiate with Red Mortgage Capital to maintain our current line of credit, we cannot guarantee that we will be able to do so in sufficient amounts or at all. In the event we are not able to secure a warehouse line of credit for our Freddie Mac loan closings, we will cease originating Freddie Mac loans until we have an available warehouse line of credit. We are also paid interest on our loan secured by a multifamily loan at the interest rate set forth in the Freddie Mac note.
 
We regularly monitor our liquidity position, including cash levels, credit lines, interest and payments on debt, capital expenditures and matters relating to liquidity and to compliance with regulatory net capital requirements. We maintain a line of credit under our revolving credit facility in excess of anticipated liquidity requirements. As of September 30, 2006, we had $20 million in undrawn line of credit available to us under our credit agreement with Bank of America, N.A. This facility provides us with the ability to meet short-term cash flow needs resulting from our various business activities. If this facility proves to be insufficient or unavailable to us, we would seek additional financing in the credit or capital markets, although we may be unsuccessful in obtaining such additional financing on acceptable terms or at all. In addition, we intend to enter into a tax receivable agreement with HFF Holdings that will provide for the payment by us to HFF Holdings of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of these increases in tax basis and as a result of certain other tax benefits arising from our entering into the tax receivable agreement and making payments under that agreement.
 
In accordance with the Operating Partnerships’ partnership agreements, we intend to cause the Operating Partnerships to make distribution to its partners, including HFF, Inc., in an amount sufficient to cover all applicable taxes payable by the members of HFF Holdings and by us and to cover dividends, if any, declared by the board of directors.
 
Critical Accounting Policies; Use of Estimates
 
We prepare our financial statements in accordance with accounting principles generally accepted in the United States. In applying many of these accounting principles, we need to make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are


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reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and they and our actual results may change negatively or based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates and/or judgments. See the notes to our consolidated financial statements for a summary of our significant accounting policies.
 
Goodwill.  In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, we evaluate goodwill for potential impairment annually or more frequently if circumstances indicate impairment may have occurred. In this process, we make estimates and assumptions in order to determine the fair value of the Company. In determining the fair value of the Company for purposes of evaluating goodwill for impairment, we utilize a valuation multiple approach. In applying this approach, we use recent historical EBITDA amounts and multiply by EBITDA multiples observed in transactions in the market. We utilize judgment in determining which market transactions best represent our Company and the mix of our revenue streams. We evaluate goodwill for impairment at the reporting unit level, which is the financial statements of HFF LP. Based on HFF LP’s EBITDA levels as of September 30, 2006 and the results of recent transactions in the market, HFF LP’s twelve-month rolling EBITDA could decrease by more than $50 million before our estimated fair value of the Company would be lower than the book value of the Company. Goodwill is considered impaired if the recorded book value of goodwill exceeds the implied fair value of goodwill as determined under this valuation technique. We use our best judgment and information available to us at the time to perform this review. Because our assumptions and estimates are used in projecting future earnings as part of the valuation, actual results could differ.
 
Intangible Assets.  Our intangible assets primarily include servicing rights under agreements with third party lenders and deferred financing costs. Servicing rights are recorded at the lower of cost or market. Management makes certain judgments and estimates in determining the fair value of servicing rights. These judgments and estimates include prepayment levels of the underlying mortgages, the income margin expected to be realized by the Company and the discount rate. The prepayment levels is the most important factor affecting the value of the servicing rights. Management estimates the prepayment levels of the underlying mortgages by analyzing recent historical experience. Many of the commercial loans being serviced have financial penalties for prepayment or early payoff before the stated maturity date. As a result, the Company has consistently experienced a low level of loan runoff. The estimated value of the servicing rights is impacted by changes in these assumptions. As of September 30, 2006, the fair value and net book value of the servicing rights were $2.9 million and $2.4 million, respectively. A 10% and 20% increase in the level of assumed prepayments would decrease the estimated fair value of the servicing rights by 17% and 35%, respectively. A 10% and 20% decrease in the estimated net income margin of the servicing business would decrease the estimated fair value of the servicing rights by 12% and 22%, respectively. A 10% and 20% increase in the discount rate would decrease the estimated fair value of the servicing rights by 7% and 12%, respectively. The effect of a variation in each of these assumptions on the estimated fair value of the servicing rights is calculated independently without changing any other assumption. Servicing rights are amortized over their estimated useful life using a method of amortization that reflects the pattern of economic benefit, which results in an accelerated level of amortization over eight years. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we evaluate amortizable intangible assets on an annual basis, or more frequently if circumstances so indicate, for potential impairment.
 
Certain Information Concerning Off-Balance Sheet Arrangements
 
We do not currently invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any leasing activities that expose us to any liability that is not reflected in our combined financial statements.


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Contractual and Commercial Commitments Summary
 
The following table sets forth information relating to our contractual obligations as of September 30, 2006:
 
                                         
    Payment Due by Period  
                            More
 
          10/1/06-
    2007-
    2010-
    Than
 
    Total     12/31/06     2009     2011     5 Years  
          (Dollars in thousands)        
 
Long-term debt obligations
  $ 57.5     $ 1.3     $ 51.3     $ 4.9     $ 0  
Capital lease obligations
    .2       0       .2       0       0  
Operating lease obligation
    14.6       1.1       10.0       2.5       1.0  
Purchase obligations
    0       0       0       0       0  
Other long-term liabilities reflected
    0       0       0       0       0  
                                         
Total
  $ 72.3     $ 2.4     $ 61.5     $ 7.4     $ 1.0  
 
Seasonality
 
Our capital markets services revenue are seasonal, which can affect an investor’s ability to compare our financial condition and results of operation on a quarter-by-quarter basis. Historically, this seasonality has caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first six months of the year and higher in the second half of the year. The concentration of earnings and cash flows in the last six months of the year is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year.
 
Effect of Inflation
 
Inflation will significantly affect our compensation costs, particularly those not directly tied to our transaction professionals’ compensation, due to factors such as increased costs of capital. The rise of inflation could also significantly and adversely affect certain of expenses, such as debt service costs, information technology and occupancy costs. To the extent that inflation results in rising interest rates and has other effects upon the commercial real estate markets in which we operate and, to a lesser extent, the securities markets, it may affect our financial position and results of operations by reducing the demand for commercial real estate and related services which could have a material adverse effect on our financial condition. See “Risk Factors — General Economic Conditions and Commercial Real Estate Market Conditions.”
 
Recent Accounting Pronouncements
 
SFAS 123(R).  On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2003), “Share-Based Payment,” or SFAS 123(R), which is a revision of SFAS No. 123 “Accounting for Stock Based Compensation.” SFAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the Consolidated Statements of Income based on their fair values. Pro forma disclosure is no longer an option. We have operated as a series of partnerships and limited liability companies and have not historically issued stock-based compensation awards. We adopted SFAS 123(R) on January 1, 2006 using the modified prospective method. The impact of adopting SFAS 123(R) will depend on the timing, nature, and level of share-based awards granted in the future.
 
SFAS 154.  In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” or SFAS 154. SFAS 154 replaces APB Opinion No. 20, “Accounting Changes,” and FASB SFAS No. 3, “Reporting Accounting Charges in Interim Financial Statements.” SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors beginning July 1, 2005. We adopted SFAS 154 on January 1, 2006. The adoption of SFAS 154 did not have a material effect on the Company’s consolidated financial condition or result of operations.


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SFAS 156.  In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140,” or SFAS 156. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract based on certain conditions. SFAS No. 156 permits a company to choose either the amortized cost method or fair value method for each class of separately recognized servicing assets. The provisions of SFAS 156 are effective for fiscal years beginning after September 15, 2006. We are currently analyzing the impact of adopting SFAS No. 156 on our consolidated financial statements.
 
SFAS 157.  In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Prior to adoption, we will evaluate the impact of adopting SFAS No. 157 on our consolidated financial statements.
 
FIN 48.  In June 2006, the FASB also issued FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes,” or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we recognize in the financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Due to the nature of our business and the manner in which we conduct our operations, in particular that our financial instruments which are exposed to concentrations of credit risk consist primarily of short-term cash investments, we believe we do not face any material interest rate risk, foreign currency exchange rate risk, equity price risk or other market risk.


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THE COMMERCIAL REAL ESTATE INDUSTRY
 
Our business provides a broad array of services to clients involved in the purchase, sale and financing of commercial real estate. We believe that a combination of the following trends has created and will continue to create a favorable climate for continued potential revenue growth in the markets in which we compete: (1) growth in the U.S. commercial real estate markets, (2) increasing equity and debt allocations to commercial real estate, (3) growth in commercial real estate financing activity, and (4) industry consolidation.
 
Growth in the U.S. Commercial Real Estate Markets
 
The U.S. commercial real estate market has grown substantially since 2000. According to Real Capital Analytics, commercial real estate sales volume has increased from $76.4 billion in 2001 to $274.9 billion in 2005. More recently, for the first three quarters of 2006, real estate sales volume totaled $210.8 billion, an increase of 5% over the same period in 2005.
 
Increasing Investment Allocations to Commercial Real Estate
 
Increased allocations by pension funds, endowments, life insurers and other primary asset allocators, as well as increased investment from private equity funds and wealthy individuals, have increased the amount of capital committed to the commercial real estate market. According to Kingsley Associates and Institutional Real Estate, Inc., new allocations in 2006 to U.S. real estate assets are expected to reach $59 billion, approximately 15% more than the new allocations in 2005 of $51 billion, which was an increase of 16% from allocations in 2004 of $44 billion. The Pension Real Estate Association (PREA) found its plan sponsor members’ investment in “core” real estate properties during 2004 captured 70%, or $73 billion, of the total funds allowable in the real estate category. This is higher than reported in previous years — 65% or $51 billion to core assets in 2003 and 66.5% or $50 billion in 2002. PREA’s data for 2005 shows that plan sponsors’ allocation to core assets was approximately 68% of the seeded amount in real estate, or $65 billion.
 
Growth in Commercial Real Estate Financing Activity
 
The availability of debt financing has also been a significant contributor to the robust U.S. commercial real estate market. According to the Mortgage Bankers Association, commercial and multifamily real estate loan originations totaled $201.7 billion in 2005, a 48% increase over 2004 originations of $136 billion. Originations in the first half of 2006 increased 24% over the same period in 2005. A significant contributor to this growth is investment banks’ and commercial banks’ so-called “conduit” platforms, which originate loans for sale into the commercial mortgage backed securities (“CMBS”) market as well as collateralized debt obligations (“CDO’s”) and other instruments. The U.S. and global CMBS markets have experienced significant growth and record issuance volumes as investors have increased their willingness to invest in increasingly complex transactions. Many fixed income portfolio investors have found CMBS an attractive alternative to other fixed income investments such as rated and unrated corporate bonds. According to Commercial Mortgage Alert, U.S. CMBS issuance increased to $169 billion in 2005, an 82% increase over 2004, and global CMBS issuance increased to $239 billion in 2005, an 86% increase over 2004.
 
Industry Consolidation
 
The commercial real estate industry remains highly fragmented despite recent consolidation which has reduced the number of firms we compete with. We believe that most major property owners and capital providers are motivated to consolidate their service provider relationships, preferably on a national or regional basis. We believe that by utilizing a smaller group of service providers, clients are able to achieve more consistent execution across markets due to the efficiency of single point of contact and benefit from lower costs from the economies of scale resulting from streamlined management oversight. We also believe that these current market forces will result in further consolidation going forward among local, regional, national and international service providers.


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BUSINESS
 
Overview
 
We are a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry based on transaction volume and are one of the largest private full-service commercial real estate financial intermediaries in the country. We operate out of 18 offices nationwide with more than 130 transaction professionals and approximately 270 support associates. In 2005, we advised on approximately $32 billion of completed commercial real estate transactions, more than a 40% increase compared to the approximately $22 billion of completed transactions we advised on in 2004.
 
Our fully-integrated national capital markets platform, coupled with our knowledge of the commercial real estate markets, allows us to effectively act as a “one-stop shop” for our clients, providing a broad array of capital markets services including:
 
  •  Debt placement;
 
  •  Investment sales;
 
  •  Structured finance;
 
  •  Private equity, investment banking and advisory services;
 
  •  Note sale and note sales advisory services; and
 
  •  Commercial loan servicing.
 
Substantially all of our revenues are in the form of capital market services fees collected from our clients, usually negotiated on a transaction-by-transaction basis. We believe that our multiple product offerings, diverse client mix, expertise in a wide range of property types and our national platform create a stable and diversified revenue stream. Furthermore, we believe our business mix, operational expertise and the leveragability of our platform have enabled us to achieve profit margins that are among the highest of our public company peers. Our revenues and net income were $205.8 million and $46.8 million, respectively, for the year ended December 31, 2005, compared to $143.7 million and $28.1 million, respectively, for the year ended December 31, 2004. For the nine months ended September 30, 2006, our revenues and net income were $156.5 million and $31.7 million, respectively.
 
We have established strong relationships with our clients. Our clients are both users of capital, such as property owners, and providers of capital, such as lenders and equity investors. Many of our clients act as both users and providers of capital in different transactions, which enables us to leverage our existing relationships and execute multiple transactions across multiple services with the same clients.
 
We believe we have a reputation for high ethical standards, dedicated teamwork and a strong focus on serving the interests of our clients. We take a long-term view of our business and client relationships, and our culture and philosophy are firmly centered on putting the client’s interests first. Furthermore, through their ownership of HFF Holdings, approximately 40 of our senior transaction professionals will in the aggregate own a majority interest in the Operating Partnerships following this offering. We believe this further aligns their individual interests with those of the Company, our clients and now our stockholders.
 
Our Competitive Strengths
 
We attribute our success and distinctiveness to our ability to leverage a number of key competitive strengths, including:
 
People, Expertise and Culture
 
We and our predecessor companies have been in the commercial real estate business for over 25 years, and our transaction professionals have significant experience and long-standing relationships with our clients. We employ over 130 transaction professionals with an average of nearly 16 years of commercial real estate transaction


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experience. The transaction history accumulated among our transaction professionals ensures a high degree of market knowledge on a macro level, intimate knowledge of local commercial real estate markets, long term relationships with the most active investors, and a comprehensive understanding of capital market products. Our employees come from a wide range of real estate related backgrounds, including investment advisors and managers, investment bankers, attorneys, brokers and mortgage bankers.
 
Our culture is governed by our commitment to high ethical standards, putting the client’s interest first and treating clients and our own associates fairly and with respect. These distinctive characteristics of our culture are highly evident in our ability to retain and attract employees. The average tenure for our senior transaction professionals is 10 years and the average production tenure for the top 25 senior transaction professionals compiled by initial leads during the last five years was 14 years (including tenure with predecessor companies). Furthermore, many of our senior transaction professionals have a significant economic interest in our firm, which aligns their individual interests with those of the company as a whole and our clients. Following the completion of our initial public offering, through their ownership of HFF Holdings, approximately 40 senior transaction professionals will in the aggregate own a majority interest in the company which we believe will continue to align their interests with the company.
 
Integrated Capital Markets Services Platform
 
(PLATFORM CHART)
 
In the increasingly competitive commercial real estate and capital markets industry, we believe our key differentiator is our ability to analyze all commercial real estate product types and markets as well as our ability to provide clients with comprehensive analysis, advice and execution expertise on all types of debt and equity capital markets solutions. Because of our broad range of execution capabilities, our clients rely on us not only to provide capital market alternatives but, more importantly, to advise them on how to optimize value by uncovering inefficiencies in the non-public capital markets to maximize their commercial real estate investments. Our capabilities provide our clients with the flexibility to pursue multiple capital market options simultaneously so that, upon conclusion of our efforts, they can choose the best risk-adjusted based solution.
 
Independent Objective Advice
 
Unlike many of our competitors, we do not currently offer services that compete with services provided by our clients such as leasing or property management, nor do we currently engage in principal capital investing activities. This allows us to offer independent objective advice to our clients. We believe our independence distinguishes us from our competitors, enhances our reputation in the market and allows us to retain and expand our client base.
 
Extensive Cross-Selling Opportunities
 
As some participants in the commercial real estate market are frequently buyers, sellers, lenders and borrowers at various times, our relationships with these participants across all aspects of their businesses provides us with multiple revenue opportunities throughout the life cycle of their commercial real estate investments. In addition, we often provide more than one service in a particular transaction, such as in an investment sale or note sale assignment where we not only represent the seller of a commercial real estate investment but also represent the buyer in


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arranging acquisition financing. From 2003 through 2005, we executed multiple transactions across multiple platform services with 24 of our top 25 clients.
 
Broad and Deep Network of Relationships
 
We have developed broad and deep-standing relationships with the users and providers of capital in the industry and have completed multiple transactions for many of the top institutional commercial real estate investors in the U.S. as well as several global investors who invest in the U.S. Importantly, our transaction professionals, analysts and closing specialists foster relationships with their respective counterparts within each client’s organization. This provides, in our opinion, a deeper relationship with our firm relative to our competitors. In 2004 and 2005, no one borrower or seller client represented more than 4% of our total capital market services revenues. The combined fees from our top 25 seller clients for the years 2004 and 2005, respectively, were less than 20% of our capital market services revenues for each year, and the combined fees from our top 25 borrower clients were less than 20% of our capital market services revenues for each year. Additionally, we closed multiple transactions with 23 of our top 25 clients in 2004 and 25 of our 25 top clients in 2005.
 
Proprietary Transaction Database
 
We believe that the extensive volume of commercial real estate transactions that we advise on throughout the U.S. and across multiple property type and capital market service lines provides our transaction professionals with valuable, real-time market information. We maintain a proprietary database on over 4,800 clients as well as databases that track key terms and provisions of all closed and pending transactions for which we are involved as well as historic and current flows and the pricing of debt, structured finance, investment sales, note sales and equity transactions. Included in the databases are real-time quotes and bids on pipeline transactions, status reports on all current transactions as well as historic information on clients, lenders and buyers. Furthermore, our internal databases maintain current and historical information on our loan servicing portfolio, which enables us to track real-time property level performance and market trends. These internal databases are updated regularly and are available to our transaction professionals, analysts and other internal support groups to share client contact information and real-time market information. We believe this information strengthens our competitive position by enhancing the advice we provide to clients and improving the probability of successfully closing a transaction. Our associates also understand the confidential nature of this information, and if it is misused and depending on the circumstances, it can be cause for immediate dismissal from the Company.
 
