fin. 355 - all chapters - has adobe - wlb modified
TRANSCRIPT
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
1/280
1
The Real EstateInvestment Decision
Chapter 1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
2/280
2
State of the Investment
Analysis Art
Historically lagged behindmainstream finance andinvestment thought; greatstrides recently
Treats real estate as capitalasset desired for stream ofbenefits
Real estate investment as
special case of modern capitalbudgeting
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
3/280
3
Real Estate as an
Investment
Investors Passive or Active Active investors acquire direct
title to real property; eitheroversee property themselves orhire management firms
Passive investors place assetswith professional moneymanagers who acquire interestsin real property; may acquireshares in corporations or
partnerships that hold realproperty interests; make nooperating decisions
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
4/280
4
Real Estate as an
Investment
Investors take equity ordebt position
Distinction betweeninvestors in real assets andinvestors in financial assets
While both are investors,exclude mortgage lendersfrom this study ofinvestment analysis anddecision making
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
5/280
5
Figure 1.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
6/280
6
Who Are the Investors?
Private investors
Institutions, such as REITsand pension funds
Small level of foreign holdings
Concentrated in locales and
types of properties Surged during early 1980s and
later moderated
Level shifts with foreign
exchange rates Level impacted by relative
interest rates
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
7/280
7
Figure 1.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
8/280
8
Real Estate Investment
Performance
Data for investment comparisonsscarce, but frequently concluded
that real estate generates returnsroughly comparable to commonstock, with greater predictability ofreturns
More data for investment return
comparisons available recently, butheavily influenced by period fromwhich data are drawn
Brueggeman, Chen and Thibodeauanalysis--real estate funds
outperformed Standards andPoors 500 stock index andIbbotson Associates bond index
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
9/280
9
Real Estate Investment
Performance
Giliberto compared REIT yieldswith Standard and Poors 500
stock index, 1978 1989; foundadvantage in common stocks
Zerbst and Cambon (1984)analyzed earlier studies; found real
estate tends to outperform stocksduring periods of inflation
Clayton and MacKinnon (2001)find REIT returns now closelycorrespond to returns on smallcapitalization stocks
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
10/280
10
Concepts and Definitions
Most Probable Selling Price
Probabilistic estimate of theprice at which a futuretransaction will occur
Investment ValueValue ofa property as an investment toa present or prospectiveowner
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
11/280
11
Concepts and Definitions
Transaction Investment value from thepresent owners perspective sets thelower end of the range of possible
transaction prices. Investment value fromthe perspective of the most likely buyerdetermines the upper end of the range.
To be motivated to sell, seller mustconclude most probable selling price isgreater than investment value
To be motivated to buy, buyer mustconclude investment value is greater thanmost probable selling price
For transaction to be possible, investment
value from prospective buyers point ofview must be greater than from theprospective sellers point of view
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
12/280
12
Figure 1.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
13/280
13
Figure 1.4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
14/280
14
Figure 1.5
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
15/280
15
Estimating Investment
Value: An Overview
Investor who buys property buys set ofassumptions about ability of property togenerate cash flows over the expected
holding period and likely market value ofproperty at end of proposed holdingperiod. Analysis:
Estimate the stream of expected benefits
Adjust for timing differences in expectedstreams of benefits from investmentalternatives
Adjust for differences in perceived riskassociated with alternatives
Rank alternatives according to relativedesirability of the perceived risk-returncombinations they embody
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
16/280
16
Estimating Investment
Value: An Overview
Value of an investmentproperty is sum of the debtand equity positions
Investment can be expressed
aspresent value of the equityposition plus thepresent valueof debt position
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
17/280
17
Figure 1.6
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
18/280
18
Figure 1.7
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
19/280
19
Investors Disagree on
Investment Values
Investors unlikely to arrive atsame investment value
conclusions as they differ on: Future stream of rental revenue
and operating expenses
Perceived levels of risks