Our Strategic Growth Plan
 
We seek to improve our market position by focusing on the following strategic growth initiatives:
 
Expand Our Geographic Footprint
 
We believe that opportunities exist to establish and increase our presence in several key domestic, and potentially, international markets. While our transactional professionals, located in 18 offices throughout the U.S., advised clients on transactions in 44 states (and the District of Columbia) and in more than 500 cities in 2005, there are a number of major metropolitan areas where we do not maintain an office, and we have no overseas offices. By comparison, many of our large public competitors have over 100 offices worldwide. We constantly review key demand drivers of commercial real estate by market, including growth in population, households, employment, commercial real estate inventory by product type, and new construction. By doing so, we can determine not only where future strategic growth should occur, but more importantly, we can also ensure our transaction professionals are constantly calling on the most attractive markets where we do not have offices. Since 1998, we have opened offices in Washington, D.C., Los Angeles, San Francisco (opened in October 2006) and Chicago. In addition, during this same period, we have significantly added to the platform services in our Miami, New York City, New Jersey, Washington, D.C., Los Angeles and Chicago offices. While historical performance does not assure similar results, the combined revenues from these new offices (Washington, DC, Los Angeles and Chicago) in the offices’ respective third year of operation were approximately 2.6 times higher than these same offices’ respective first year of operation.


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We expect to achieve future strategic geographic expansion through a combination of recruitment of key transaction professionals, organic growth and possible acquisitions of smaller local and regional firms across all services in both new and existing markets. However, in all cases our strategic growth will be focused on serving our clients’ interests and predicated on finding the most experienced professionals in the market who have the highest integrity, work ethic and reputation, while fitting into our culture and sharing our philosophy and the way we conduct our business.
 
Increase Market Share Across Each of our Capital Market Services
 
We have achieved significant growth in each of the services we provide through our integrated capital market platform. We believe that we have the opportunity to continue to increase our market share in each of the various capital market services we provide to our clients by penetrating deeper into our national, regional and local client relationships. We also intend to increase our market shares by selectively hiring transaction professionals in our existing offices and in new locations, predicated on finding the most experienced professionals in the market who have the highest integrity, work ethic and reputation, while fitting into our culture and sharing our philosophy and the way we conduct our business. For example, since 1998, in addition to opening offices in Washington, D.C., Los Angeles, San Francisco (opened in October 2006) and Chicago, we have significantly added to the platform services in our Miami, New York City, New Jersey, Washington, D.C., Los Angeles and Chicago offices. While historical performance does not assure similar results, the combined additional platform services revenue in the third year were approximately 5.6 times higher than the combined additional platform services revenue in the first year.
 
  •  Debt Placement.  Our transaction value in debt placements was approximately $22.0 billion in 2005, an increase of approximately 39% from approximately $15.8 billion in 2004. According to Mortgage Bankers Association, debt issuances in 2005 were $201.7 billion and $136 billion in 2004. Also, given our top reputation for debt placement and the growth expectations of our investment sales platform, loan servicing business, structured finance activity and HFF Securities, we believe the firm is well-positioned to gain additional market share in debt placements.
 
  •  Investment Sales.  In 2005, we completed investment sales in excess of $7.6 billion, an increase of 38% over $5.5 billion completed in 2004. According to Real Capital Analytics, commercial real estate sales volume in the U.S. in 2005 was $274.9 billion and $187.0 billion in 2004. In 2001, our New York City office generated 99% of its capital markets services revenue from debt placement fees. During 2001, we hired three investment sales transaction professionals in our New York City office, and in 2005 the New York City office generated more than $3.1 billion in debt and investment sales transaction volume while revenues associated with these capital markets services grew by 4.4 times over 2001 with investment sales contributing to 46% of the revenue in 2005.
 
  •  Structured Finance, Private Equity and Advisory Services.  In 2005, we completed approximately $2.1 billion of structured finance, private equity and advisory services transactions (which includes amounts that we internally allocate to the structured finance reporting category, even though the transaction may have been funded through a single mortgage note) for our clients. In April 2004, we formed our broker-dealer subsidiary, HFF Securities, to undertake both discretionary and non-discretionary private equity raises, select property specific joint ventures, and select investment banking activities for our clients. We are selectively looking to add to HFF Securities licensed transaction professionals in our larger markets who fit with our culture and meet our high standards of integrity.
 
  •  Note sale and note sales advisory.  Since formalizing our note sales and note sales advisory services platform in 2004, we have consummated over $250 million in note sale and note sales advisory transactions. We see growth in this market as well due to the desire of lenders seek to diversify concentration risk (geographic, borrower or product type), manage potential problems in their loan portfolios or sell loans rejected from CMBS securitization pools. We recently added two transaction professionals in our Chicago office which we believe resulted in a significant increase in our pipe-line of business from institutional and CMBS lenders who are all existing clients of our firm.
 
  •  Loan servicing.  In 2005, we serviced approximately $14.9 billion in principal amount of commercial mortgages, an increase of 14.6% from the approximately $13.0 billion we were servicing at the end of 2004. Currently, we have 33 formal correspondent lender relationships with life insurers and 17 CMBS sub


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  servicing and primary servicing agreements The majority of the CMBS contracts having been put in place over the past 18 months due to our increased focus on growing our servicing platform to better serve our client. As a result of our continued debt placements with correspondent lenders as well as our new sub servicing relationships with CMBS lenders, our loan servicing portfolio has grown from $14.9 billion in 2005 to $16.4 billion at September 30, 2006 with a large percentage of this growth coming from CMBS sub-servicing contracts we have been executing since early 2005. We expect to continue to grow our servicing platform by increasing our sub-servicing penetration of CMBS originators, leveraging our formal correspondent lender relationships with life insurance companies as well as our Freddie Mac originations, and pursuing third-party servicing opportunities.
 
Continue to Capitalize on Cross-Selling Opportunities
 
Participants in the commercial real estate market increasingly are buyers, sellers, lenders and borrowers at various times. We believe our relationships with these participants across all aspects of their businesses provide us with multiple revenue opportunities throughout the lifecycle of their commercial real estate investments. Many of our clients are both users and providers of capital. Our clients typically execute transactions throughout the U.S. utilizing the wide spectrum of our services. By maintaining close relationships with these clients, we intend to continue to generate significant repeat business across all of our business lines.
 
Our debt transaction professionals originated approximately $377 million and $1.3 billion of debt for clients that purchased properties sold by our investment sales professionals for their clients in 2004 and 2005, respectively. Our investment sales professionals also referred clients to our debt transaction professionals who arranged debt financings totalling approximately $593 million and $475 million in 2004 and 2005, respectively. Our debt professionals also referred clients to our investment sales transaction professionals who sold approximately $736 million and $1.8 billion of properties in 2004 and 2005, respectively. Also, from its inception in late 2004 through the third quarter of 2006, our HFF Securities subsidiary originated debt volumes of approximately $589 million, in addition to their other equity placement activities.
 
Our Services
 
Debt Placement Services
 
We offer our clients a complete range of debt instruments, including but not limited to construction and construction/mini-permanent loans, adjustable and fixed rate mortgages, entity level debt, mezzanine debt, forward delivery loans, tax exempt financing, and sale/leaseback financing.
 
Our clients are owners of various types of property, including, but not limited to, office, retail, industrial, hotel, multi-family, self-storage, assisted living, nursing homes, condominium conversions, mixed-use properties and land. Our clients range in size from individual entrepreneurs who own a single property to the largest real estate funds and institutional property owners throughout the world who invest in the U.S. Debt is placed with all major capital funding sources, both domestic and foreign, including but not limited to life insurance companies, conduits, investment banks, commercial banks, thrifts, agency lenders, pension funds, pension fund advisors, REITs, credit companies, opportunity funds and individual investors.
 
Investment Sales Services
 
We provide investment sales services to commercial real estate owners who are seeking to sell one or more properties or property interests. We seek to maximize proceeds and certainty of closure for our clients through our knowledge of the commercial real estate and capital markets, our extensive database of potential buyers, with whom we have deep and long-standing relationships, and our experienced transaction professionals. Real time data on comparable transactions, recent financings of similar assets and market trends, enable our transaction professionals to better advise our clients on valuation and certainty of execution based on a prospective buyer’s proposed capital structure.


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Structured Finance Services
 
We offer a wide array of structured finance alternatives and solutions at both the property and ownership entity level. This allows us to provide financing alternatives at every level of the capital structure, including but not limited to mezzanine and equity, thereby providing potential buyers and existing owners with the highest appropriate leverage at the lowest blended cost of capital to purchase properties or recapitalize existing ones versus an out-right sales alternative. By focusing on the inefficiencies in the structured finance capital markets, such as mezzanine, preferred equity, participating and/or convertible debt structures, pay and accrual debt structures, pre-sales, stand-by commitments and bridge loans, we are able to access capital for properties in transition, predevelopment and development loans and/or joint ventures and/or structured transactions, which provide maximum flexibility for our clients.
 
Private Equity, Investment Banking and Advisory Services
 
Through HFF Securities, our licensed broker-dealer subsidiary, we offer our clients the ability to access the private equity markets for an identified commercial real estate asset and discretionary and non-discretionary joint ventures, funds marketing, private equity placements, and advisory services. HFF Securities’ services to its clients include:
 
  •  Joint Ventures.  Equity capital for our commercial real estate clients to establish joint ventures relating to either identified properties or properties to be acquired by a fund sponsor. These joint ventures typically involve the acquisition, development, recapitalization or restructuring of multi-asset commercial real estate portfolios, and include a variety of property types and geographic areas.
 
  •  Private Placements.  Private placements of common, perpetual preferred and convertible preferred securities. Issuances involve primary or secondary shares that may be publicly registered, listed and traded.
 
  •  Advisory Services.  Entity-level advisory services for various types of transactions including mergers and acquisition, sales and divestitures, management buyouts, and recapitalizations and restructurings.
 
  •  Marketing and Fund-Raising.  Institutional marketing and fund-raising for public and private commercial real estate companies, with a focus on opportunity and value-added commercial real estate funds. In this capacity, we undertake private equity raises, both discretionary and non-discretionary, and offer advisory services.
 
Note Sale and Note Sales Advisory Services
 
We assist our clients in their efforts to sell all or portions of their commercial real estate debt note portfolios. We are actively marketing our note sale and note sales advisory services to our clients.
 
Commercial Loan Servicing
 
We provide commercial loan servicing (primary and sub-servicing) for life insurance companies and CMBS originators. Our servicing platform, experienced personnel and hands-on service allow us to maintain close contact with both borrowers and lenders. As a result, we are often the first point of contact in connection with refinancing, restructuring or sales of commercial real estate assets. Revenue is earned primarily from servicing fees charged to the lender, as well as from investment income earned on escrow balances.
 
To avoid potential conflicts, our transaction professionals do not share in servicing revenue, eliminating conflicts which can occur with serviced versus non-serviced lenders. However, throughout the servicing life of a loan, the transaction professional who originated the loan usually remains the main contact for both the borrower and lender, or the master servicer, as the case may be, to assist our servicing group with annual inspections, operating statement reviews and other major servicing issues affecting a property or properties.


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Competition
 
The commercial real estate services industry, and all of the services that we provide, are highly competitive, and we expect them to remain so. We compete on a national, regional and local basis as well as on a number of other critical factors, including but not limited to the quality of our people and client service, historical track record and expertise and range of services and execution skills, absence of conflicts and business reputation. Depending on the product or service, we face competition from other commercial real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting firms, some of which may have greater financial resources than we do. Consistently, the top competitors we face on national, regional and local levels include, but are not limited to, CB Richard Ellis Group, CBRE Capital Markets (formerly L.J. Melody & Company), Cushman & Wakefield, Eastdil Secured, Trammell Crow, Jones Lang LaSalle, Northmarq Capital (Marquette) and CapMark (formerly GMAC). There are numerous other local and regional competitors in each of the local markets where we are located as well as the markets we do business in.
 
Competition to attract and retain qualified employees is also intense in each of the capital market services we provide to our clients. We compete by offering a competitive compensation package to our transaction professionals and our other associates as well as equity-based incentives for key associates who lead our efforts in terms of running our offices or leading our efforts in each of our capital market services. Our ability to continue to compete effectively will depend upon our ability to retain and motivate our existing transaction professionals and other key associates as well as our ability to attract new ones, all predicated on finding the most experienced professionals in the market who have the highest integrity, work ethic and reputation, while fitting into our culture and sharing our philosophy and the way we conduct our business.
 
Regulation
 
Our U.S. broker-dealer subsidiary, HFF Securities, is subject to regulation. HFF Securities is currently registered as a broker-dealer with the SEC and the NASD. HFF Securities is registered as a broker dealer in California and is considering in which additional states it may register as a broker-dealer. HFF Securities is subject to regulations governing effectively every aspect of the securities business, including the effecting of securities transactions, minimum capital requirements, record-keeping and reporting procedures, relationships with customers, experience and training requirements for certain employees and business procedures with firms that are not subject to regulatory controls. Violation of applicable regulations can result in the revocation of broker-dealer licenses, the imposition of censures or fines and the suspension, expulsion or other disciplining of a firm, its officers or employees.
 
Our broker-dealer subsidiary is also subject to the SEC’s uniform net capital rule, Rule 15c3-1, and the net capital rules of the NYSE and the NASD, which may limit our ability to make withdrawals of capital from our broker-dealer subsidiary. The uniform net capital rule sets the minimum level of net capital a broker-dealer must maintain and also requires that a portion of its assets be relatively liquid. The NYSE and the NASD may prohibit a member firm from expanding its business or paying cash dividends if resulting net capital falls below its requirements. In addition, our broker-dealer subsidiary is subject to certain notification requirements related to withdrawals of excess net capital. Our broker-dealer subsidiary is also subject to several new laws and regulations that were recently enacted. The USA Patriot Act of 2001 has imposed new obligations regarding the prevention and detection of money-laundering activities, including the establishment of customer due diligence and other compliance policies and procedures. Additional obligations under the USA Patriot Act regarding procedures for customer verification became effective on October 1, 2003. Failure to comply with these new requirements may result in monetary, regulatory and, in the case of the USA Patriot Act, criminal penalties.
 
HFF LP is licensed (in some cases, through our employees or its general partner) as a mortgage broker and a real estate broker in multiple jurisdictions. Generally we are licensed in each state where we have an office as well as where we frequently do business.


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Facilities
 
Our principal executive offices are located in leased office space at 429 Fourth Avenue, Suite 200, Pittsburgh, Pennsylvania. We also lease or sublease space for our offices at Boston, Massachusetts; Hartford, Connecticut; Westport, Connecticut; New York, New York; Florham Park, New Jersey; Washington, D.C.; Miami, Florida; Atlanta, Georgia; Indianapolis, Indiana; Chicago, Illinois; Houston, Texas; Dallas, Texas; San Diego, California; Orange County, California; Los Angeles, California; San Francisco, California and Portland, Oregon. We do not own any real property. We consider these arrangements to be adequate for our present needs.
 
Legal Proceedings
 
We believe, based on currently available information, that the results of any pending judicial, regulatory and arbitration proceedings, in the aggregate, will not have a material adverse effect on our financial condition but might be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
 
History
 
We have grown through the combination of several prominent commercial real estate brokerage firms. Our namesake dates back to Holliday Fenoglio & Company, which was founded in Houston in 1982. Although our predecessor companies date back to the 1970s, our recent history began in 1994 when Holliday Fenoglio Dockerty & Gibson, Inc. was purchased by AMRESCO, Inc. to create Holliday Fenoglio Inc. In 1998, Holliday Fenoglio acquired Fowler Goedecke Ellis & O’Connor, to create Holliday Fenoglio Fowler, L.P. Later that year Holliday Fenoglio Fowler, L.P. acquired PNS Realty Partners, LP and Vanguard Mortgage.
 
In March 2000, AMRESCO sold its commercial mortgage banking businesses, Holliday Fenoglio Fowler, L.P., to Lend Lease (US) Inc., the U.S. subsidiary of the Australian real estate services company. Finally, in June 2003, HFF Holdings completed an agreement for a management buyout from Lend Lease. In April 2004, we established our broker-deal subsidiary, HFF Securities L.P.


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MANAGEMENT
 
Directors and Executive Officers
 
The following table sets forth the names, ages and positions of our current directors and executive officers, as well as our nominees for our board of directors as of January 1, 2007.
 
             
Name
 
Age
 
Position
 
John P. Fowler
  61   Director
Mark D. Gibson
  47   Director
John Z. Kukral
  46   Director Nominee and Lead Director Nominee
Deborah H. McAneny
  47   Director Nominee
George L. Miles, Jr. 
  65   Director Nominee
Lenore M. Sullivan
  48   Director Nominee
John H. Pelusi, Jr. 
  51   Director and Chief Executive Officer
McHenry T. Tichenor, Jr.
  51   Director Nominee
Joe B. Thornton, Jr. 
  46   Director
Gregory R. Conley
  46   Chief Financial Officer
Nancy O. Goodson
  48   Chief Operating Officer
 
John P. Fowler.  Mr. Fowler currently serves as a director of HFF, Inc. after holding the positions of Executive Managing Director of HFF, L.P. and member of the operating committee of HFF Holdings since 2003. Mr. Fowler began his career in the real estate finance business in 1968 and spent four years in the Real Estate Department of John Hancock Mutual Life Insurance Company. In 1972 he joined a New England-based mortgage banking and development company, and in 1974 formed Fowler, Goedecke & Co., a predecessor to Fowler Goedecke Ellis & O’Connor, Inc., which was merged into our predecessor in 1998. Mr. Fowler is active in the Urban Land Institute, Real Estate Finance Association, Mortgage Bankers Association, International Council of Shopping Centers, National Association of Industrial & Office Properties, and Artery Business Committee. He received his Bachelor of Arts from Brown University.
 
Mark D. Gibson.  Mr. Gibson is one of our founding partners having joined our predecessor firm, Holliday Fenoglio & Company, in 1984. He currently serves as a director of HFF, Inc. after holding the positions of Executive Managing Director and member of the operating committee of HFF Holdings since 2003. Mr. Gibson is an Assistant Chairman/Council Member of IOPC Gold in the Urban Land Institute; Chairman of the University of Texas Real Estate Finance & Investment Center; Member and Former Board Member of the Real Estate Council of Dallas; and is a member of International Council of Shopping Centers, Mortgage Bankers Association of America, and Young Presidents Organization. Mr. Gibson graduated in 1981 from the University of Texas at Austin with a BBA in Finance.
 
John Z. Kukral.  Mr. Kukral is a nominee for a director position for HFF, Inc. Mr. Kukral is currently President of Northwood Investors, a real estate investment company. Mr. Kukral started his career at JMB Realty Corporation in 1982 and was most recently (1994 to 2005) with Blackstone Real Estate Advisors where he served as President and Chief Executive Officer from 2002 until 2005. Mr. Kukral graduated from Northwestern University and received an M.B.A. from Harvard University. Mr. Kukral is a member of the board of directors of Aircastle Limited and is a Trustee of the Urban Land Institute and a Governor of the Urban Land Foundation.
 
Deborah H. McAneny.  Ms. McAneny is a nominee for a director position for HFF, Inc. Ms. McAneny is currently a principal of Equinox Advisors LLC. Prior to this, Ms. McAneny was employed at John Hancock Financial Services for 20 years, including as Executive Vice President for Structured and Alternative Investments and a member of its Policy Committee from 2002 to 2004, as Senior Vice President for John Hancock’s Real Estate Investment Group from 2000 to 2002 and as a Vice President of the Real Estate Investment Group from 1997 to 2000. She received a Bachelor of Science degree from the University of Vermont and is a Certified Public Accountant. Ms. McAneny is currently a member of the board of directors of KKR Financial Corp. and the Board of


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Trustees of the University of Vermont and The Rivers School. She is a past president of the Commercial Mortgage Securities Association.
 
George L. Miles, Jr.  Mr. Miles is a nominee for a director position as well as the Chairman of the Audit Committee position for HFF, Inc. Mr. Miles is president and Chief Executive Officer of WQED Multimedia, the public broadcaster in southwestern Pennsylvania. He joined the organization in 1994 after serving ten years as Executive Vice President and Chief Operating Officer of WNET/Thirteen in New York. Prior to that he held executive positions at KDKA, Pittsburgh; WPCQ, Charlotte; the Westinghouse Television Group; and WBZ-TV, Boston. Earlier in his career, Mr. Miles was a contract auditor at the U.S. Department of Defense and a manager at Touche Ross & Co. He earned his BA degree from Seton Hall University and his MBA from Fairleigh Dickinson University. He serves on the Board of Directors of American International Group, Inc. (AIG) — Audit Committee; WESCO International, Inc.; Equitable Resources, Inc.; Harley Davidson, Inc.; the University of Pittsburgh and the UPMC Health System. He is the former Chairman of the Association for America’s Public Television Stations and the Urban League of Pittsburgh, Inc.
 
John H. Pelusi, Jr.  Mr. Pelusi has served as a director and Chief Executive Officer of HFF, Inc. since its inception. He has also served as an Executive Managing Director of HFF LP since 2001 and a member of the operating committee and the Managing Member of HFF Holdings since June 16, 2003. Mr. Pelusi has over 25 years of experience in commercial real estate, including investment sales, note sales, debt placement, equity, structured finance and loan servicing. Mr. Pelusi joined HFF LP in May 1998, and prior to that he was the Managing Partner of PNS Realty Partners, L.P. Mr. Pelusi is currently a member of the Board of Trustees for the University of Pittsburgh, the Board of Directors for the University of Pittsburgh Medical Center, the Board of Trustees for the Holy Family Foundation, and the Board of Directors for the Manchester Bidwell Corporation. He is also a member of the Real Estate Roundtable, the International Council of Shopping Centers (ICSC) and the Mortgage Bankers Association.
 
Lenore M. Sullivan.  Ms. Sullivan is a nominee for a director position for HFF, Inc. Since 2002, Ms. Sullivan has served as the Associate Director for the Real Estate and Finance and Investment Center at the University of Texas at Austin. From 2000 to 2002, she was Vice President of Hunt Private Equity Group, Inc. and from 1992 to 2000 she was the President and co-owner of Stonegate Advisors, an investment banking firm. Ms. Sullivan graduated cum laude from Smith College with a degree in economics and government and a minor in urban studies. She holds a MBA from Harvard Business School. Ms. Sullivan is a member of the board of directors of Parkway Properties, Inc., where she also sits on the audit and corporate governance and nominating committees. She is a Charter Investor in the Texas Women Ventures Fund, and sits on the investment advisory and investment committees of the fund. She is a partner in Republic Holdings Texas, L.P., and sits on the investment committee of the fund. Ms. Sullivan has served as a member of the Advisory Board of Capstone Partners and is a full member of the Urban Land Institute and the Pension Real Estate Association.
 
Joe B. Thornton, Jr.  Mr. Thornton currently serves as a director of HFF, Inc. in addition to holding the position of Executive Managing Director and a member of the operating committee of HFF Holdings since 2003. Mr. Thornton operates from our Dallas office. Mr. Thornton joined HFF’s predecessor firm, Holliday Fenoglio, Inc., in March 1992. He has held several senior positions with the firm, including Board Member and Principal. Prior to his employment with us, he was a Senior Vice President of The Joyner Mortgage Company, Inc., where he was responsible for the origination of commercial mortgage and equity transactions, and a Senior Accountant with the Audit Division of Peat Marwick Mitchel & Co. Mr. Thornton is a licensed Real Estate Salesman in the State of Texas. Mr. Thornton graduated from the University of Texas at Austin with a BBA in Accounting in 1982.
 
McHenry T. Tichenor, Jr.  Mr. Tichenor is a nominee for a director position for HFF, Inc. Mr. Tichenor is currently a private investor and Executive Director of the WWWW Foundation. He was, until December 31, 2004, Executive Vice President of Univision Communications Inc. and was President of the company’s radio division. From 1997 through 2003, Mr. Tichenor was Chairman, President and Chief Executive Officer of Hispanic Broadcasting Corporation prior to its merger with Univision in September 2003. From 1981 until February 1997, Mr. Tichenor was the President, Chief Executive Officer and a director of Tichenor Media System, Inc. He received a B.A. with Honors in 1977 and a M.B.A. from the University of Texas at Austin in 1979. Mr. Tichenor currently serves as a member of the board of directors of Univision Communication, Inc. and 8e6 Technologies.


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Gregory R. Conley.  Mr. Conley serves as the Chief Financial Officer for HFF, Inc. Mr. Conley joined us in October 2006 and, working out of the Pittsburgh office, is responsible for all areas of financial accounting and reporting for the firm’s 18 offices. He has also served as an Executive Managing Director of HFF LP since 2007. Most recently, from 1998 through mid-year 2006, Mr. Conley was an executive vice president and CFO with Precise Technology, Inc. and its successor, Rexam Consumer Plastics, Inc. Precise Technology, Inc. was a plastics packaging business and portfolio company of Code Hennessy & Simmons. Between 1986 and early 1998, Mr. Conley served as a consultant with national consulting firms that eventually became part of Navigant Consulting, Inc. Between mid-1990 and early 1998, he was a vice president of Barrington Consulting Group, Inc. Prior to that between 1986 and mid-year 1990, he was an executive consultant at Peterson & Company. Mr. Conley began his career in public accounting with Ernst & Young LLP. He earned an MBA from the University of Pittsburgh and a BS from Duquesne University.
 
Nancy O. Goodson.  Ms. Goodson serves as the Chief Operating Officer of HFF, Inc. after holding the same position at HFF LP and its predecessor companies since 1993. She has also served as an Executive Managing Director of HFF LP since 2007. Working out of the firm’s Houston office, Ms. Goodson is responsible for the overall direction of the firm’s 18 national offices, with a specific focus on the oversight of administrative functions and loan servicing aspects of the Company. Prior to joining HFF in 1993, she spent seven years as a controller at Beeler Sanders Properties in Houston. She is a member of CREW Houston and is Treasurer of First United Methodist Church in Missouri City, Texas. She received her BBA from Southwest Texas State University.
 
There are no family relationships among any of our directors, director nominees or executive officers.
 
Board Composition
 
Prior to the closing of this offering, we intend to appoint John Z. Kukral, Deborah H. McAneny, George L. Miles, Jr., Lenore M. Sullivan, and McHenry T. Tichenor, Jr. to our board of directors and they have consented to so serve. In addition, we expect that John Z. Kukral will serve as the lead director of our board of directors. Our board of directors has determined that each of them is independent under the independence standards promulgated by the NYSE.
 
Our bylaws provide that our board of directors will consist of such number of directors as set from time to time by our board of directors. Further, our certificate of incorporation will be amended to divide our board of directors into three classes. The members of each class will serve for a staggered, three-year term. Upon the expiration of the term of a class of directors, directors in that class will be elected for three-year terms at the annual meeting of stockholders in the year in which their term expires. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors.
 
Committees of the Board of Directors
 
In connection with this offering, our board of directors will establish an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, and our board of directors intends to adopt charters for its committees that comply with current federal and New York Stock Exchange rules relating to corporate governance matters.
 
Audit Committee.  We anticipate that George L. Miles, Jr., Deborah H. McAneny and McHenry T. Tichenor, Jr. will serve on the Audit Committee and that Mr. Miles will serve as its chair. The Audit Committee is responsible for, among other things, directly appointing, retaining, evaluating, compensating and terminating our independent auditors; discussing with our independent registered public accounting firm their independence from management; reviewing with our independent registered public accounting firm the scope and results of their audit; pre-approving all audit and permissible non-audit services to be performed by the independent registered public accounting firm; overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; and reviewing and monitoring our accounting principles, policies and financial and accounting controls.
 
Compensation Committee.  We anticipate that John Z. Kukral, Lenore M. Sullivan and George L. Miles, Jr. will serve on the Compensation Committee and that Mr. Kukral will serve as its chair. The Compensation


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Committee will be responsible for, among other things, reviewing and recommending director compensation policies to the board of directors; making recommendations, at least annually, to the board of directors regarding our policies relating to the amounts and terms of all compensation of our executive officers; and administering and discharging the authority of the board of directors with respect to our equity plans.
 
Nominating and Corporate Governance Committee.  We anticipate that Deborah H. McAneny, Lenore M. Sullivan, McHenry T. Tichenor, Jr. and John Z. Kukral will serve on the Nominating and Corporate Governance Committee and that Ms. McAneny will serve as its chair. The Corporate Governance and Nominating Committee will be responsible for, among other things, selecting potential candidates to be nominated for election to the board of directors; recommending potential candidates for election to the board of directors; reviewing corporate governance matters; and making recommendations to the board of directors concerning the structure and membership of other board committees.
 
Compensation Committee Interlocks and Insider Participation
 
We do not anticipate any interlocking relationships between any member of our Compensation Committee or our nominating and governance committee and any of our executive officers that would require disclosure under the applicable rules promulgated under federal securities laws. Prior to this offering, the operating committee of HFF Holdings made all determinations regarding executive officer compensation.
 
Director Compensation
 
In 2006, none of our directors received any compensation for service as a member of our board of directors or board committees.
 
Our policy is not to pay director compensation to directors who are also our employees. We anticipate that each outside director will be paid a base annual retainer of $50,000. Each outside director who is a director as of the date this registration statement becomes effective will receive an initial grant of approximately 4,688 options to purchase shares of our Class A common stock, which will vest annually over three years. Each outside director elected after the date this registration statement becomes effective will receive an initial election grant of options to purchase shares of our Class A common stock with a Black-Scholes (or similar valuation method) value of $30,000, which will vest annually over three years. Each outside director will receive an annual grant of restricted stock units based upon our Class A common stock with a market value of $50,000 on the grant date which will initially be upon the offering and thereafter will be payable at a future date determined by our board of directors.
 
In addition, we expect the chair of the Audit Committee will receive an additional annual retainer of $10,000 and the chair of each of the Compensation Committee and Nominating and Corporate Governance Committee will receive an additional annual retainer of $5,000.
 
We intend to reimburse all non-employee directors for reasonable expenses incurred to attend meetings of our board of directors or committees. Other than as described above, we do not expect to provide any of our directors with any other compensation or perquisites.
 
In addition to the payments described above, we intend to allow voluntary deferral by our directors of up to 100% of the cash retainer and committee fees to a future date elected by the director. The deferred retainer and fees will be deemed invested in an investment fund based upon our Class A common stock or another investment vehicle such as an interest-bearing cash account.
 
Compensation Discussion and Analysis
 
Current Compensation Policies
 
Prior to the consummation of the Reorganization Transactions and since June 2003, we were controlled by our principal shareholder, HFF Holdings. All compensation decisions relating to our senior transaction professionals, including those for members of the operating committee of HFF Holdings and the managing member of HFF Holdings, John H. Pelusi, Jr., were subject to the approval of the operating committee of HFF Holdings and then put to a vote of the members of HFF Holdings for approval. Generally, the salary of Mr. Pelusi and others on the


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operating committee are proposed by the members of the operating committee as part of the annual budget process and approved by a vote of the members of HFF Holdings on the budget. In addition, the managing member is eligible for a discretionary performance bonus every year. Upon the recommendation of the operating committee of HFF Holdings, the bonus for Mr. Pelusi is approved by a vote of the members of the HFF Holdings (except for Mr. Pelusi).
 
Mission and Vision Statement
 
The Operating Partnerships have adopted a mission and vision statement that reflects their pay for value-added performance philosophy. We believe this mission and vision statement is critical to our continued success. The mission and vision statement relies upon the concept that a client’s interest must be ahead of ours or any individual working for us. Our goal is to hire and retain associates throughout the entire organization who have the highest ethical standards with the best reputation in the industry to preserve our culture of integrity, trust and respect. We endeavor to promote and encourage teamwork to ensure our clients have the best team on each transaction. Without the best people, we believe we cannot be the best firm and achieve superior results for our clients.
 
To enable us to achieve our goals, we must maintain a flexible compensation structure, including equity-based compensation awards, to appropriately recognize and reward our existing and future associates who profoundly affect our future success. The ability to reward superior performance is essential if we want to provide superior results for our clients.
 
Compensation for Executive Officers During 2006
 
During 2006, Mr. Pelusi was not paid any amount for his services as an executive officer to HFF, Inc. Mr. Pelusi is also a transaction professional of HFF LP. He is primarily paid for his service as a transaction professional. His payment as a transaction professional is based upon commissions he earns for the capital markets revenue that through his efforts he brings into HFF LP. Like our other transaction professionals, Mr. Pelusi is entitled to receive commission payments equal to 50% of the adjusted collected fee amount that he has generated for HFF LP. The adjusted collected fee amount is determined based upon the gross revenue actually received by HFF LP attributable to the efforts of Mr. Pelusi and after payment of all customary and appropriate fee splits with outside cooperating brokers or others. The adjusted collected fee amount is also reduced by related producer expenses, including all applicable management plan payments, bonus pool payments to analysts, splits with other producers and employees, and other similar compensation paid or payable to individuals involved in the generation of any commission revenue. This is consistent with HFF LP’s pay for performance policy, as the compensation earned by Mr. Pelusi as a transaction professional is directly related to the amount of revenue he generates for HFF LP. In addition, in order to attract and retain top producers, such as Mr. Pelusi, it is critical that they share in the revenue and certain other income that they generate for the Operating Partnerships.
 
During 2006, Mr. Pelusi was paid a salary that is determined by annual review of the members of HFF Holdings. His salary was proposed by the operating committee of HFF Holdings and included in an annual operating budget. The annual operating budget was then approved by a vote of the members of HFF Holdings. Mr. Pelusi was also paid an additional discretionary amount as the Executive Managing Director of HFF LP and a member of the operating committee and Managing Member of HFF Holdings. This amount is initially determined by the operating committee of HFF Holdings and is based upon a number of subjective factors, including, the performance of the Operating Partnerships and HFF Holdings during the year, the ability to attract and retain transactional professionals, establish additional offices, and the time and effort dedicated to the administration of the day-to-day affairs of the Operating Partnerships and HFF Holdings. The annual discretionary bonus is then recommended to the members of HFF Holdings who then approve the bonus through a vote (Mr. Pelusi does not vote on the bonus nor is he present during the vote or any discussion of the operating committee regarding his bonus). In 2006, Mr. Pelusi was awarded a bonus of $500,000 plus a tax gross up of $148,077 for self employment taxes relating to compensatory payments received by Mr. Pelusi in his capacity as a member of HFF Holdings. To retain employees with high ethical standards, integrity and the best reputation, consistent with our mission and vision statement, we must be able to reward executive officers, such as Mr. Pelusi for achieving individual or company-wide milestones. We believe these milestones can only be determined and adequately rewarded after they have been achieved and we have reviewed them.


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Mr. Pelusi also is eligible to participate in the HFF LP Profit Participation Bonus Plan. The Profit Participation Bonus Plan, described in more detail in “— Profit Participation Bonus Plans”, provides that offices or lines of business that generate profit margins for their office or line of business of 14.5% or more are entitled to additional bonuses of an allocated share of 15% of net income from the office. The allocation of the profit participation bonus and how it is shared within the office are determined by the office head in consultation with the managing member. In 2006, Mr. Pelusi received a profit participation bonus of $175,286. We believe HFF LP Profit Participation Bonus plan rewards an office or line of business for an exceptionally productive year. In addition, the Profit Participation Bonus Plan rewards income generation as well as the ability of an office or line of business to control costs. This element of compensation is integral to HFF LP’s compensation practices because it provides an understandable incentive to each of our offices and lines of business and allows us to reward superior performance.
 