Willingness to defer immediateconsumption in interest of futurebenefits
Desire for preciselydeterminable future
Investors in higher-incomebrackets benefit more from tax-deductible losses
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
20/280
20
Investor Objectives and
Risk
Seek financial return as reward forcommitting resources and as
compensation for bearing risk
Emotional temperament plays a largerole in an investors attitude
Relate expected return to risk; acceptadditional perceived risk only ifaccompanied by additional expectedreturn
Tend to become increasingly averseto additional risk as total perceivedrisk increases
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
21/280
21
Figure 1.8
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
22/280
22
Figure 1.9
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
23/280
23
Investment Strategy andthe Concept of Market
Efficiency
Chapter 2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
24/280
24
Supply, Demand, and the
Price of Real Estate Assets
Demand
Relationship between marketprice and the quantity of a goodor service that will be boughtper time period, over the entirerange of possible prices
For real estate assets, demandis inversely related to their price
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
25/280
25
Figure 2.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
26/280
26
Supply, Demand, and the
Price of Real Estate Assets
Demand Schedule is therelationship between priceand quantity; demand curve isthe graphic form of the sameinformation
A specific demand scheduleapplies only to a definedpopulation vying for a particularclass of property
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
27/280
27
Supply, Demand, and the
Price of Real Estate Assets
Shift in demandthe entirerange of relationships
between price and quantitydemanded changes. Amongdeterminants of location andshape of demand curves for
real estate assets, and ofchanges in demand are: Number of prospective tenants
Changes in operating expenses
Yields available on other assets Technology
Tastes
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
28/280
28
Figure 2.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
29/280
29
Supply, Demand, and the
Price of Real Estate Assets
Example - demand schedulefor downtown office space
Price changes alter quantitydemanded
Decline in after-tax cash flow
Market areas become relatively
more desirable, drop bidding fordowntown property
Less downtown space purchasedat each possible price per squarefoot
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
30/280
30
Figure 2.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
31/280
31
Supply, Demand, and the
Price of Real Estate Assets
Relative Scarcity
Property in abundancecommands no substantial value
Supply is defined as therelationship between price andthe quantity of a productsuppliers place on the marketduring a specified time period,
for all possible prices
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
32/280
32
Supply, Demand, and the
Price of Real Estate Assets
Supply function differs asspecified time period islengthened or shortened
Short runvariations in thesupply of real estate placed onthe market are an individuals
perceptions of the relationshipbetween market value andinvestment value
Long runthe supply curve ofreal estate is influenced by costof construction
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
33/280
33
Supply, Demand, and the
Price of Real Estate Assets
Quantity suppliedrefers toamount of product that will beplaced on the market perperiod of time at a specifiedprice
Supplythe relationshipbetween price and quantitysupplied over the entire range
of possible prices
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
34/280
34
Supply, Demand, and the
Price of Real Estate Assets
Equilibrium price price atwhich there will be sufficientquantity of a product to satisfydesires of all consumers atthat price, but with no surplusremaining on the market.Quantity demanded andquantity supplied meet at thepoint where the supply and
demand functions intersect.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
35/280
35
Figure 2.4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
36/280
36
Figure 2.5
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
37/280
37
Figure 2.6
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
38/280
38
Market Efficiency and
Profit Opportunities
Markets institutionalarrangements or mechanismswhereby buyers and sellersare brought into contact witheach other. There are notnecessarily physical entitiesor geographical location
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
39/280
39
Market Efficiency and
Profit Opportunities
Marketscommonality ofproduct
Owner-occupant market
Renter-occupant market
Multifamily investment
Nonresidential market
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
40/280
40
Figure 2.7
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
41/280
41
Market Efficiency and
Profit Opportunities
Range of Markets In an atomistic market, each
participant is so insignificantrelative to the size of the totalmarket that he has noperceptible effect on price,Every buyer can purchase as
much as desired, every sellercan sell as much as desired.