In addition to the above, Mr. Pelusi received distributions with respect to his ownership interests in HFF Holdings as set forth in the Summary Compensation Table below. The payments for these ownership interests results in the alignment of Mr. Pelusi’s interest as an employee with those as an owner.
 
During 2006, Ms. Goodson was not paid any amount for her services to HFF, Inc. She was paid a base salary based upon her services as an Executive Managing Director of HFF LP and as chief administrative and operational officer of the Operating Partnerships and HFF Holdings. Her base salary was established by Mr. Pelusi in consultation with the operating committee of HFF Holdings. Among the factors considered in establishing her base salary were her historical base salary and comparisons to similar positions in similar peer group industries in Texas for non-publicly traded companies. She is not a transactional professional and accordingly is not entitled to a commission. However, Ms. Goodson was eligible to receive a discretionary annual cash bonus payable to her as an executive officer based upon her individual achievement of financial or strategic performance goals established by HFF LP from time to time. The strategic and financial goals for 2006 were based upon her efforts assisting in consummating this offering and running the day-to-day operations of the Operating Partnerships. HFF Holdings retained Mercer Human Resource Consulting to evaluate our compensation practices and make recommendations about compensation practices relative to Ms. Goodson’s current role as well as her expanded role. An increase in salary is contemplated, to $200,000, as set forth in the description of her employment agreement below. Furthermore, Ms. Goodson’s duties will be expanded after the consummation of the Reorganization Transactions and this offering.
 
Mr. Conley was hired in October 2006 when the offering was being contemplated by us. In connection with his hiring, we reviewed the compensation practices of a peer group of businesses. HFF LP determined that Mr. Conley’s salary should be comparable to the salaries paid to our peer group. His base salary was established at $215,000. In addition, as discussed below, in connection with this offering, HFF Holdings retained Mercer Human Resource Consulting to evaluate our compensation practices, and make recommendations about compensation practices. These recommendations included a determination that the $215,000 salary was an appropriate salary for Mr. Conley.
 
Mr. Conley is not a transactional professional and accordingly is not entitled to a commission. However, Mr. Conley is eligible to receive a discretionary annual cash bonus payable to him as an executive officer based upon the achievement of financial or strategic performance goals established by us from time to time. Furthermore, Mr. Conley’s duties will be substantially expanded after the consummation of the Reorganization Transactions and this offering.
 
Expected Compensation Policies
 
The following discussion relates to our anticipated policies and practices relating to officer compensation following the offering:
 
As soon as practicable after the consummation of this offering, the Compensation Committee of the board of directors will be responsible for implementing and administering all aspects of our benefit and compensation plans and programs. All of the members of our Compensation Committee will be independent directors who are not currently members of HFF Holdings. Though we expect the Compensation Committee to follow these policies, it is possible that the Compensation Committee could develop a compensation philosophy different than that discussed here.


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We have adopted the mission and vision statement set forth above, which was used to determine compensation by our Operating Partnerships prior to the consummation of the Reorganization Transactions and this offering. In addition, our mission and vision statement reflects the fact that our ability to reward superior performance is essential to appropriately align our interests with our shareholders.
 
In connection with this offering, HFF Holdings retained the compensation consulting firm of Mercer Human Resource Consulting to evaluate our compensation practices and to assist in developing and implementing the executive compensation program and philosophy with respect to Mr. Conley and Ms. Goodson. Mr. Pelusi’s compensation was not reviewed by Mercer. It is anticipated that after the consummation of this offering, the Compensation Committee will undertake a review of the compensation of Mr. Pelusi. Mercer developed a competitive peer group comprised of 24 companies comparable in size to us that have consummated an initial public offering in the past three years (2003 – 2006). Using benchmarks based on this peer group, Mercer performed analyses of competitive performance and compensation levels. It also met with senior management to learn about our business operations and strategy as a public company, key performance metrics and target goals, and the labor and capital markets in which we will compete. It developed recommendations that were reviewed and approved by our board of directors in connection with developing and approving this offering.
 
From time to time, our board of directors and/or compensation committee will evaluate the performance of our senior executives based on quantitative and qualitative performance criteria.
 
Elements of Compensation
 
Following the consummation of the offering, we anticipate executive compensation to consist of the following elements:
 
Base Salary.  Base salaries for executive officers are established based on each individual’s job responsibilities and contribution to the Company, while taking into account total compensation levels at other companies for similar positions. Generally, we believe that base salaries should be set at the low end of competitive levels, while providing somewhat higher bonuses based on the performance of the Company and the individual. Base salaries are reviewed annually; however, a decrease in base salary may be prohibited by an executive officer’s employment agreement.
 
Bonuses.  Our Compensation Committee will be responsible for establishing and implementing pre-established quantitative and qualitative performance standards for executive bonuses. To the extent that our employment agreements contain qualitative standards for discretionary bonuses, our board of directors intends to take the following steps to ensure direct correlation between executive compensation and performance:
 
•  initiate a practice of reviewing the performance of all senior executives at every board meeting; and
 
•  establish annual reviews of compensation reports for the named executive officers.
 
Bonus targets are intended to be on the high end of competitive levels to compensate for lower salaries.
 
In addition to our regular bonus program, our Chief Executive Officer will also be eligible for an annual bonus through our Profit Participation Bonus Plan, mentioned above.
 
Long-Term Incentive Program.  Our board of directors believes that compensation paid to executive officers should be closely aligned with our performance on both a short-term and long-term basis, and that their compensation should assist us in recognizing and rewarding key executives who profoundly affect our future success through their value-added performances. Therefore, as discussed below under “— Omnibus Incentive Compensation Plan”, we will adopt a new incentive compensation plan prior to the consummation of this offering. That plan is designed to align management’s performance objectives with the interests of our shareholders. Awards under our 2006 Omnibus Incentive Compensation Plan will be administered by a committee appointed by our board of directors consisting of at least two non-employee, outside directors. That committee will be authorized to, among other things, select the participants and determine the type of awards to be made to participants, the number of shares subject to awards and the terms, conditions, restrictions and limitations of the awards.


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Employment Agreements.  A description of the employment agreements of our current executive officers, John H. Pelusi, Jr. at HFF LP, Gregory R. Conley and Nancy O. Goodson, including a specific description of the components of each such executive officer’s compensation, is set forth below.
 
Stock Ownership.  We have not yet developed a stock ownership policy, guidelines or requirements. The Compensation Committee may consider adopting such a policy in the future for all or a select portion of our executive officers.
 
Executive Compensation
 
Summary Compensation Table.  Prior to this offering, we have operated our business with a relatively small number of executive officers. In October 2006, Gregory R. Conley joined us as our Chief Financial Officer. The following table sets forth the compensation paid or accrued during fiscal 2006 for our named executive officers: John H. Pelusi, Jr., our Chief Executive Officer; Gregory R. Conley, our Chief Financial Officer; and Nancy O. Goodson, our Chief Operating Officer.
 
                                         
                All Other
   
            Bonus
  Compensation
   
Name and Principal Position
  Year   Salary($)   ($)   ($)   Total ($)
 
John H. Pelusi, Jr. 
    2006       400,000       2,190,552       4,841,986(1 )     7,432,538  
Chief Executive Officer
                                       
Gregory R. Conley
    2006       44,792       25,000       1,194(2 )     70,986  
Chief Financial Officer
                                       
Nancy O. Goodson
    2006       165,000       200,000       17,858(3 )     382,858  
Chief Operating Officer
                                       
 
(1) Includes current estimates of Mr. Pelusi’s participation in the earnings of HFF Holdings of Mr. Pelusi in the amount of $4,500,000. We have historically operated as two limited liability companies (HFF Holdings and Holdings Sub) and two limited partnerships (HFF LP and HFF Securities, which two partnership we refer to collectively as the Operating Partnerships), and transaction professionals who are also members of HFF Holdings, in addition to a salary and bonus, received compensation in the form of participation in the earnings of HFF Holdings. The amounts presented reflect current estimates of distributions made by such entities in respect of the fiscal year ended December 31, 2006, include distributions to Mr. Pelusi in 2007 in respect of the prior fiscal year and exclude distributions to be made to him in 2006 in respect of the prior fiscal year. The Operating Partnerships are currently finalizing 2006 financial information and as a result this amount is preliminary and subject to change. This amount also includes $12,277 in health benefits, $153 in life insurance premiums, $5,000 in a 401(k) match, $175,286 in profit participation, $1,193 in a gross-up for taxes on parking expenses paid for by us and $148,077 in a tax gross-up for self-employment taxes relating to compensatory payments received by Mr. Pelusi in his capacity as a member of HFF Holdings.
 
(2) This amount includes $12 in life insurance premiums, $1,019 in a 401(k) match and $163 in a gross-up for taxes on parking expenses paid for by us.
 
(3) This amount includes $12,705 in health benefits, $153 in life insurance premiums and $5,000 in a 401(k) match.
 
Plan-Based Award Grant Policies.  As discussed below under “— Omnibus Incentive Compensation Plan”, we will adopt a new incentive compensation plan prior to the consummation of this offering. That plan is designed to align management’s performance objectives with the interests of our shareholders. Awards under our 2006 Omnibus Incentive Compensation Plan will be administered by a committee appointed by our board of directors consisting of at least two non-employee, outside directors. That committee will be authorized to, among other things, select the participants and determine the type of awards to be made to participants, the number of shares subject to awards and the terms, conditions, restrictions and limitations of the awards.
 
Employment Agreements
 
John H. Pelusi, Jr.
 
Prior to this offering, we expect HFF LP to enter into an amended and restated employment agreement with Mr. Pelusi in respect of Mr. Pelusi’s capacity as a transaction professional on terms and conditions substantially identical to the employment agreements between HFF LP and our other transaction professionals. We believe that the compensation paid by HFF LP to these transaction professionals, including Mr. Pelusi, relates to such transaction professionals’ services to HFF LP and not to any executive services to HFF, Inc. Consequently, we anticipate our Compensation Committee may not take into account the compensation HFF LP pays to those


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transaction professionals, including Mr. Pelusi, when determining our executive compensation policies, programs or awards for those individuals. This employment agreement would provide for salary, bonuses, commission sharing, draws against commissions, bonuses and other income allocations as established from time to time by Holliday GP at the direction of our board of directors after consideration of the recommendation and advice of the operating committee and managing member of HoldCo LLC. Mr. Pelusi would be provided with the welfare benefits and other fringe benefits to the same extent as those benefits are provided to our other similarly situated employees.
 
Gregory R. Conley and Nancy O. Goodson
 
Prior to this offering, we anticipate entering into employment agreements with each of Gregory R. Conley and Nancy O. Goodson. Pursuant to the terms of these respective employment agreements, Mr. Conley will serve as our Chief Financial Officer and Ms. Goodson will serve as our Chief Operating Officer, in each case until such executive’s employment is terminated by us or Mr. Conley or Ms. Goodson, as the case may be.
 
The compensation package of each of Mr. Conley and Ms. Goodson is comprised of the following elements:
 
  •  Base Salary.  Each employment agreement establishes a base salary for the first year of the agreement. The Compensation Committee, in consultation with our chief executive officer, will review an executive officer’s base salary annually to ensure that the proper amount of compensation is being paid to such executive officer commensurate with his or her services performed for us. The Compensation Committee may increase, but not decrease, such base salary in its sole discretion.
 
  •  Annual Cash Bonus. Mr. Conley and Ms. Goodson are each eligible to receive an annual cash bonus, in an amount up to 50% of his or her base salary, based upon the applicable executive officer’s achievement of certain pre-determined financial or strategic performance goals established by the Company from time to time.
 
  •  Long-Term Incentive Compensation. On the effective date of the employment agreement of Mr. Conley and Ms. Goodson, subject to the terms and conditions of the HFF, Inc. 2006 Omnibus Incentive Compensation Plan and the applicable award agreement with such executive officer under such plan, each executive officer will receive a grant of restricted Class A common stock with an aggregate fair market value on the date of grant of $300,000. This restricted stock grant will vest in four equal annual installments beginning on the second anniversary of the grant.
 
  •  Other Benefits. Mr. Conley and Ms. Goodson will be provided with welfare benefits and other fringe benefits to the same extent as those benefits are provided to our other similarly situated employees.
 
Non-Competition, Non-Disclosure, Non-Solicitation and Other Restrictive Covenants
 
Pursuant to the employment agreement, we will enter into non-competition, non-disclosure, non-solicitation and other restrictive covenants with Mr. Pelusi and non-disclosure and other restrictive covenants with Mr. Conley and Ms. Goodson. The following are descriptions of the material terms of each covenant.
 
The non-competition, non-disclosure, non-solicitation and other restrictive covenants provide as follows:
 
Non-Competition.  For a period of time until the earlier of (i) five years after the initial effective date of the employment agreement (March 29, 2006), and (ii) the second anniversary of the termination date of Mr. Pelusi’s employment, Mr. Pelusi may not, directly or indirectly, own, operate, manage, participate in, invest in, render services for or otherwise assist any entity that engages in any competitive business that we or our affiliates are in or are actively considering conducting during a six month period preceding the termination date of Mr. Pelusi’s employment. Mr. Pelusi is also prohibited by the terms of the non-competition covenant from directly or indirectly engaging in any activity that requires or would inevitably require the disclosure of confidential information of us or our affiliates. This non-competition covenant does not apply if Mr. Pelusi is terminated by us without “cause” (as defined in the employment agreement).


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Non-Disclosure.  Each of Mr. Pelusi, Mr. Conley and Ms. Goodson is required, whether during or after his or her employment, to hold all “confidential information” in trust for us and is prohibited from using or disclosing such confidential information except as necessary in the regular course of our business or that of our affiliates.
 
Non-Solicitation.  For a period of time until the earlier of (i) five years after the initial effective date of the employment agreement, and (ii) the second anniversary of the termination date of the Mr. Pelusi’s employment, Mr. Pelusi may not, directly or indirectly, solicit the business of or perform duties for any client or prospective client of ours in respect of any service similar to a service performed by us or our affiliates. “Prospective client” means any person with which we or our affiliates were in active business discussions at any time within six months prior to the termination date of the Mr. Pelusi’s employment. Mr. Pelusi is also prohibited from influencing or encouraging any of our clients or prospective clients from ceasing to do business with us during this same time period. This non-solicitation covenant does not apply if Mr. Pelusi is terminated by us without “cause” (as defined in the employment agreement).
 
Pursuant to the employment agreement, Mr. Pelusi also may not, directly or indirectly, knowingly solicit or encourage any of our employees or consultants to leave their employment with us, or hire any such employee or consultant until the earlier of (i) five years after the initial effective date of the employment agreement, and (ii) the second anniversary of the termination date of Mr. Pelusi’s employment.
 
Non-Disparagement.  Each of Mr. Pelusi, Mr. Conley and Ms. Goodson may not, except as legally compelled, make any statement to third parties that would have a material adverse impact on the business or business reputation of, as the case may be, Mr. Pelusi, Mr. Conley and Ms. Goodson or any of us or our affiliates.
 
Specific Performance.  In the case of any breach of the employment agreement, including the non-competition, non-disclosure, non-solicitation and other restrictive covenants thereof, Mr. Pelusi, Mr. Conley, Ms. Goodson will each agree that, in addition to any other right we may have at law, equity or under any agreement, we will be entitled to immediate injunctive relief and may obtain a temporary or permanent injunction or other restraining order.
 
Potential Payments Upon Termination
 
Mr. Conley’s and Ms. Goodson’s respective employment agreements will contain provisions providing for payments by us following the termination of his or her employment by us without cause or by such executive for good reason. Under the respective employment agreements, if Mr. Conley or Ms. Goodson’s employment is terminated by us without cause or by such executive with good reason, he or she, as the case may be, will be entitled to receive his or her base salary through the date of termination and for a subsequent period of twelve months, the benefits provided under our employee benefit plans and programs, continuation of medical benefits for twelve months after the date of termination, vesting of 50% of his or her unvested restricted stock units or stock options, if any, and 90 days to exercise any vested stock options, if any. In addition, any restricted stock units or stock options granted will become 100% vested if his or her position is eliminated or compensation is reduced following a change in control. “Cause” is defined under the respective employment agreements as (i) gross misconduct or gross negligence in the performance of one’s duties as our employee, (ii) conviction or pleading nolo contendre to a felony or a crime involving moral turpitude, (iii) significant nonperformance of an executive’s duties as our employee, (iv) material violation of our established policies and procedures, or (v) material violation of the respective employment agreement. “Good reason” is defined under the respective employment agreements as (i) a significant reduction of duties or authority, (ii) a reduction in base salary without the executive’s consent, (iii) a reduction in the executive’s bonus opportunity, (iv) a significant change in the location of the executive’s principal place of employment and (v) material violation of the respective employment agreements.
 
If the employment of Mr. Conley or Ms. Goodson, as the case may be, is terminated for any reason other than by us without cause or by such executive for good reason (including by us with cause, by such executive without good reason, or due to death or disability), such executive will only be entitled to all earned, unpaid base salary and the benefits provided under our employee benefit plans and programs. Mr. Conley or Ms. Goodson, as the case may be, will be permitted to exercise vested stock options for a period of 30 days following termination due to a voluntary resignation for a period of 30 days and for a period of one year following a termination due to death or


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disability. For a termination due to cause, Mr. Conley or Ms. Goodson, as the case may be, will not be permitted to exercise any of their stock options following termination.
 
Unvested restricted stock units and stock options will be forfeited upon a termination for any reason.
 
Mr. Pelusi’s employment agreement is not expected to provide for any potential severance payments by us upon the termination of his employment.
 
                 
    Continuation of
    Continuation of
 
    Base Salary     Medical Benefits  
 
Gregory R. Conley
Without cause or with good reason
  $ 215,000        
Nancy O. Goodson
Without cause or with good reason
  $ 200,000     $ 16,331  
 
Omnibus Incentive Compensation Plan
 
Our board of directors intends to adopt the HFF, Inc. 2006 Omnibus Incentive Compensation Plan (the “Plan”) before the effective date of this offering. The purpose of the Plan is to assist HFF, Inc., HFF LP and HFF Securities, and each of their subsidiaries and affiliates in attracting and retaining valued employees, directors and consultants by offering them a greater stake in our success and a closer identity with it and to encourage ownership of our stock by such individuals. The Plan will accomplish these goals by granting to eligible individuals awards of deferred stock, restricted stock, options, stock appreciation rights, stock units, stock purchase rights, cash-based awards, or other stock-based awards. The number of shares of our Class A common stock available for awards under the terms of the Plan is 3,500,000 (subject to adjustments for stock splits, stock dividends and the like) which equals approximately 9.5% of the shares of Class A common stock to be outstanding immediately following this offering plus the number of shares of Class A common stock for which the partnership units HFF Holdings holds in the Operating Partnerships are exchangeable. Upon the effective date of our Registration Statement on Form S-1 of which this prospectus is a part, we anticipate making grants of 18,750 restricted stock units to Mr. Conley and 18,750 restricted stock units to Ms. Goodson, 25% of which will vest annually beginning on the second anniversary of the grant date. Each outside director will receive a grant of approximately 4,688 options to purchase shares of our Class A common stock, which will vest annually over three years, and a grant of approximately 2,500 restricted stock units which will be fully vested. In addition, we intend to grant up to another approximately 137,500 restricted stock units to certain other employees. A $1.00 increase (decrease) in the assumed offering price of $16.00 per share would decrease (increase) the amount of shares underlying these awards by approximately 15,000 shares. No awards have been or will be made under the Plan prior to this offering. The Plan imposes limits on the awards that may be made to any individual during any calendar year as follows: awards to any individual that are settled or payable in stock are limited to 1,750,000 shares and awards settled or payable in cash are limited to $28,000,000.
 
General.  The Plan authorizes the grant of deferred stock, restricted stock, options, stock appreciation rights, stock units, stock purchase rights, cash-based awards, or other stock-based awards (collectively called “Awards”). Options granted under the Plan may be either “incentive stock options” as defined in section 422 of the Internal Revenue Code, or nonqualified stock options, as determined by the Board or a committee appointed by the Board (in either case, the “Committee”).
 
Eligibility.  The Plan provides that Awards may be granted to any of our employees, directors or consultants.
 
Administration.  The Committee which will consist of at least two non-employee, outside directors will administer the Plan. With respect to Awards to individuals who are not subject to the requirements of Rule 16b-3 of the Securities Exchange Act of 1934, as amended or Section 162(m) of the Internal Revenue Code, the Plan may be administered by a Secondary Committee consisting of one or more members of the Board. Subject to the other provisions of the Plan, the Committee has the authority to:
 
  •  interpret the Plan and correct any defect or supply any omission or reconcile any inconsistency in the Plan;
 
  •  establish and amend rules and regulations relating to the Plan;
 
  •  select the participants and determine the type of Awards to be made to participants, the number of shares subject to Awards and the terms, conditions, restrictions and limitations of Awards;
 
  •  accelerate or waive any such term or condition as the Committee may have imposed on an Award;


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  •  determine whether, and certify that, performance goals to which the settlement of an Award is subject are satisfied;
 
  •  allocate any portion of its responsibilities among its members, the Chief Executive Officer or the Secondary Committee; and
 
  •  make all other determinations it deems necessary or advisable for the administration of the Plan.
 
Each Award granted under the Plan will be evidenced by a written award agreement between the participant and us, which will describe the Award and state the terms and conditions to which the Award is subject. The principal terms and conditions of each particular type of Award are described below.
 
If any shares subject to Award are forfeited, or if any Award terminates, expires or lapses without being exercised, shares of Class A common stock subject to such Award will again be available for future grant. In addition, any shares under the Plan that are used to satisfy award obligations under the plan of another entity that is acquired by us will not count against the remaining number of shares available. Finally, in the event of certain changes in our corporate capitalization, the Committee in its sole discretion will cancel and make substitutions of Awards or will adjust the number and kind of shares available for award under the Plan, the number and kind of shares covered by Awards then outstanding under the Plan, the aggregate number and kind of shares of Class A common stock available under the Plan and the exercise price of outstanding Awards.
 
Performance Goals
 
The Committee may condition the grant and vesting or exercise of Awards on the achievement of performance objectives, and will have discretion to determine the specific targets with respect to such performance objectives.
 
The Committee may grant Awards intended to qualify as “performance-based compensation” to “covered employees” within the meaning of Section 162(m) of the Internal Revenue Code. In such event, the Committee will designate which covered employees will receive such Awards and the performance goals applicable thereto within the earlier of (1) 90 days or (2) the lapse of 25% of the performance period to which such performance goals relate. Unless otherwise determined by the Committee, the participant must be employed by us on the last day of the performance period to receive payment of such Award. A participant will only receive payment of performance-based compensation after the completion of the performance period to the extent performance goals are certified by the Committee as having been achieved during the performance period.
 
Deferred Stock
 
An Award of deferred stock is an agreement by us to deliver to the recipient a specified number of shares of Class A common stock at the end of a specified deferral period, subject to the fulfillment of conditions specified in the Award agreement. During the deferral period, an amount equal to any dividends declared with respect to the number of shares covered by a deferred stock award will be paid to the participant currently, or deferred and deemed reinvested in additional shares of deferred stock or such other investment as the Committee may determine, in its sole discretion.
 
Restricted Stock
 
An Award of restricted stock is a grant to the recipient of a specified number of shares of Class A common stock which are subject to forfeiture upon specified events during the restriction period. Each grant of restricted stock will specify the length of the restriction period and will include restrictions on transfer to third parties during the restriction period. During the restriction period, unless otherwise determined by the Committee, the participant has the right to receive dividends from and to vote the shares of restricted stock. The Committee may provide, in an applicable restricted stock Award Agreement, for a tax reimbursement cash payment to be made to the participant in connection with the tax consequences resulting from an Award of restricted stock.


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Options
 
An option is the right to purchase shares of Class A common stock for a specified period of time at a fixed price (the “exercise price”). Each option agreement will specify the exercise price, the type of option, the term of the option, the date when the option will become exercisable and any applicable performance goals. The Committee will determine the exercise price of an option at the time the option is granted. The exercise price under an option will not be less than 100% of the fair market value of Class A common stock on the date the option is granted unless the option was granted through the assumption of, or in substitution for, outstanding awards previously granted by an entity acquired by us. The term of an option granted under the Plan will be no longer than ten years from the date of grant or five years in the case of an Incentive Stock Option granted to a Ten Percent Shareholder. No option may be exercised more than ten years from the grant date.
 
Stock Appreciation Rights
 
A stock appreciation right (“SAR”) entitles the recipient to receive, upon exercise of the SAR, the increase in the fair market value of a specified number of shares of Class A common stock from the date of the grant of the SAR to the date of exercise, payable in cash, shares of Class A common stock, or any combination thereof as specified by the Committee. Any grant may specify a waiting period or periods before the SAR may become exercisable and permissible dates or periods on or during which the SAR will be exercisable. In addition, the Committee may grant limited stock appreciation rights (“LSARs”) that are exercisable upon the occurrence of specified contingent events. Such LSARs may provide for a different method of determining the increase in the fair market value of shares of Class A common stock, may provide for payment only in cash, and may provide that any related Awards are not exercisable while the LSARs are exercisable. No SAR (including LSARs) may be exercised more than ten years from the grant date.
 
Stock Units
 
A stock unit is a book-entry unit with a value equal to one share of Class A common stock. Payment of stock units may be made either by delivery of shares to the participant or payment in cash equal to the fair market value of the shares of Class A common stock to which the award relates multiplied by the number of stock units granted. The Committee may condition the vesting of stock units upon performance goals or continued service of the participant. The Committee will determine on what terms and conditions the participant will be entitled to receive current or deferred payments of cash, Class A common stock or other property corresponding to dividends payable on Class A common stock prior to the payment of stock units.
 
Stock Purchase Awards
 
A stock purchase award entitles the participant to purchase a set number of shares of Class A common stock at a price equal to the price established by the Committee. Upon purchase, a participant will be a shareholder, entitled to exercise voting rights and receive dividends.
 
Other Stock-Based Awards
 
The Committee, in its sole discretion, may grant or sell other stock-based awards, which will be subject to the terms and conditions as the Committee will determine, including without limitation performance goals. Such other stock-based awards may be granted alone or in addition to any other awards and may be settled in cash or shares of Class A common stock (or a combination thereof), as determined by the Committee.
 
Cash-Based Awards
 
The Committee, in its sole discretion, may grant cash-based awards, which will be subject to the terms and conditions as the Committee will determine, including performance goals. Such cash-based awards will specify a payment amount or payment range as determined by the Committee.


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Profit Participation Bonus Plans
 
The purpose of the Holliday Fenoglio Fowler, L.P. Profit Participation Bonus Plan and the HFF Securities, L.P. Profit Participation Bonus Plan (each, a “Profit Participation Bonus Plan”) is to attract, retain and provide incentives to employees, and to promote the financial success, of HFF LP and HFF Securities, respectively.
 
Applicability of Plan to Designated Offices.  A Profit Participation Bonus Plan shall apply to each separate office or line of business (each, a “Business Line”) of HFF LP and HFF Securities (each, an “Office”) designated by the Managing Member of HFF LP (the “Managing Member”). The Managing Member, currently John H. Pelusi, Jr., is elected by certain senior officers of HFF LP pursuant to the HFF LP partnership agreement.
 
Bonus Pool Calculation.  With respect to each Office or Business Line to which a Profit Participation Bonus Plan applies and for each calendar year, if a fourteen and one-half percent (14.5%) or greater Profit Margin is generated by such Office or Business Line, then an amount equal to fifteen percent (15%) of the Adjusted Operating Income generated by such Office or Business Line, shall comprise the bonus pool. For purposes of each Profit Participation Bonus Plan, “Profit Margin” means the net operating income of such Office or Business Line as a percentage of the revenue of such Office or Business Line and “Adjusted Operating Income” means the net operating income of such Office or Business Line adjusted for depreciation and amortization, all as determined in accordance with U.S. Generally Accepted Accounting Principles.
 
Allocation of Bonus Pool.  Each full-time or part-time employee of HFF LP and HFF Securities is eligible to receive a bonus payment under the applicable Profit Participation Bonus Plans (a “Profit Participation Bonus”) with respect to services performed during the calendar year.
 
For each calendar year, the head of each Office or Business Line of HFF LP and HFF Securities, after consultation with the Managing Member, shall select the recipients of Profit Participation Bonuses and shall determine the allocation of the bonus pool among the eligible recipients.
 
Payment of Profit Participation.  Subject to any applicable federal, state, local or other withholding taxes, Profit Participation Bonuses shall be paid in accordance with each Office’s or Business Line’s allocation plan on the last business day of the year in which the Profit Participation Bonus is earned, or, if determined by the Managing Member with respect to any Office or Business Line, on or before March 15 of the year following the year with respect to which the Profit Participation Bonus was earned.
 
Administration.  The Profit Participation Bonus Plans shall be administered by the Managing Member. Any action of the Managing Member in administering the Profit Participation Bonus Plans shall be final, conclusive and binding on all persons. Subject to the provisions of the Profit Participation Bonus Plans, the Managing Member has the authority to:
 
  •  determine the effect upon each Profit Participation Bonus Plan and the Profit Participation Bonuses, if any, of any stock dividend, recapitalization, forward stock split or reverse stock split, reorganization, division, merger, consolidation, spin-off, combination, repurchase or share exchange, extraordinary or unusual cash distribution or other similar corporate transaction or event,
 
  •  construe and interpret the Profit Participation Bonus Plans and to make all other determinations, including determinations as to the eligibility of any employee, as he or she may deem necessary or advisable for the administration of the Profit Participation Bonus Plans,
 
  •  correct any defect or supply any omission or reconcile any inconsistency in the Profit Participation Bonus Plans,
 
  •  adopt, amend and rescind such rules and regulations as, in his or her opinion, may be advisable in the administration of the Profit Participation Bonus Plans,
 
  •  require any person to furnish such reasonable information as requested for the purpose of the proper administration of the Profit Participation Bonus Plans as a condition to receiving any benefits under the Profit Participation Bonus Plans, and
 
  •  prepare and distribute information explaining the Profit Participation Bonus Plans to employees.


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HFF LP and HFF Securities, respectively, shall indemnify and hold harmless the Managing Member from and against any and all liabilities, costs and expenses incurred by the Managing Member as a result of any act or omission to act in connection with the performance of the Managing Member’s duties, responsibilities and obligations under the applicable Profit Participation Bonus Plan, to the maximum extent permitted by law, other than such liabilities, costs and expenses as may result from the gross negligence, bad faith, willful misconduct or criminal acts of the Managing Member.
 
Amendment or Termination of Plans.  Each Profit Participation Bonus Plan may only be amended or terminated through a writing executed by each limited partner and general partner of the HFF LP and HFF Securities, as the case may be.


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PRINCIPAL STOCKHOLDERS
 
The following table sets forth information regarding the beneficial ownership of our Class A common stock and Class B common stock, and of partnership units in the Operating Partnerships, by (1) each person known to us to beneficially own more than 5% of our voting securities, (2) each of our directors, (3) each of our named executive officers and (4) all directors and executive officers as a group.
 
The number of shares and partnership units of the Operating Partnerships outstanding and percentage of beneficial ownership before the offering of Class A common stock set forth below are based on the number of shares and partnership units in the Operating Partnerships to be issued and outstanding prior to the offering of Class A common stock after giving effect to the other elements of the Reorganization Transactions. The number of shares and partnership units in the Operating Partnerships and percentage of beneficial ownership after this offering set forth below are based on shares and partnership units of the Operating Partnerships to be issued and outstanding immediately after this offering.
 
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.
 
                                                                                                 
          Partnership Units
                         
                            in each of the Operating Partnerships
                         
    Shares of Class A Common Stock Beneficially Owned(b)     Beneficially Owned(b)                       Percentage
 
                                        Percentage
    Percentage
                Percentage
    of
 
                                        After
    After
          Percentage
    of
    Combined
 
                Percentage
    Percentage
                the
    the
          of
    Combined
    Voting
 
                After the
    After the
                Offering
    Offering of
          Combined
    Voting
    Power
 
                Offering of
    Offering of
                of Class A
    Class A
          Voting
    Power
    After the
 
                Class A
    Class A
          Percentage
    Common
    Common
          Power of
    After the
    Offering
 
          Percentage
    Common
    Common
          Prior to
    Stock
    Stock
    Number of
    HFF, Inc.
    Offering
    Assuming
 
          Prior to
    Stock
    Stock
          the
    Assuming
    Assuming
    Shares of
    Prior
    Assuming
    the
 
          the
    Assuming the
    Assuming the
          Offering
    the Under-
    the
    Class B
    to the
    the Under-
    Under-
 
          Offering of
    Underwriters’
    Underwriters’
          of
    writers’
    Underwriters’
    Common
    Offering
    writers’
    writers’
 
          Class A
    Option Is
    Option is
          Class A
    Option is
    Option is
    Stock
    of Class A
    Option is
    Option is
 
Name and address of
        Common
    Not
    Exercised in
          Common
    Not
    Exercised in
    Beneficially
    Common
    Not
    Exercised
 
Beneficial Owner(a)
  Number     Stock     Exercised     Full     Number     Stock     Exercised     Full     Owned(c)     Stock     Exercised     in Full  
 
HFF Holdings LLC(d)
                            22,500,000 (e)     100 %     61 %     55 %     1             61 %     55 %
                                                 
John P. Fowler(d)
                                                                       
                                                 
Mark D. Gibson(d)
                                                                       
                                                 
John Z. Kukral(f)
    7,188             *       *                                           *       *  
                                                 
Deborah H. McAneny(f)
    7,188             *       *                                           *       *  
                                                 
George L. Miles, Jr.(f)
    7,188             *       *                                           *       *  
                                                 
John H. Pelusi, Jr.(d)
                                                                       
                                                 
Lenore M. Sullivan(f)
    7,188             *       *                                           *       *  
                                                 
Joe B. Thornton, Jr.(d)
                                                                       
                                                 
McHenry T. Tichenor, Jr.(f)
    7,188             *       *                                           *       *  
                                                 
Gregory R. Conley(g)
    18,750             *       *                                     100 %(h)            
                                                 
Nancy O. Goodson(g)
    18,750             *       *                                           *       *  
                                                 
Directors and executive
officers as a group
    73,440             *       *                                     100 %     *       *  
 
 
* Less than 1%.
 
(a) The address of each beneficial owner in the table above is: c/o HFF, Inc., 429 Fourth Avenue, Suite 200, Pittsburgh, PA 15219.
 
(b) The partnership units of the Operating Partnerships are exchangeable for shares of Class A common stock of HFF, Inc. on the basis of two partnership units, one of each Operating Partnership, for one share of Class A common stock, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Pursuant to contractual provisions in the HFF Holdings Operating Agreement, HFF Holdings’ right to exchange its partnership units in the Operating Partnerships for shares of our Class A common stock is exercisable on the second, third, fourth and fifth anniversaries of this offering as described in “Shares Eligible for Future Sale.” Beneficial ownership of partnership units in the Operating Partnerships reflected in this table has not also been reflected as beneficial ownership of the shares of the Class A common stock of HFF, Inc. for which such units may be exchanged.
 
(c) Holders of our Class B common stock (other than HFF, Inc. or any of its subsidiaries) will be entitled to a number of votes that is equal to the total number of shares of Class A common stock for which the partnership units that HFF Holdings holds in the Operating Partnerships are exchangeable.