In an absolute monopoly, thereis only one supplier or a good orservice for which there are notreasonably acceptablesubstitutes
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
42/280
42
Figure 2.8
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
43/280
43
Market Efficiency and
Profit Opportunities
Price Searchers and MarketEfficiency
In an efficient market,information is transmittedquickly and without cost,eliminating above average profit
Time required for information tobe reflected in price is ameasure of market efficiency
In less efficient market,
information is scarce and costly;greater degree of pricesearching
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
44/280
44
Market Efficiency and
Profit Opportunities
Sources of Market Inefficiency
Information costly and difficult toobtain; comparison shoppingexpensive and time consuming
High transaction costs prohibitportfolio adjustment
No two properties exactly alike
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
45/280
45
Strategy Implications
In atomistic markets,economic rentwill be rare andshort-lived
Less efficient the market,
longer the adjustment processtakes
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
46/280
46
Figure 2.9
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
47/280
47
Land Utilization and theRental Value of Real
Estate
Chapter 3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
48/280
48
Economic Factors in Land
Use Decisions
Location choice is primarilyeconomic decision
Economic models investigateland development patterns
Market imperfections create
deviations, yet systematicpattern is discernible
Clusters of stores for multiplenuclei that create peaks in
local land values
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
49/280
49
Economic Factors in Land
Use Decisions
Friction of space
Linkages
Transfer costs
Processing costs
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
50/280
50
Figure 3.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
51/280
51
Figure 3.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
52/280
52
Figure 3.4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
53/280
53
Figure 3.5
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
54/280
54
The Market for Rental
Space
Competitive bids for bestspace create highest rents;rents tend to decline asdistance from 100 percent
location increases
Overlapping of uses
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
55/280
55
Market Structure and the
Need for Market Research
Atomistic markets (price takers) havelittle need for market research; sellersdeliver homogeneous product to whatever
buyer is currently in the market and sellfor established market price Price searchers (those who operate in
monopolistically competitive oroligopolistic markets) face more complexproblem; control over market price isclosely related to the extent that theirproduct is distinguished from closestsubstitute
Each piece of real estate is unique withrespect to exact location
Product differences desensitize buyers toprice differentials
Price searchers with access to marketintelligence benefit
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
56/280
56
Market Research Tools
and Techniques
Chapter 4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
57/280
57
The Need for Market
Research
Investment analysts and portfolio managersneed market information at every stage intheir decision-making efforts
Market information is required not only forrational acquisition decisions, but formanaging the existing investment portfolio
Market research is also need to facilitateoperating management decisions
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
58/280
58
How Much Market
Research?
Justified by market stabilityand degree of investmentcomplexity
Maximum net benefit from
research occurs whenpursued to point wheremarginal benefits equalmarginal cost
Decision makers must identifypoint of maximum benefit
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
59/280
59
Figure 4.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
60/280
60
A Design for Market
Research
Formulate nature of problem
Proceed from general tospecific
Four quadrant forecasting
matrix
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
61/280
61
Figure 4.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
62/280
62
Preparing the Research
Report
Summarizes proceduresemployed and describes
conclusions reached
Everything in research reportshould be explained in terms
of its bearing on theconclusion
Report format is determinedby nature of research problemand needs of user
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
63/280
63
Data Sources
Primary data
Secondary data
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
64/280
64
Primary data
Statistics gathered byresearcher precisely forproblem at hand
Can be gathered bycommunication or byobservation
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
65/280
65
Secondary data
Less costly and timeconsuming to generate
Never precisely in desired
form
Available from agencies
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
66/280
66
Descriptive Research
Examples Describing profile of typical
tenants
Estimating proportion of peoplein a specific population whobehave in a particular manner
Describes aspect of problem
Requires planning and
catalog system Cross-sectionalortime series
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
67/280
67
Statistical Research
Permit reliable generalizationsto be drawn after examinationof a limited portion of the totalpool of information
Descriptive statistics
Inferential statistics
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
68/280
68
Geographic Information
Systems
(GIS) relate information togeographic location; series ofmap overlays
Computerized systems
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
69/280
69
Figure 4.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
70/280
70
Reconstructing theOperating History
Chapter 5
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
71/280
71
Overview of Operating
Statement
Concerned with actual cashflows into and out of investors
funds
Present cash inflows andoutflows from operations and
extend the presentation toinclude non-operating cashflows such as those from debtservice, income taxes and
capital expenditures
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
72/280
72
Table 5.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
73/280
73
Overview of Operating
Statement
Potential gross rentamount ofrental revenue a property wouldgenerate with no vacancies
Operating expenses include allcash expenditures required tomaintain and operate the propertyso as to generate the gross rent
Net operating income thedifference between effective grossincome and operating expenses
Debt service consequence ofusing borrowed money to acquireproperty
After-tax cash flow= bottom linethe amount of cash remaining atthe end of the reporting period
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
74/280
74
Estimating Ability to
Command Rent
History of recent operations Verify records of comparable
properties
Estimate recent gross income
through research Find comparable properties
Define market area
Identify properties thatprospective tenants wouldconsider as close substitutes
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
75/280
75
Figure 5.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
76/280
76
Figure 5.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
77/280
77
Estimating Operating
Expenses
Subject propertys operatinghistory
Recent expense history of
comparable properties
Published compendiums of
similar properties asbenchmarks
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
78/280
78