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(d) The voting right and investment power of HFF Holdings as the holder of Class A common stock and/or Class B common stock is exercised by HFF Holdings’ managing member, currently John H. Pelusi, Jr., upon the approval of 65% or more of the interests held by the members of HFF Holdings, of which there are presently approximately 40. No individual holds interests sufficient to approve or block approval of any vote. On investment and voting matters with respect to the Class A common stock or Class B common stock that may be held by HFF Holdings, the managing member and operating committee of HFF Holdings act upon the approval of the members described above.
 
Messrs. Fowler, Gibson, Thornton and Pelusi are each a member of HFF Holdings and currently serve on its operating committee. Each member of HFF Holdings holds an ownership interest in HFF Holdings which in turn holds partnership units of the Operating Partnerships.
 
(e) If the underwriters exercise in full their options to purchase additional shares, HFF Holdings will hold 20,355,000 partnership units in each of the Operating Partnerships.
 
(f) Includes grants of approximately 4,688 options to purchase shares of our Class A common stock, which will vest annually over three years, and a grant of approximately 2,500 restricted stock units, which will be fully vested, that will be made upon the effective date of our Registration Statement on Form S-1 of which this prospectus is a part.
 
(g) Includes grants of 18,750 restricted stock units to Mr. Conley and 18,750 restricted stock units to Ms. Goodson that will be made upon the effective date of our Registration Statement on Form S-1 of which this prospectus is a part, 25% of which restricted stock units will vest annually beginning at the second anniversary of the grant date.
 
(h) Prior to the consummation of this offering and the Reorganization Transactions, Mr. Conley holds one share of common stock of HFF, Inc. In connection with the consummation of this offering and the Reorganization Transactions, this share will be extinguished.


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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
The agreements described below are each filed as an exhibit to the registration statement of which this prospectus forms a part, and the following descriptions of each of these agreements are qualified by reference thereto.
 
Reorganization Transactions
 
Upon the consummation of this offering, pursuant to a sale and merger agreement, HFF, Inc. will contribute the net proceeds raised in this offering to HoldCo LLC, its wholly-owned subsidiary. In consideration for the net proceeds from this offering and one share of Class B common stock, HFF Holdings will sell all of the shares of Holliday GP, which is the sole general partner of each of the Operating Partnerships, and approximately 39% of the partnership units in each of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP), or approximately 45% of the partnership units in each of the Operating Partnerships (including partnership units in the Operating Partnerships held by Holliday GP) if the underwriters exercise in full their option to purchase additional shares, to HoldCo LLC. HFF Holdings will use approximately $56.3 million of the sale proceeds to repay all outstanding borrowings under HFF LP’s credit agreement. Accordingly, we will not retain any of the proceeds from this offering. In addition to cash, HFF Holdings will also receive an exchange right that will permit HFF Holdings to exchange interests in the Operating Partnerships for shares of our Class A common stock (the “Exchange Right”) and rights under a tax receivable agreement between HFF, Inc. and HFF Holdings (the “TRA”).
 
Tax Receivable Agreement
 
As described in “Organizational Structure,” partnership units in HFF LP and HFF Securities held by Holdings Sub, HFF Holdings’ wholly-owned subsidiary, will be sold to HoldCo LLC, our wholly-owned subsidiary, for cash raised in the initial public offering. In the future, partnership units in HFF LP and HFF Securities held by HFF Holdings through Holdings Sub may be exchanged by HFF Holdings for shares of our Class A common stock on the basis of two partnership units, one of each Operating Partnership, for one share of Class A common stock, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. HFF LP and HFF Securities intend to have an election under Section 754 of the Internal Revenue Code effective for the taxable year in which the initial sale of partnership units occurs and for each taxable year in which an exchange of partnership units for shares occurs. The initial sale is expected to produce (and later exchanges may produce) increases to the tax basis of the assets owned by HFF LP and HFF Securities at the time of the initial public offering (and at the time of each exchange of partnership units). These anticipated increases in tax basis would be allocated to us and would likely reduce the amount of tax that we would otherwise be required to pay in the future.
 
We intend to enter into a tax receivable agreement with HFF Holdings that will provide for the payment by us to HFF Holdings of 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of these increases in tax basis and as a result of certain other tax benefits arising from our entering into the tax receivable agreement and making payments under that agreement. We would retain the remaining 15% of cash savings, if any, in income tax that we realize. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase to the tax basis of the assets of HFF LP and HFF Securities allocable to us as a result of the initial sale and later exchanges and had we not entered into the tax receivable agreement. The term of the tax receivable agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or have expired.
 
Although we are not aware of any issue that would cause the IRS to challenge the tax basis increases or other tax benefits arising under the tax receivable agreement, HFF Holdings will not reimburse us for any payments previously made if such basis increases or other benefits were later not allowed. As a result, in such circumstances we could make payments to HFF Holdings under the tax receivable agreement in excess of our actual cash tax savings. While the actual amount and timing of any payments under this agreement will vary depending upon a number of factors, including the timing of exchanges, the extent to which such exchanges result in taxable gain and the amount, character and timing of our income, we expect that during the term of the tax receivable agreement, the


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payments that we may make to HFF Holdings could be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the full tax benefit of the increased amortization of our assets, we expect that future payments to HFF Holdings in respect of the initial sale to aggregate $90.4 million and range from approximately $4.1 million to $10.6 million per year over the next 15 years. Future payments to HFF Holdings in respect of subsequent exchanges would be in addition to these amounts and are expected to be substantial.
 
Registration Rights Agreement
 
We will enter into a registration rights agreement with HFF Holdings pursuant to which we will be required to register under the Securities Act, under certain circumstances and subject to certain restrictions, shares of our Class A common stock (and other securities convertible into or exchangeable or exercisable for shares of our Class A common stock) held or acquired by HFF Holdings, its affiliates and certain of its transferees. Such securities registered under any registration statement will be available for sale in the open market unless restrictions apply.
 
HFF LP Partnership Agreement
 
As a result of the Reorganization Transactions, HFF, Inc. will, through HFF LP and HFF Securities, operate our business. Below is a brief summary of the HFF LP partnership agreement, qualified in all respects by reference to the form of agreement attached hereto.
 
Purpose
 
The partnership agreement provides that HFF LP’s purpose will be to engage in any lawful act or activity for which limited partnerships may be formed under the Texas Revised Limited Partnership Act.
 
Management and Control
 
The partnership agreement further provides that Holliday GP, as general partner, will manage and control the business and affairs of HFF LP. As noted above, the shares of Holliday GP are wholly-owned by HoldCo LLC, a wholly-owned subsidiary of HFF, Inc.
 
In exercising such control, Holliday GP will act at the direction of the managing member of HoldCo LLC who will be appointed by the Board of Directors of HFF, Inc. Holliday GP will also consult with and consider the non-binding recommendations of the operating committee of HoldCo LLC which will be appointed by certain senior officers of the Operating Partnerships (and will be comprised of 10 employees of the Operating Partnerships (or either of them)). Additionally, a managing member and operating committee will be established in HFF LP. The managing member of HFF LP will be selected in the same manner as the HoldCo LLC operating committee, and the HFF LP operating committee will be identical to the HoldCo LLC operating committee. In performing its duties as general partner of HFF LP, Holliday GP will consult with and consider the non-binding recommendations of the HFF LP managing member and HFF LP operating committee. Additionally, such senior officers, HFF LP managing member and HFF LP operating committee will participate in the preparation of the annual budget for submission to Holliday GP as a non-binding recommendation.
 
Holliday GP will delegate certain control over HFF LP to certain officers of HFF LP. The initial officers of HFF LP will be identical to the officers in place prior to the closing of the Reorganization Transactions.
 
Units; Percentage Interests
 
Each partner in HFF LP will be issued units representing interests in HFF LP, and the percentage interest of each partner will be determined based on the ratio of the number of units held by such partner to the number of


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outstanding units in the partnership. The units to be issued to the partners upon the closing of the Reorganization Transactions are as set forth below:
 
                 
Name
  Units     Percentage Interest  
 
Holliday GP
    368,000       1 %
HoldCo LLC
    13,932,000       38 %
Holdings Sub
    22,500,000       61 %
 
In the event a share of Class A common stock is redeemed, repurchased, acquired, cancelled or terminated by HFF, Inc., one unit of HFF LP registered in the name of HoldCo LLC (or in the event HoldCo LLC no longer holds units, Holliday GP) will automatically be cancelled for no consideration. Similarly, in the event HFF, Inc. issues a share of Class A common stock (other than in connection with the initial public offering), the net proceeds received by HFF, Inc. with respect to such share will be concurrently transferred to HoldCo LLC for transfer to HFF LP and HFF Securities in such manner as Holliday GP shall determine, each of which will in return issue to HoldCo LLC one unit in such Operating Partnership.
 
In the event any member of HFF Holdings forfeits a membership interest in HFF Holdings in accordance with the HFF Holdings operating agreement (i.e., as the result of being removed for cause under the HFF Holdings operating agreement or competing or soliciting in violation of the HFF Holdings operating agreement), the HFF LP partnership agreement provides that Holdings Sub will simultaneously forfeit a portion of the units it then holds in HFF LP (equal to such forfeiting member’s indirect ownership interest in HFF LP).
 
Distributions; Tax Distributions
 
Holliday GP has the right to determine when distributions will be made to the partners of HFF LP and the amount of any such distribution. All distributions shall be made to the partners pro rata in accordance with their respective percentage ownership interests in HFF LP.
 
The holders of the partnership units in HFF LP, including HoldCo LLC and Holliday GP, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of HFF LP. Net profits and net losses of HFF LP will generally be allocated to the partners pro rata in accordance with their respective percentage interests (as determined in accordance with the HFF LP partnership agreement). The partnership agreement will provide for cash distributions to the partners of HFF LP if Holliday GP determines that the taxable income of HFF LP will give rise to taxable income for its partners (or their constituent members). Generally these tax distributions will be computed based on our estimate of the net taxable income of HFF LP allocable to each partner multiplied by an assumed rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate for the applicable year prescribed for an individual or corporate resident in New York, New York assuming such taxpayer: (a) had no itemized deductions or tax credits, (b) was not subject to the alternative minimum tax, the self employment tax or other U.S. federal (or comparable state or local) income taxes not imposed under sections 1 or 11 of the Internal Revenue Code, and (c) was subject to income tax only in the jurisdictions where the taxpayer resides or is commercially domiciled. The assumed tax rate will be the same for all partners of HFF LP.
 
Transfers
 
The partnership agreement requires that each limited partner obtain Holliday GP’s consent to any sale, assignment, pledge, transfer, distribution or other disposition of any unit. Holliday GP may grant or withhold such consent in its sole discretion, provided that the partnership agreement permits certain transfers including (a) transfers contemplated under and in accordance with the Exchange Right, (b) transfers by the members in HFF Holdings of their interests (i) by devise or descent or by operation of law upon the death or disability of a member of HFF Holdings and (ii) to (x) immediate family members or trusts established for the benefit of such family members for estate planning purposes, (y) a charity for gratuitous purposes, or (z) as otherwise expressly permitted under the HFF Holdings operating agreement, and (c) transfers of shares of Class A common stock and Class B common stock of HFF, Inc.


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Dissolution
 
HFF LP may be dissolved only upon the occurrence of the voluntary agreement of all partners, any act constituting dissolution under applicable law or certain other events specified in the partnership agreement. Upon dissolution, HFF LP will be liquidated and the proceeds from any liquidation will be applied and distributed in the following manner: (a) first, to creditors (including to the extent permitted by law, creditors who are partners) in satisfaction of the liabilities of the Partnership, (b) second, to the setting up of any reserves which Holliday GP may determine to be reasonably necessary for any contingent liability of HFF LP and (c) third, to the partners in proportion to their respective percentage interests.
 
HFF Securities Partnership Agreement
 
As a result of the Reorganization Transactions, HFF, Inc. will, through HFF LP and HFF Securities, operate our business. Below is a brief summary of the HFF Securities partnership agreement, qualified in all respects by reference to the form of agreement attached hereto.
 
Purpose
 
The partnership agreement provides that HFF Securities’ purpose will be to act as a registered broker-dealer in connection with its efforts, on behalf of its clients, to (a) raise equity capital for discretionary, commingled real estate funds marketed to institutional investors, (b) raise equity capital for real estate projects, (c) raise equity capital from institutional investors to fund future real estate acquisitions, recapitalizations, developments, debt investments and other real estate-related strategies, and (d) execute private placements of securities in real estate companies. In addition, the partnership agreement provides that HFF Securities will provide advisory services on various project or entity-level strategic assignments such as mergers and acquisitions, sales and divestitures, recapitalizations and restructurings, privatizations, management buyouts, and arranging joint ventures for specific real estate strategies; and will be entitled to engage in any and all purposes and activities that are ancillary thereto as permitted under the Delaware Revised Uniform Limited Partnership Act, Delaware Code Annotated.
 
Management and Control
 
The partnership agreement of HFF Securities provides that Holliday GP, as general partner will manage and control the business and affairs of HFF Securities. Holliday GP will exercise such management and control in accordance with applicable securities laws. As noted above, the shares of Holliday GP are wholly-owned by HoldCo LLC, which is a wholly-owned subsidiary of HFF, Inc.
 
Holliday GP will delegate certain control over HFF Securities to certain officers of HFF Securities, including, without limitation, one or more executive managing directors, senior managing directors, directors, supervisory principals and registered representatives. The officers of HFF Securities following the Reorganization Transactions will be identical to the officers in place prior to the closing of the reorganization transactions.
 
Each supervisory principal is required to qualify with the NASD Series 7 and 24 examinations. The executive managing directors and supervisory principals are responsible for, among other things, preparing HFF Securities’ annual budget and business plan, which after approval by the senior officers of the Operating Partnerships and the Holdco Operating Committee, will be submitted to the General Partner as a non-binding recommendation.
 
Units; Percentage Interests
 
Each partner in HFF Securities will be issued units representing interests in HFF Securities, and the percentage interest of each partner will be determined based on the ratio of the number of units held by such partner to the number of outstanding units in the partnership. The units and associated percentage interests to be issued to the partners upon the closing of the Reorganization Transactions are as set forth below:
 
                 
Name
  Units     Percentage Interest  
 
Holliday GP
    368,000       1 %
Holdco LLC
    13,932,000       38 %
Holdings Sub
    22,500,000       61 %


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In the event a share of Class A common stock is redeemed, repurchased, acquired, cancelled or terminated by HFF, Inc., one unit of HFF Securities registered in the name of HoldCo LLC (or in the event Holdco LLC no longer holds units, Holliday GP) will automatically be cancelled for no consideration. Similarly, in the event HFF, Inc. issues a share of Class A common stock (other than in connection with the initial public offering), the net proceeds received by HFF, Inc. with respect to such share will be concurrently transferred to HoldCo LLC for transfer to HFF Securities and HFF LP in such manner as Holliday GP shall determine, each of which will in return issue to HoldCo LLC one unit in such Operating Partnership.
 
In the event any member of HFF Holdings forfeits a membership interest in HFF Holdings in accordance with the HFF Holdings operating agreement (i.e., as the result of being removed for cause under the HFF Holdings operating agreement or competing or soliciting in violation of the HFF Holdings operating agreement), the partnership agreement provides that Holdings Sub will simultaneously forfeit a portion of the units it then holds in HFF Securities (equal to such forfeiting member’s indirect ownership interest in HFF Securities).
 
Distributions; Tax Distributions
 
Holliday GP has the right to determine when distributions will be made to the partners of HFF Securities and the amount of any such distribution. All distributions will be made to the partners pro rata in accordance with their respective percentage ownership interests (as evidenced by units or fractional units held by each partner) in HFFS.
 
The holders of the partnership units in HFF Securities, including HoldCo LLC and Holliday GP, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of HFFS. Net profits and net losses of HFF Securities will generally be allocated to the partners pro rata in accordance with their respective percentage interests (as determined pursuant to the HFF Securities partnership agreement). The partnership agreement will provide for cash distributions to the partners of HFF Securities if Holliday GP determines that the taxable income of HFF Securities will give rise to taxable income for its partners (or their constituent members). Generally these tax distributions will be computed based on our estimate of the net taxable income of HFF Securities allocable to each partner multiplied by an assumed rate equal to the highest effective marginal combined U.S. federal, state and local income tax rate prescribed for an individual or corporate resident in New York, New York assuming such taxpayer: (a) had no itemized deductions or tax credits, (b) was not subject to the alternative minimum tax, the self employment tax or other U.S. federal (or comparable state or local) income taxes not imposed under sections 1 or 11 of the Internal Revenue Code, and (c) was subject to income tax only in the jurisdictions where the taxpayer resides or is commercially domiciled. The assumed tax rate will be the same for all partners of HFF Securities.
 
Transfers
 
The partnership agreement requires that each limited partner obtain Holliday GP’s consent to any sale, assignment, pledge, transfer, distribution or other disposition of any unit. Holliday GP may grant or withhold such consent in its sole discretion, provided that the partnership agreement permits certain transfers including (a) transfers contemplated under and in accordance with the Exchange Right, (b) transfers by members in HFF Holdings of their interests (i) by devise or descent or by operation of law upon the death or disability of a member of HFF Holdings and (ii) to (x) immediate family members or trusts established for the benefit of such family members for estate planning purposes, (y) a charity for gratuitous purposes, or (z) as otherwise expressly permitted under the HFF Holdings operating agreement, and (c) transfers of shares of Class A common stock and Class B common stock.
 
Dissolution
 
HFF Securities may be dissolved only upon the occurrence of the voluntary agreement of all partners, any act constituting dissolution under applicable law or certain other events specified in the partnership agreement. Upon dissolution, HFF Securities will be liquidated and the proceeds from any liquidation will be applied and distributed in the following manner: (a) first, to creditors (including to the extent permitted by law, creditors who are partners) in satisfaction of the liabilities of the Partnership, (b) second, to the setting up of any reserves which Holliday GP may determine to be reasonably necessary for any contingent liability of HFF Securities and (c) third, to the partners in proportion to their respective percentage interests.


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DESCRIPTION OF CAPITAL STOCK
 
The following description of our capital stock as it will be in effect upon the consummation of this offering is a summary and is qualified in its entirety by reference to our certificate of incorporation and bylaws, the forms of which are filed as exhibits to the registration statement of which this prospectus forms a part, and by applicable law.
 
Upon consummation of this offering, our authorized capital stock will consist of 175,000,000 shares of Class A common stock, par value $0.01 per share, 1 share of Class B common stock, par value $0.01 per share and 25,000,000 shares of preferred stock. Unless our board of directors determines otherwise, we will issue all shares of our capital stock in uncertificated form.
 
Common Stock
 
Class A common stock
 
Holders of our Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.
 
Holders of our Class A common stock are entitled to receive dividends when and if declared by our board of directors out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock.
 
Upon our dissolution or liquidation or the sale of all or substantially all of our assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of our Class A common stock will be entitled to receive pro rata our remaining assets available for distribution.
 
Holders of our Class A common stock do not have preemptive, subscription, redemption or conversion rights.
 
Subject to the transfer restrictions set forth in the Operating Partnerships’ partnership agreements, HFF Holdings may exchange partnership units in the Operating Partnerships (other than those held by us) for shares of our Class A common stock on the basis of two partnership units (one of each Operating Partnership) for one share of Class A common stock, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.
 
Class B common stock
 
Holders of our Class B common stock (other than HFF, Inc. or any of its subsidiaries) will be entitled to a number of votes that is equal to the total number of shares of Class A common stock for which the partnership units that HFF Holdings holds in the Operating Partnerships are exchangeable.
 
Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to our stockholders for their vote or approval, except with respect to the amendment of certain provisions of the certificate of incorporation or as otherwise required by applicable law.
 
Holders of our Class B common stock will not have any right to receive dividends or to receive a distribution upon a liquidation or winding up of HFF, Inc.
 
Preferred Stock
 
Our certificate of incorporation authorizes our board of directors to establish one or more series of preferred stock (including convertible preferred stock). Unless required by law or by any stock exchange, the authorized shares of preferred stock will be available for issuance without further action by you. Our board of directors is able to determine, with respect to any series of preferred stock, the terms and rights of that series, including:
 
  •  the designation of the series;
 
  •  the number of shares of the series, which our board may, except where otherwise provided in the preferred stock designation, increase or decrease, but not below the number of shares then outstanding;


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  •  whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series;
 
  •  the dates at which dividends, if any, will be payable;
 
  •  the redemption rights and price or prices, if any, for shares of the series;
 
  •  the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;
 
  •  the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of our company;
 
  •  whether the shares of the series will be convertible into shares of any other class or series, or any other security, of our company or any other entity, and, if so, the specification of the other class or series or other security, the conversion price or prices or rate or rates, any rate adjustments, the date or dates as of which the shares will be convertible and all other terms and conditions upon which the conversion may be made;
 
  •  restrictions on the issuance of shares of the same series or of any other class or series; and
 
  •  the voting rights, if any, of the holders of the series.
 
We could issue a series of preferred stock that could, depending on the terms of the series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of you might believe to be in your best interests or in which you might receive a premium for your Class A common stock over the market price of the Class A common stock.
 
Authorized but Unissued Capital Stock
 
Delaware law does not require stockholder approval for any issuance of authorized shares. However, the listing requirements of the New York Stock Exchange, which would apply so long as the Class A common stock remains listed on the New York Stock Exchange, require stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of Class A common stock. These additional shares may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.
 
One of the effects of the existence of unissued and unreserved common stock or preferred stock may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.
 
Anti-Takeover Effects of Provisions of Delaware Law
 
We are subject to Section 203 of the General Corporation Law of Delaware. Subject to certain exceptions, Section 203 prevents a publicly held Delaware corporation from engaging in a “business combination” with any “interested stockholder” for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our board of directors or held 85% of our voting stock at the time of the consummation of the transaction in which such person attained the status of an “interested stockholder” or unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, consolidation, stock sale or any sale of more than 10% of our assets involving us and the “interested stockholder,” or any other transaction resulting in a financial benefit to the “interested stockholder.” In general, an “interested stockholder” is any entity or person (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation) that beneficially owns 15% or more of our outstanding voting stock or any entity or person affiliated with or controlling or controlled by any such entity or person.
 
Under certain circumstances, Section 203 makes it more difficult for a person who would be an “interested stockholder” to effect various business combinations with a corporation for a three-year period. The provisions of Section 203 may encourage companies interested in acquiring our company to negotiate in advance with our board of directors because the stockholder approval requirement would be avoided if our board of directors approves


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either the business combination or the transaction that results in the stockholder becoming an interested stockholder. These provisions also may make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their interests.
 
Anti-Takeover Effects of Provisions of the Amended and Restated Certificate of Incorporation and Bylaws
 
Certain provisions of our certificate of incorporation and bylaws could have anti-takeover effects. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our corporate policies formulated by our board of directors. In addition, these provisions also are intended to ensure that our board of directors will have sufficient time to act in what our board of directors believes to be in the best interests of us and our stockholders. These provisions also are designed to reduce our vulnerability to an unsolicited proposal for our takeover that does not contemplate the acquisition of all of our outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of us. The provisions are also intended to discourage certain tactics that may be used in proxy fights. However, these provisions could delay or frustrate the removal of incumbent directors or the assumption of control of us by the holder of a large block of common stock, and could also discourage or make more difficult a merger, tender offer, or proxy contest, even if such event would be favorable to the interest of our stockholders.
 
Classified Board of Directors.  Upon the consummation of this offering, our certificate of incorporation and bylaws will provide for our board of directors to be divided into three classes, with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.
 
The classified board provision will help to assure the continuity and stability of our board of directors and our business strategies and policies as determined by our board of directors. The classified board provision could have the effect of discouraging a third party from making an unsolicited tender offer or otherwise attempting to obtain control of us without the approval of our board of directors. In addition, the classified board provision could delay stockholders who do not like the policies of our board of directors from electing a majority of our board of directors for two years. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for our stockholders or a third party to effect a change in our management without the consent of the board of directors.
 
Written Consent of Stockholders.  Our certificate of incorporation and bylaws provide that any action required or permitted to be taken by our stockholders must be taken at a duly called meeting of stockholders and not by written consent except as specifically provided therein with respect to the Class B common stock. Elimination of actions by written consent of stockholders may lengthen the amount of time required to take stockholder actions because actions by written consent are not subject to the minimum notice requirement of a stockholder’s meeting. The elimination of actions by written consent of the stockholders may deter hostile takeover attempts. Without the availability of actions by written consent of the stockholders, a holder controlling a majority of our capital stock would not be able to amend our bylaws without holding a stockholders meeting. To hold such a meeting, the holder would have to obtain the consent of a majority of the board of directors, the chairman of the board or the chief executive officer to call a stockholders’ meeting and satisfy the applicable notice provisions set forth in our bylaws.
 
Amendment of the Bylaws.  Under Delaware law, the power to adopt, amend or repeal a corporation’s bylaws is conferred upon the stockholders. A corporation may, however, in its certificate of incorporation also confer upon the board of directors the power to adopt, amend or repeal its bylaws. Our certificate of incorporation and bylaws grant our board the power to alter, amend and repeal our bylaws, or adopt new bylaws, on the affirmative vote of a majority of the directors then in office. Our stockholders may alter, amend or repeal our bylaws, or adopt new bylaws, but only at a regular or special meeting of stockholders by an affirmative vote of not less than 662/3% in voting power of all outstanding shares of our capital stock entitled to vote generally at an election of directors, voting together as a single class.
 
Amendment of Certificate of Incorporation.  The provisions of our certificate of incorporation that could have anti-takeover effects as described above are subject to amendment, alteration, repeal, or rescission require approval by (i) our board of directors and (ii) the affirmative vote of not less than 662/3% in voting power of all outstanding shares of our capital stock entitled to vote generally at an election of directors, voting together as a single class,


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depending on the subject provision. This requirement makes it more difficult for stockholders to make changes to the provisions in our certificate of incorporation which could have anti-takeover effects by allowing the holders of a minority of the voting securities to prevent the holders of a majority of voting securities from amending these provisions.
 
Special Meetings of Stockholders.  Our bylaws preclude our stockholders from calling special meetings of stockholders or requiring the board of directors or any officer to call such a meeting or from proposing business at such a meeting. Our bylaws provide that only a majority of our board of directors, the chairman of the board or the chief executive officer can call a special meeting of stockholders. Because our stockholders do not have the right to call a special meeting, a stockholder cannot force stockholder consideration of a proposal over the opposition of the board of directors by calling a special meeting of stockholders prior to the time a majority of the board of directors, the chairman of the board or the chief executive officer believes the matter should be considered or until the next annual meeting provided that the requestor met the notice requirements. The restriction on the ability of stockholders to call a special meeting means that a proposal to replace board members also can be delayed until the next annual meeting.
 
Other Limitations on Stockholder Actions.  Advance notice is required for stockholders to nominate directors or to submit proposals for consideration at meetings of stockholders. This provision may have the effect of precluding the conduct of certain business at a meeting if the proper notice is not provided and may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company. In addition, the ability of our stockholders to remove directors without cause is precluded.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our Class A common stock is American Stock Transfer & Trust Company.
 
Listing
 
We have applied to list our Class A common stock on the New York Stock Exchange under the symbol “HF.”


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SHARES ELIGIBLE FOR FUTURE SALE
 
Prior to this offering, there has been no public market for our Class A common stock. No prediction can be made as to the effect, if any, future sales of shares, or the availability for future sales of shares, will have on the market price of our Class A common stock prevailing from time to time. The sale of substantial amounts of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of our Class A common stock.
 
Upon completion of this offering we will have a total of 14,300,000 shares of our Class A common stock outstanding, or 16,445,000 shares assuming the underwriters exercise in full their option to purchase additional shares. All of these shares will have been sold in this offering and will be freely tradable without restriction or further registration under the Securities Act by persons other than our “affiliates.” Under the Securities Act, an “affiliate” of a company is a person that directly or indirectly controls, is controlled by or is under common control with that company.
 
In addition, upon consummation of this offering, HFF Holdings will beneficially own 22,500,000 partnership units in each of the Operating Partnerships. Pursuant to the terms of our amended and restated certificate of incorporation, HFF Holdings could from time to time exchange its partnership units in the Operating Partnerships for shares of our Class A common stock on the basis of two partnership units, one of each Operating Partnership, for one share of Class A common stock, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. The following table reflects the exchangeability of HFF Holdings’ rights to exchange its partnership units in the Operating Partnerships for shares of our Class A common stock, pursuant to contractual provisions in the HFF Holdings Operating Agreement. However, these contractual provisions may be waived, amended or terminated by a vote of the members holding 65% of the interests of HFF Holdings following consultation with our board of directors.
 
                 
          Percentage of HFF
 
    Number of
    Holdings’ Partnership
 
    Additional Shares
    Units in the
 
    of Class A Common
    Operating
 
    Stock Expected to
    Partnerships
 
    Become Available
    Becoming Eligible
 
Anniversary of the Offering
  for Exchange     for Exchange  
 
Second
    5,625,000       25 %
Third
    5,625,000       25 %
Fourth
    5,625,000       25 %
Fifth
    5,625,000       25 %
                 
Total
    22,500,000       100 %
                 
 
These shares of Class A common stock would be “restricted securities,” as defined in Rule 144. As a result, absent registration under the Securities Act or compliance with Rule 144 thereunder or an exemption therefrom, these shares of Class A common stock will not be freely transferable to the public. We intend, however, to enter into a registration rights agreement with HFF Holdings that would require us to register under the Securities Act these shares of Class A common stock. See “— Registration Rights” and “Certain Relationships and Related Party Transactions — Registration Rights Agreement.”
 
In addition, we expect to grant awards of deferred stock, restricted stock, options, stock appreciation rights, stock units, stock purchase rights and other stock-based awards under our 2006 Omnibus Incentive Compensation Plan. The number of shares of our Class A common stock available for awards under the terms of the plan is 3,500,000 (subject to adjustments for stock splits, stock dividends and the like) which equals approximately 9.5% shares of our Class A common stock outstanding immediately following this offering plus the number of shares of Class A common stock for which the partnership units HFF Holdings holds in the Operating Partnerships are exchangeable. We intend to file one or more registration statements on Form S-8 under the Securities Act to register Class A common stock issued or reserved for issuance under the plan. Any such Form S-8 registration statement will automatically become effective upon filing. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with HFF, Inc. or the lock-up restrictions described below.


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Registration Rights
 
We will enter into a registration rights agreement with HFF Holdings pursuant to which we will be required to register under the Securities Act, under certain circumstances and subject to certain restrictions, shares of our Class A common stock (and other securities convertible into or exchangeable or exercisable for shares of our Class A common stock) held or acquired by HFF Holdings, its affiliates and certain of its transferees. Such securities registered under any registration statement will be available for sale in the open market unless restrictions apply.
 
Lock-Up Arrangements
 
We, HFF Holdings and our directors and officers have agreed, without the prior written consent of Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of our Class A common stock, or any options or warrants to purchase any shares of our Class A common stock, or any securities convertible into, exchangeable for or that represent the right to receive shares of our Class A common stock or any such substantially similar securities for a period of 180 days after the date of this prospectus. This restriction expressly precludes us, HFF Holdings and our directors and officers from engaging in any hedging or other transaction which is designed or could be expected to result in a sale or disposition of shares of Class A common stock (even if such shares would be disposed of by some other person).
 
The 180-day restricted period described in the preceding paragraph will be extended if:
 
  •  during the last 17 days of the 180-day restricted period, we release earnings results or announce material news or a material event relating to us; or
 
  •  prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during a 15-day period following the last day of the 180-day restricted period.
 
In each case, the 180-day restricted period will be automatically extended until the expiration of an 18-day period beginning on the date of the release of earnings results or the announcement of the material news or material event, as applicable. The underwriters have advised the Company that there is no specific criteria for the waiver of the lock-up restrictions and that they grant waivers after evaluating the unique facts and circumstances of each individual’s request for such a waiver. Such waivers are subject to the sole discretion of the underwriters.
 
Rule 144
 
In general, under Rule 144, a person (or persons whose shares are aggregated), including any person who may be deemed our affiliate, is entitled to sell within any three month period, a number of restricted securities that does not exceed the greater of 1% of the then outstanding common stock and the average weekly trading volume during the four calendar weeks preceding each such sale, provided that at least one year has elapsed since such shares were acquired from us or any affiliate of ours and certain manner of sale, notice requirements and requirements as to availability of current public information about us are satisfied. Any person who is deemed to be our affiliate must comply with the provisions of Rule 144 (other than the one year holding period requirement) in order to sell shares of Class A common stock which are not restricted securities (such as shares acquired by affiliates either in this offering or through purchases in the open market following this offering). In addition, under Rule 144(k), a person who is not our affiliate, and who has not been our affiliate at any time during the 90 days preceding any sale, is entitled to sell such shares without regard to the foregoing limitations, provided that at least two years have elapsed since the shares were acquired from us or any affiliate of ours.


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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF CLASS A COMMON STOCK
 
The following is a summary of the material United States federal income and estate tax consequences of the ownership and disposition of shares of our Class A common stock to a non-United States holder. For purposes of this discussion, a non-United States holder is any beneficial owner that for United States federal income tax purposes is not a United States person; the term United States person means:
 
  •  an individual citizen or resident of the United States;
 
  •  a corporation or other entity taxable as a corporation or a partnership or other entity taxable as a partnership created or organized in the United States or under the laws of the United States or any political subdivision thereof;
 
  •  an estate whose income is subject to United States federal income tax regardless of its source; or
 
  •  a trust (x) whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust or (y) which has made a valid election to be treated as a United States person.
 
If a partnership or other pass-through entity holds Class A common stock, the tax treatment of a partner or member in the partnership or other entity will generally depend on the status of the partner or member and upon the activities of the partnership or other entity. Accordingly, we urge partnerships or other pass-through entities which hold shares of our Class A common stock and partners or members in these partnerships or other entities to consult their tax advisors.
 
This discussion assumes that non-United States holders will hold shares of our Class A common stock issued pursuant to the offering as a capital asset (generally, property held for investment). This discussion does not address all aspects of United States federal income taxation that may be relevant in light of a non-United States holder’s special tax status or special tax situations. United States expatriates, life insurance companies, tax-exempt organizations, dealers in securities or currency, banks or other financial institutions, pension funds and investors that hold shares of Class A common stock as part of a hedge, straddle or conversion transaction are among those categories of potential investors that are subject to special rules not covered in this discussion. This discussion does not address any non-income tax consequences except as noted under “— Federal Estate Tax” or any income tax consequences arising under the laws of any state, local or non-United States taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code, Treasury Regulations and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. Additionally, we have not sought any ruling from the IRS, with respect to statements made and conclusions reached in this discussion, and there can be no assurance that the IRS will agree with these statements and conclusions. We urge each prospective purchaser to consult a tax advisor regarding the United States federal, state, local and non-United States income and other tax consequences of acquiring, holding and disposing of shares of our Class A common stock.
 
Dividends
 
If we make distributions on our Class A common stock, those payments will constitute dividends for United States tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles. To the extent those distributions exceed our current and accumulated earnings and profits, the distributions will constitute a return of capital and will first reduce a holder’s basis, but not below zero, and then will be treated as gain from the sale of shares and may be subject to United States federal income tax as described below.
 
Any dividend (out of earnings and profits) paid to a non-United States holder of common shares generally will be subject to United States withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. In order to receive a reduced treaty rate, a non-United States


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holder must provide us with an IRS Form W-8BEN or other appropriate version of IRS Form W-8 certifying qualification for the reduced rate.
 