Table 5.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
79/280
79
Table 5.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
80/280
80
Table 5.4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
81/280
81
Table 5.5
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
82/280
82
Table 5.6
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
83/280
83
Forecasting Income andProperty Value
Chapter 6
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
84/280
84
Forecasting Gross
Income
Desirability of space, attractiveness,price of competing space
Prospects for continued income-generating ability
Physical (natural and man-made)and location characteristics
Forecast changes in physical and
location characteristics Linkages and transfer costs
Inharmonious or incompatible landusage
Changes in supply of comparablerental space
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
85/280
85
Forecasting Operating
Expenses
Extend prior years trend into
future (simple straight-lineextrapolation)
Alter trend line based on
predicted changes duringforecast period
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
86/280
86
The Net Operating
Income Forecast
Difference between forecastof rental revenue and forecastof operating expenses
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
87/280
87
Table 6.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
88/280
88
Table 6.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
89/280
89
Estimating Future Market
Value
Cash flow from eventualdisposal
Capitalization rate ratiobetween operating income
and market value Note current capitalization
rate applicable to comparableproperties and estimate how
rate might change overforecasting period
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
90/280
90
Financial Leverage and
Investment Analysis
Chapter 7
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
91/280
91
Why Leverage is So
Popular
Financial leverage usingborrowed funds to amplify theoutcome of equity investment
Greater ratio of borrowed
funds to equity, greaterdegree of financial leverage
Leverage is favorable so longas the rate of return on assetsexceeds the cost of borrowing
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
92/280
92
Why Leverage is So
Popular
Spreaddifference betweenrate of return on assets and
cost of borrowing Favorable spread magnifies
return on equity of highlyleveraged investment
When debt service constantisless than the rate of return ontotal assets, additionalfinancial leverage increases
cash flow to the equityposition
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
93/280
93
Table 7.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
94/280
94
Why Leverage is So
Popular
Federal income tax lawcreates major incentive to usefinancial leverage
Interest payments generally taxdeductible
Depreciation allowance torecover costs
Gains on disposal treated ascapital gains
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
95/280
95
Measuring Financial
Leverage
Debt/equity ratio ratiobetween borrowed funds andequity funds
Loan/value ratio ratiobetween borrowed funds andmarket value of asset beingfinanced
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
96/280
96
Measuring Financial
Leverage
Greater leverage increases risk
that cash flow from investment willbe insufficient to meet debt serviceobligation (financial risk)
Debt coverage ratio degree towhich actual net operating incomecan fall below expectations and stillbe sufficient to meet debt service
obligation
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
97/280
97
How Much is Enough
Financial Leverage?
Lenders frequently expressmaximum amount of loan in termsof minimum permissible debtcoverage ratio
Lenders specify maximumpermissible loan-to-value ratio
As more money is borrowed tofinance an investment, the venturebecomes increasingly risky
Increasing amount of borrowedfunds relative to equity funds driveup cost of borrowing
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
98/280
98
Table 7.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
99/280
99
Who Are the Lenders?
Commercial banks
Life insurance companies
Pension funds
Commercial mortgage-backed
securities (CMBs)
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
100/280
100
Credit Instruments andBorrowing Arrangements
Chapter 8
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
101/280
101
Credit and Security
Instruments
Promissory notes
Mortgages
Purchase-money mortgages
Blanket mortgages
Open-ended mortgage
Deed of trust
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
102/280
102
Credit Terms
Fully amortizing
Partially amortizing
Straight/term/bullet
Portion of interest deferred
Fluctuating interest rates
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
103/280
103
Alternative Financing
Methods
Installment sales contracts
Sale and leaseback
Junior mortgages
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
104/280
104
Government-Sponsored
Credit Arrangements
Department of Housing andUrban Development
State and local government
private activity bonds
Redevelopment bonds
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
105/280
105
The Cost of Borrowed Money
Chapter 9
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
106/280
106
The Many Faces of
Interest Expense
Nominal rate orcontract rateinterest rate based on faceamount of promissory note
Effective rate rate actuallypaid
After-tax borrowing costs areusually lower than before-taxcosts
Real rate of interest
effective rate, adjusted forprice inflation
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
107/280
107
Table 9.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
108/280
108
Comparing Financing
Alternatives
Effective interest rates differ
Different contract rates
Differences in effective rates due todifferences in loan origination fees ordiscount fees
Lenders often refuse to quote rateuntil late in loan approval process
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
109/280
109
Table 9.5
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
110/280
110
Basic Income Tax Issues
Chapter 10
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
111/280
111
Nature and Significance
of the Tax Basis
Newly acquired propertysinitial tax basis is starting
point in determining incometax consequences ofoperating the property and,ultimately, the tax
consequence of disposal
During holding period, taxbasis is adjusted to reflect
disinvestment or additionalcapital investment
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
112/280
112
Nature and Significance
of the Tax Basis
Selling or exchanging aproperty generates a gain orloss equal to the differencebetween the sales price and
the adjusted basis of theproperty at the time ofdisposal
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
113/280
113
The Initial Tax Basis
Property acquired as gift,initial tax basis the same asdonors, unless donor incurs
gift tax liability
Property acquired by
inheritance, initial tax basis ismarket value as determinedfor estate tax purposes
Property acquired by
purchase, cost forms buyersinitial tax basis
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
114/280
114
Allocating the Initial Tax
Basis
Two or more assets acquiredtogether, initial tax basis must
be allocated between themusing ratio of their relativemarket value Specify price of each in original
purchase contract Use ratio of land value to
building value estimated by taxassessor
Have independent appraiser
estimate relative value of landand buildings
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
115/280
115
Adjusting the Basis in
Cost Recovery
Depreciation allowanceAnallowance of capital invested in
improvements of property held forbusiness or investment purposes.
Does not apply to property held forpersonal use or primarily for resale
Land, considered virtuallyindestructible, is not included indepreciation allowance computation
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
116/280
116
Adjusting the Basis in
Cost Recovery
Claiming tax deduction for costrecovery allowances reduces a
propertys tax basis
Lower the adjusted tax basis whenproperty is sold, the greater the
taxable gain on disposal
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
117/280
117
Recovery of Building and
Other Improvements
27.5 years for buildingsintended for residential rentalpurposes
39 years for buildingsintended for other allowable
purposes 15 years for land
improvements such as walks,roads, sewers, and fences
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
118/280
118
Recovery of Building and
Other Improvements
Allowance for buildings arecomputed using straight-linemethod
Allowances for improvementson and to the land may be
computed using the 150percent declining balancemethod
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
119/280
119
Other Adjustments to the
Tax Basis
Basis is reduced when portionof asset is sold or destroyedby casualties such as fire,flood, or storm
Owners tax basis is
increased by expendituresthat materially increase thepropertys value or useful life
Transaction costs are added
to the tax basis
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
120/280
120
Table 10.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
121/280
121
Tax Consequences of
Ownership Form
Title may vest in owners asindividuals
Title may vest in a corporation
Tax Option Corporations
Investors may form a general
partnership Limited partnership may hold
title
Limited liability company
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
122/280
122
Tax Consequence of
Property Sales
Adjusted tax basis at time of sale isthe initial tax basis plus all
additional capital investments,minus cumulative depreciationallowances, plus-or-minus certainother adjustments that may
sometimes apply Gain or loss on propertys sale is
difference between the value ofconsideration received and theadjusted tax basis at the time of
the transaction
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
123/280
123
Tax Consequences of
Financial Leverage
Borrowing or repaying debtsare not taxable events
Interest expense is usually
tax-deductible in the year theinterest is paid
Exception--prepaid interest isnot deductible until actuallyearned by the lender
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
124/280
124
Tax Consequences of
Financial Leverage
Construction period interest isspecial exceptionmust becapitalized; reflected in annualdepreciation allowances
Deductibility of mortgage
interest is limited by passiveasset loss limitation rules
Strategyborrow againstequity rather than selling, as
selling will trigger a taxablegain
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
125/280
125
Income Tax Credits for
Property Rehabilitation
Tax credits direct, dollar-for-dollar offsets against onesincome tax obligation
Expenditures to rehabilitatecertain buildings qualify for a10 percent rehabilitation taxcredit
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
126/280
126
Limitations on
Deductibility of Losses
Limited partners income andexpenses from a partnership
are always considered passiveasset items
Real estate held for rentalpurposes is passive unless it isincidental to the primary
business activity Special exception for real estate
investors who are not activelyengaged in a real estate tradeor business to deduct up to
$25,000 of passive asset losseseach year
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
127/280
127
Figure 10.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
128/280
128
Taxation of Foreign
Investors
Taxpayer who acquires a U.S. realestate interest from a foreign
owner must withhold and remit tothe IRS 10 percent of the grosssales price, unless
Property is worth no more than$300,000 and is to be used bypurchaser as personal residence
Transaction is protected from taxationpursuant to a U.S. tax treaty
Seller or buyer obtains a certificateform the IRS that reduces the amountto be withheld
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
129/280
129
Taxation of Foreign
Investors
Buyer who fails to withholdthe correct amount may beliable for the under-withheldamount, plus interest andpenalties
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
130/280
130
Alternative Minimum Tax
After figuring tax liability theregular way, taxpayers mustperform an alternativecomputation, and pay taxeson whichever computationmethod results in the greaterliability
Alternative computation taxcredits, and many tax
deductions, that are permittedin the regular computationmust be excluded
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
131/280
131
Tax Consequence of
Property Disposal
Chapter 11
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
132/280
132
Computing the Realized
Gain or Loss
Everything of economic valuereceived in exchange for a
property comprises theconsideration