Dividends received by a non-United States holder that are effectively connected with a United States trade or business conducted by the non-United States holder (and are attributable to a non-United States holder’s permanent establishment in the United States if a tax treaty applies) are exempt from this withholding tax. In order to obtain this exemption, a non-United States holder must provide us with an IRS Form W-8ECI properly certifying this exemption. Effectively connected dividends, although not subject to withholding tax, are taxed at the same graduated rates applicable to United States persons, net of certain deductions and credits. In addition, dividends received by a corporate non-United States holder that are effectively connected with a United States trade or business of the corporate non-United States holder (and are attributable to a corporate non-United States holder’s permanent establishment in the United States if a tax treaty applies) may also be subject to a branch profits tax at a rate of 30% (or such lower rate as may be specified in a tax treaty).
 
A non-United States holder of common shares that is eligible for a reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld if an appropriate claim for refund is filed with the IRS.
 
Gain on Disposition of Shares of Class A Common Stock
 
A non-United States holder generally will not be subject to United States federal income tax on gain realized upon the sale or other disposition of shares of our Class A common stock unless:
 
  •  the gain is effectively connected with a United States trade or business of the non-United States holder (and is attributable to a permanent establishment in the United States if a tax treaty applies), which gain, in the case of a corporate non-United States holder, must also be taken into account for branch profits tax purposes;
 
  •  the non-United States holder is an individual who holds his or her common shares as a capital asset (generally, an asset held for investment purposes) and who is present in the United States for a period or periods aggregating 183 days or more during the taxable year in which the sale or disposition occurs and certain other conditions are met; or
 
  •  our Class A common stock constitutes a United States real property interest by reason of our status as a “United States real property holding corporation” for United States federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the holder’s holding period for shares of our Class A common stock. We believe that we are not currently, and we believe that we will not become, a “United States real property holding corporation” for United States federal income tax purposes. If we are or become a “United States real property holding corporation,” so long as our Class A common stock continues to be regularly traded on an established securities market, only a non-United States holder who, actually or constructively, holds or held (at any time during the shorter of the five year period preceding the date of disposition of the holder’s holding period) more than 5% of shares of our Class A common stock will be subject to United States federal income tax on the disposition of shares of our Class A common stock.
 
Backup Withholding and Information Reporting
 
Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.
 
Payments of dividends or of proceeds on the disposition of shares made to a non-United States holder may be subject to additional information reporting and backup withholding at the then effective rate unless the non-United States holder establishes an exemption, for example, by properly certifying its non-United States status on an IRS Form W-8BEN or another appropriate version of Form W-8. Notwithstanding the foregoing, information reporting and backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a United States person.


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Backup withholding is not an additional tax. Rather, the United States income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may be obtained, provided that the required information is furnished to the IRS in a timely manner.
 
Federal Estate Tax
 
An individual non-United States holder who is treated as the owner, or has made certain lifetime transfers, of an interest in our Class A common stock will be required to include the value thereof in his or her gross estate for United States federal estate tax purposes, and may be subject to United States federal estate tax unless an applicable estate tax treaty provides otherwise.


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UNDERWRITING
 
We and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated are acting as joint book-running managers of this offering and as the representatives of the underwriters.
 
         
Underwriters
  Number of Shares  
 
Goldman, Sachs & Co. 
                
Morgan Stanley & Co. Incorporated
       
Banc of America Securities LLC
       
Wachovia Capital Markets, LLC
       
J.P. Morgan Securities Inc. 
       
Lehman Brothers Inc. 
       
         
Total
    14,300,000  
         
 
The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.
 
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 2,145,000 shares from us to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.
 
The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase 2,145,000 additional shares.
 
                 
Paid by the Company
  No Exercise     Full Exercise  
 
Per Share
  $           $        
Total
  $       $  
 
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $      per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $      per share from the initial public offering price. If all the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms.
 
We, HFF Holdings and our directors and officers have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their Class A common stock or securities convertible into or exchangeable for shares of Class A common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to any existing employee benefit plans. See “Shares Eligible for Future Sale” for a discussion of certain transfer restrictions. The underwriters have advised the Company that there is no specific criteria for the waiver of the lock-up restrictions and that they grant waivers after evaluating the unique facts and circumstances of each individual’s request for such a waiver. Such waivers are subject to the sole discretion of the underwriters.
 
The 180-day restricted period described in the preceding paragraph will be automatically extended if: (1) during the last 17 days of the 180-day restricted period we issue an earnings release or announces material news or a material event; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 15-day period following the last day of the 180-day period, in which case the


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restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.
 
Prior to the offering, there has been no public market for the shares. The initial public offering price has been negotiated among us and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.
 
We have applied to list the Class A common stock on the New York Stock Exchange under the symbol “HF”. In order to meet one of the requirements for listing the Class A common stock on the NYSE, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial holders.
 
In connection with the offering, the underwriters may purchase and sell shares of Class A common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares from us in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option granted to them. “Naked” short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of Class A common stock made by the underwriters in the open market prior to the completion of the offering.
 
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
 
Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the Class A common stock. As a result, the price of the Class A common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on the New York Stock Exchange, in the over-the-counter market or otherwise.
 
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:
 
(a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;
 
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or


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(c) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.
 
For the purposes of this provision, the expression an offer of shares to the public in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Shares to be offered so as to enable an investor to decide to purchase or subscribe the Shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
 
Each of the underwriters has represented and agreed that:
 
(a) it has not made or will not make an offer of shares to the public in the United Kingdom within the meaning of section 102B of the Financial Services and Markets Act 2000 (as amended) (FSMA) except to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority (FSA);
 
(b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not, apply to us; and
 
(c) it has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.
 
The shares may not be offered or sold by means of any document other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong, and no advertisement, invitation or document relating to the shares may be issued, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.
 
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
 
Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.


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The securities have not been and will not be registered under the Securities and Exchange Law of Japan (the Securities and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
 
At our request, the underwriters have reserved for sale to our employees, directors, families of employees and directors at the initial public offering price up to 5% of the shares being offered by this prospectus. The sale of the reserved shares to these purchasers will be made by Morgan Stanley & Co. Incorporated. If purchased by these persons, these shares will be subject to a 180-day lock-up restriction. We do not know if our employees, directors, families of employees and directors will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. If all of these reserved shares are not purchased, the underwriters will offer the remainder to the general public on the same terms as the other shares offered by this prospectus. In connection with the sale of these reserved shares, we have agreed to indemnify the underwriters against certain liabilities, including those that may be caused by the failure of the participants in the reserved share program to pay for and accept delivery of the shares of Class A common stock which were subject to a properly confirmed agreement to purchase. As a result, we may be required to make payments to the underwriters if participants in the reserved share program fail to pay for and accept delivery of the shares of Class A common stock which were subject to a properly confirmed agreement to purchase and, as a result, we must indemnify the underwriters for such failure.
 
A prospectus in electronic format will be made available on the websites maintained by one or more of the representatives of this offering and may also be made available on websites maintained by other underwriters. The underwriters may agree to allocate a number of shares of Class A common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.
 
The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. The underwriters have informed us that they do not intend to confirm sales to discretionary accounts without prior written approval of the customer.
 
We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $3.7 million.
 
We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
 
Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses. In addition, affiliates of certain of the underwriters have participated, and may in the future participate, from time to time, in transactions where we provided commercial real estate and capital market services. An affiliate of Banc of America Securities LLC is the lender under our credit agreement and, accordingly, will receive the proceeds of this offering used to repay those borrowings.
 
Because the shares of Class A common stock are being offered by HFF, Inc., an indirect owner of a member of the NASD, this offering is being made in compliance with the applicable requirements of Rule 2720 of the Conduct Rules of the NASD, in that HFF, Inc. has been deemed to be engaging in an offering which will result in the public ownership of a member of the NASD.


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LEGAL MATTERS
 
The validity of the Class A common stock will be passed upon for us by Dechert LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, New York, New York.
 
EXPERTS
 
The statement of financial condition of HFF, Inc. as of December 12, 2006, and the consolidated financial statements of HFF Holdings, LLC and subsidiaries as of and for the nine months ended September 30, 2006 and as of and for the years ended December 31, 2005 and 2004, all included in this prospectus and registration statement, have been audited by Ernst & Young LLP, our independent registered public accounting firm, as set forth in their reports thereon appearing elsewhere herein and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the Class A common stock offered in this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the Securities and Exchange Commission. For further information about us and our Class A common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the Securities and Exchange Commission maintains at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of these materials from the Securities and Exchange Commission upon the payment of certain fees prescribed by the Securities and Exchange Commission. You may obtain further information about the operation of the Securities and Exchange Commission’s Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. You may also inspect these reports and other information without charge at a website maintained by the Securities and Exchange Commission. The address of this site is http://www.sec.gov.
 
In addition, you may request copies of this filing and such other reports as we may determine or as the law requires at no cost, by telephone at (713) 852-3500 or by mail to HFF, Inc., 429 Fourth Avenue, Suite 200, Pittsburgh, PA 15219, Attention: Investor Relations. Upon completion of this offering, we will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will be required to file reports, proxy statements and other information with the Securities and Exchange Commission. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the Securities and Exchange Commission at the address noted above or inspect them without charge at the Securities and Exchange Commission’s website. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by an independent registered public accounting firm.


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INDEX TO FINANCIAL STATEMENTS
 
         
HFF, Inc.:
   
Report of Independent Registered Public Accounting Firm
  F-2
Statement of Financial Condition
  F-3
Notes to Statement of Financial Condition
  F-3
HFF Holdings, LLC and Subsidiaries:
   
Report of Independent Registered Public Accounting Firm
  F-4
Consolidated Balance Sheets as of September 30, 2006, December 31, 2005 and 2004
  F-5
Consolidated Statements of Income for the nine months ended September 30, 2006 and September 30, 2005 (Unaudited) and the two years ended December 31, 2005 and 2004
  F-6
Consolidated Statements of Members’ Equity (Deficiency) for the nine months ended September 30, 2006 and each of the two years in the period ended December 31, 2005
  F-7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2005 (Unaudited) and the two years ended December 31, 2005 and 2004
  F-8
Notes to Consolidated Financial Statements
  F-9
     


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Table of Contents

Report of Independent Registered Public Accounting Firm
 
To the Stockholder of HFF, Inc.
 
We have audited the accompanying statement of financial condition of HFF, Inc. as of December 12, 2006. This statement of financial condition is the responsibility of the Company’s management. Our responsibility is to express an opinion on this statement of financial condition based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of financial condition is free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.
 
In our opinion, the statement of financial condition presents fairly, in all material respects, the financial position of HFF, Inc. as of December 12, 2006, in conformity with accounting principles generally accepted in the United States.
 
/s/ Ernst & Young LLP
 
December 12, 2006
Pittsburgh, Pennsylvania


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Table of Contents

HFF, Inc.
Statement of Financial Condition
As of December 12, 2006
 
         
Assets — Cash
  $ 1  
         
Stockholder’s Equity:
       
Class A Common Stock, par value $.01 per share, 1,000 shares authorized 1 share issued and outstanding
  $  
Additional Paid in Capital
    1  
         
Total Stockholder’s Equity
  $ 1  
         
 
NOTES TO STATEMENT OF FINANCIAL CONDITION
 
1.   Organization
 
HFF, Inc., a Delaware corporation (the “Company”), was formed in November 2006 in connection with a proposed initial public offering of Class A common stock of the Company (the “Offering”). The Company has not engaged in any business or other activities except in connection with its formation.
 
As a result of a reorganization into a holding company structure to be effected simultaneously with the Offering, the Company will become a holding company through a series of transactions pursuant to a sale and purchase agreement. Upon consummation of the Offering and reorganization, the Company’s sole assets will be, through its wholly-owned subsidiary HFF Partnership Holdings LLC, a Delaware limited liability company (“HoldCo LLC”), partnership interests in Holliday Fenoglio Fowler, L.P., a Texas limited partnership (“HFF LP”) and HFF Securities L.P., a Delaware limited partnership and registered broker-dealer (“HFF Securities” and together with HFF LP, the “Operating Partnerships”) and all of the shares of Holliday GP Corp., a Delaware corporation and the sole general partner of each of the Operating Partnerships (“Holliday GP”).
 
As the controlling owner of Holliday GP, the sole general partner of the Operating Partnerships, the Company will operate and control all of the business and affairs of the Operating Partnerships and continue to conduct the business now conducted by the Operating Partnerships, acting as a financial intermediary and advisor in the commercial real estate industry, and engaging in debt, private equity, and structured financing placements, as well as investment sales, note sales, and loan servicing out of offices in 18 cities nationwide.
 
The Company. will consolidate the financial results of the Operating Partnerships and the ownership interest of HFF Holdings in the Operating Partnerships will be treated as a minority interest in HFF, Inc.’s consolidated financial statements.
 
2.   Summary of Significant Accounting Policies
 
Basis of Presentation
 
The statement of financial condition has been prepared in accordance with accounting principles generally accepted in the United States. Separate statements of income, changes in stockholders’ equity and cash flows have not been presented in the financial statements because there have been no activities of this entity.
 
3.   Stockholders’ Equity
 
The Company is authorized to issue 1,000 shares of Class A common stock, $.01 par value per share. The Company has issued one share of Class A common stock in exchange for $1.00.


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Table of Contents

 
Report of Independent Registered Public Accounting Firm
 
The Operating Committee and Members of
HFF Holdings, LLC:
 
We have audited the accompanying consolidated balance sheets of HFF Holdings, LLC and subsidiaries as of September 30, 2006, December 31, 2005 and December 31, 2004, and the related consolidated statements of income, members’ equity (deficiency) and cash flows for the nine months ended September 30, 2006, and years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HFF Holdings, LLC and subsidiaries as of September 30, 2006, December 31, 2005 and December 31, 2004, and the consolidated results of their operations and their cash flows for the nine months ended September 30, 2006 and years ended December 31, 2005 and 2004, in conformity with accounting principles generally accepted in the United States.
 
/s/ Ernst & Young LLP
 
November 7, 2006
Pittsburgh, Pennsylvania


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HFF Holdings, LLC And Subsidiaries
 
Consolidated Balance Sheets
(Dollars in thousands)
 
                         
    September 30,
    December 31,
    December 31,
 
    2006     2005     2004  
 
ASSETS
Current assets:
                       
Cash and cash equivalents
  $ 55,224     $ 59,595     $ 41,301  
Restricted cash (Note 5)
    280       389       781  
Accounts receivable
    1,701       921       200  
Mortgage notes receivable (Note 6)
    39,550       14,700        
Prepaid expenses and other current assets
    3,853       2,691       1,553  
                         
Total current assets
    100,608       78,296       43,835  
Property and equipment, net (Note 3)
    4,903       4,276       4,365  
Goodwill
    3,712       3,712       3,712  
Intangible assets, net (Note 4)
    3,328       2,889       3,859  
Other noncurrent assets
    300       768       319  
                         
    $ 112,851     $ 89,941     $ 56,090  
                         
 
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
                       
Current portion of long-term debt (Note 5)
  $ 17,094     $ 122     $ 576  
Warehouse line of credit (Note 6)
    39,550       14,700        
Accrued compensation and related taxes
    17,888       10,800       7,865  
Accounts payable
    933       330       305  
Other current liabilities
    1,914       1,027       474  
                         
Total current liabilities
    77,379       26,979       9,220  
Deferred rent credit
    2,606       2,366       2,505  
Other long-term liabilities
    371       408       185  
Long-term debt, less current portion (Note 5)
    40,596       150       7,068  
                         
Total liabilities
    120,952       29,903       18,978  
Members’ (deficiency) equity (Note 1)
    (8,101 )     60,038       37,112  
                         
    $ 112,851     $ 89,941     $ 56,090  
                         
 
See accompanying notes.


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Table of Contents

 
HFF Holdings, LLC and Subsidiaries
 
Consolidated Statements of Income
(Dollars in thousands)
 
                                 
    Nine Months Ended
    Years Ended
 
    September 30     December 31  
    2006     2005     2005     2004  
          (Unaudited)              
 
Revenues
                               
Capital markets services revenue
  $ 153,586     $ 135,983     $ 203,457     $ 142,192  
Interest on mortgage notes receivable
    662       65       412        
Other
    2,289       1,251       1,979       1,499  
                                 
      156,537       137,299       205,848       143,691  
Expenses
                               
Cost of services
    89,340       81,026       119,106       85,778  
Personnel
    10,460       8,874       14,369       9,107  
Occupancy
    4,629       4,034       5,357       5,047  
Travel and entertainment
    3,842       3,221       5,067       3,617  
Supplies, research, and printing
    4,800       3,690       5,089       2,933  
Insurance
    2,265       1,883       2,470       1,500  
Professional fees
    1,979       1,012       1,201       871  
Depreciation and amortization
    2,039       1,988       2,735       2,506  
Interest on warehouse line of credit
    676       60       409        
Other operating
    3,270       2,532       3,483       3,441  
                                 
      123,300       108,320       159,286       114,800  
Operating income
    33,237       28,979       46,562       28,891  
Interest and other income
    1,394       675       1,267       317  
Interest expense
    (2,377 )     (220 )     (271 )     (406 )
                                 
Income before taxes
    32,254       29,434       47,558       28,802  
Income tax expense
    557       433       715       728  
                                 
Net income
  $ 31,697     $ 29,001     $ 46,843     $ 28,074  
                                 
 
See accompanying notes.


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Table of Contents

HFF Holdings, LLC and Subsidiaries
 
Consolidated Statements of Members’ Equity (Deficiency)
(Dollars in thousands)
 
                                         
          Retained
                   
          Earnings
    Receivable
    Payable
       
    Capital     (Deficit)     From Members     To Members     Total  
 
Members’ equity, December 31, 2003
  $ 7,000     $ 13,529     $     $     $ 20,529  
Net income
          28,074                   28,074  
Distributions
          (11,491 )                 (11,491 )
                                         
Members’ equity, December 31, 2004
    7,000       30,112                   37,112  
Withdrawal of member
    (71 )                       (71 )
Net income
          46,843                   46,843  
Distributions
          (23,846 )                 (23,846 )
                                         
Members’ equity, December 31, 2005
    6,929       53,109                   60,038  
Contributions
    71                         71  
Net income