If seller receives other property orservices as part of the transaction,
these must be included at their fairmarket value
Difference between considerationreceived and the adjusted taxbasis at the time of the transactionis the realized gain orloss ondisposal
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
133/280
133
Tax Treatment of
Realized Gains or Losses
Gains are ordinary incomewhen they result from recapture
of depreciation allowances. Gains are also ordinary income
when they result from sellingreal estate that has been heldfor resale in the normal course
of business (dealer property). Gains on the sale or exchange
of real estate held for businessor investment purposes arecapital gains. If the holding
period exceeds one year, thegain is a long-term capital gain.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
134/280
134
Tax Treatment of
Realized Losses
Real estate used in a trade orbusiness (includes actively
managed rental property) and heldfor more than one year are calledSection 1231 assets. Gains ontheir disposal are treated as capital
gains, losses are treated as offsetsagainst ordinary income.
Losses on real estate held forinvestment purposes are capitallosses. If the real estate is held for
more than one year, the loss is along-term capital loss
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
135/280
135
Computing Net Gain or Losson Sale of Assets Held for
Use in Trade or Business
Offset Section 1231 gains andlosses against each other.
Offset long-term capital gainsagainst long-term capitallosses
Offset short-term capitalagainst against short-termcapital losses
If there are net losses in one
category and gains in theother, offset the two
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
136/280
136
Tax Consequences DependsUpon Outcome of Offsetting
Gains and Losses
If outcome is net short-termgains, lump them with
ordinary income If outcome is net long-term
gains, they are taxed at themaximum rate of 20%,
regardless of taxpayersmarginal tax bracket.
If outcome is net losses, theyare offset against ordinary
income on a dollar-for-dollarbasis, but only to the extent of$3,000 per year
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
137/280
137
When Realized Gains or
Losses Are Recognized
Gains are realizedwhen atransaction is completed
They may be recognized(andtax consequences
experienced) in that year or atanother time
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
138/280
138
Using the Installment
Method
If seller takes back a promissorynote in part payment for property, it
may be possible to deferrecognition of part of the taxablegain until principal amount of thenote is collected
Gain that may be deferred is theinstallment method gain total gainminus any portion that representsrecapture of accelerateddepreciation allowances
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
139/280
139
Using the Installment
Method
Contract price is total sellingprice, less balance of anymortgage note payable by thepurchaser to a third party
Each year, recognized gain is
determined by multiplying theamount of the sales priceactually collected by theseller, multiplied by the ratio
of the installment method gainto the contract price
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
140/280
140
Using the Installment
Method
Installment note must include aprovision for reasonable rate of
interestotherwise, IRS imputes areasonable rate and recalculatesthe tax consequences of thetransaction
Complex tax rules limit the extentto which a taxpayer can defer again by using the installmentmethod when they themselves ownsubstantial amount of mortgage
indebtedness
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
141/280
141
Like-Kind Exchanges
An otherwise taxable gainrealized on an exchange oflike-kind assets need not berecognized in the year of thetransaction. Tax liability ispostponed until a future,taxable transaction occurswith respect to the newlyacquired property.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
142/280
142
Like-Kind Exchanges
Enabling legislation for like-kind exchanges (called tax-free exchanges) is containedin Section 1031 of the InternalRevenue Code.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
143/280
143
Like-Kind Exchanges
To qualify under Section1031:
Must have been bona fideexchange of assets involved
Property conveyed must havebeen held for productive use in
a trade or business or aninvestment and must beexchanged for like-kind propertythat is also to be used in a trade
or business or held as aninvestment
Property must be of like-kind
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
144/280
144
Like-Kind Exchanges
Certain types of property arespecifically excluded formSection 1031
Foreign real estate is never
considered like-kind withdomestic real estate
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
145/280
145
Tax Consequences of
Like-Kind Exchanges
If all property involved in anexchange qualifies as like-kind and
all parties qualify, then no party tothe exchange may recognize anygain or loss on the transaction.
Should some of the propertyinvolved in an exchange fail the
like-kind test, then some portion ofa gain must be recognized in theyear of the transaction.
Receipt of property that does notmeet the like-kind definition has
the effect of partially disqualifying again from deferral under Section1031.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
146/280
146
Giving Property Away
Gifts and legacies aresubjected to a unified,graduated gift and estate taxthat is imposed on the personwho makes a gift or to theestate of a decedent
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
147/280
147
Giving Property Away
Exemptions and exclusionsfrom the gift and estate tax:
One may give as much as$11,000 each to as manpersons as one wishes eachyear with no gift tax implications
($22,000 for spouses) Unlimited exemption for gifts or
legacies to a spouse who is aUnited States citizen
Unlimited exemption forpayment of tuition and medicalexpenses for others
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
148/280
148
Giving Property Away
Gifts are cumulative over thegivers lifetime for purposes of
determining the graduated taxrate, but gift taxes are due inthe year the gift is made
Each taxpayer has a lifetimecredit against the unified giftand estate tax. The amountof the credit will shelter
$1,000,000
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
149/280
149
Giving Property Away
Gift of property that is subjectto a mortgage will have saleas well as giftelements
The tax basis of a recipients
interest in property received
as a gift is the same as thebasis of the givers, unless thegiver incurred a gift taxliability.
Letting title pass as a legacyrather than a gift works betterfor highly appreciatedproperty
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
150/280
150
Traditional Measures of
Investment Worth
Chapter 12
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
151/280
151
Ratio Analysis
Ratios are employed to gaugethe reasonableness ofrelationships between variousmeasures of value andperformance:
Income multipliers
Financial ratios
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
152/280
152
Income Multipliers
Express the relationshipbetween price and eithergross or net income
Multiplier analysis permitsobviously unacceptable
opportunities to be weededout
Gross income multipliers
Net income multipliers
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
153/280
153
Financial Ratio Analysis
Frequently employed tofacilitate inter-propertycomparisons.
Operating ratio
Break-even ratio
Debt coverage ratio
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
154/280
154
Traditional Profitability
Measures
Attempt to relate cashinvestment to expected cashreturns in some systematicfashionnot equallysuccessful
Overall capitalization rate(free-and-clear rate of return)
Equity dividend rate (Cash-on-Cash rate of return)
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
155/280
155
Traditional Profitability
Measures
Brokers rate of return
Payback period
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
156/280
156
Traditional Profitability
Measures
Shortcomings of traditionalmeasures of investmentperformances:
Ignore cash-flow expectations
during the later years of theholding period
Ignore cash-flow expectations
from disposal
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
157/280
157
Toward More Rational
Analysis
Five major factors governingthe relative attractiveness of areal estate investment mustbe incorporated into rationalreal estate investmentanalysis
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
158/280
158
Toward More Rational
AnalysisMajor Factors
Anticipated stream of net cashflow to the investor
Expected timing of cashreceipts
Degree of certainty with which
expectations are held Yields available from
alternative investmentopportunities
Investors attitude toward risk
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
159/280
159
Toward More Rational
Analysis
Time-adjusted investmentevaluation measures
Discount expected future cashflows to make them more nearlycomparable to those receivablein the present
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
160/280
160
Discounted Cash-Flow
Analysis
Chapter 13
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
161/280
161
Present Value
Present value is the value today ofbenefits that are expected to
accrue in the future When discounting is done at the
minimum acceptable rate of returnon equity:
Present value in excess of therequired initial equity cash outlayimplies that a project is worthy offurther considerations
A present value totaling less than the
required initial equity expenditureresults in automatic rejection
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
162/280
162
Present Value
To use this approach, discount allanticipated future cash flows at the
minimum acceptable rate of return.The result is the present value ofexpected cash flows.
PV=CF1/(1+i)+CF2(1+i)2
+CF3/(1+i)3
+.+(CFn/(1+i)n
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
163/280
163
Net Present Value
Subtracting the required initialequity expenditure from the
present value yields net presentvalue
A positive net present value means aproject is expected to yield a rate ofreturn in excess of the discount rate,
and therefore merits furtherconsideration
A net present value of less than zeromeans the project is expected to yielda rate of return less than the minimum
acceptable rate, and therefore shouldbe rejected
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
164/280
164
Internal Rate of Return
There is an inverserelationship between discountrates and present value
The rate that will exactlyequate the present value of a
projected stream of cashflows with any positive initialcash investment is the internalrate of return
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
165/280
165
Internal Rate of Return
n
Cost = CF1/(1+k)t
t=1
Where CF is the cash flow
projected for year t, cost isdefined as the initial cashoutlay, and k is the discountrate that makes the present
value of the expected futurecash flows exactly equal tothe initial cash outlay
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
166/280
166
Internal Rate of Return
Decision criteria using the IRRis:
If the internal rate of return isequal to or greater than aninvestors required rate of
return, a project is consideredfurther
If the internal rate of return isless than the minimum
acceptable rate of return, theproject is rejected
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
167/280
167
Problems with the Internal
Rate of Return
Can result in conflictingdecision signals
Might result in investmenterror
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
168/280
168
ReinvestmentRate
Problem
Interproject comparison usinginternal rate of return analysisinvolves an implicitassumption that funds arereinvested at the internal rateof return. The internal rate ofreturn method reliablydiscriminates betweenalternatives only if there are
available other acceptableopportunities expected toyield an equally high rate.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
169/280
169
The Multiple-Solutions
Problem
Generally, a projects net
present value is a decreasingfunction of the discount rateemployed. Thus, withsuccessively a higherdiscount rates, a point isreached where the netpresent value is zero. This isthe internal rate of return, and
any greater discount rate willresult in a negative netpresent value.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
170/280
170
The Multiple-Solutions
Problem
Not all cash-flow forecastshave one internal rate ofreturn equating all cashinflows with all cash outflows.
Investment proposals may
have any number of internalrates of return, depending onthe cash-flow pattern.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
171/280
171
Comparing Net Present
Value and IRR
When using internal rate ofreturn, reject all projectswhose internal rate of return isless than the minimumrequired rate of return.Projects with an internal rateof return equal to or greaterthan the minimum acceptablerate are considered further.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
172/280
172
Comparing Net Present
Value and IRR
When using net presentvalue, discount at theminimum acceptable rate ofreturn and reject all projectswith a net present value ofless than zero. Projects with anet present value of zero orgreater are consideredfurther.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
173/280
173
Comparing Net Present
Value and IRR
Under most circumstances,the internal rate of return andnet present value approacheswill give the same decisionsignals
In some conditions,contradictory signals emerge
Given different decisionsignals, results of net present
value are usually preferred
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
174/280
174
Modified Internal Rate of
Return
Discounts all negative cashflows back to the time atwhich the investment isacquired, and compounds allpositive cash flows forward
to the end of the final year ofthe holding period.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
175/280
175
Financial Management
Rate of Return
Findley and Messner havedeveloped a variation on the
internal rate of return calledfinancial management rate ofreturn which incorporatestwo intermediate rates: Cost of capital rate employed
to discount negative cashflows back to year zero
Specified reinvestment rate for
compounding positive cashflows to the end of theprojection period
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
176/280
176
Investment Goals and
Decision Criteria
Chapter 14
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
177/280
177
Choosing a Discount
Rate
Choice is critical in selectingbetween alternative opportunities
and deciding what opportunitiesmerit additional considerations
Summation technique
Risk-adjusted discount rate
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
178/280
178
Investment Decisions and
Decision Rules
Precise rules for makinginvestment decisions depend of
the nature of the problem Net present value does not give an
unambiguous decision signal whenprojects require different levels of
initial cash outlay Profitability index (PI) is calculated by
dividing the present value of expectedfuture cash flows by the amount of theinitial cash outlay. The quotient
represents present value per dollar ofinitial cash expenditure
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
179/280
179
Investment Decisions and
Decision Rules
General decision rule is toaccept the project with thegreatest profitability index(assuming there is nodifference in the risk profile ofcompeting opportunities)
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
180/280
180
Investment Decisions and
Decision Rules
Investors must select frombetween investment alternatives,
all of which are considereddesirable. Investors constantly face mutually
exclusive investment decisions
The most appropriate technique fordeciding between mutually exclusivealternatives when using the netpresent value approach is to acceptthe alternative producing greater(positive) net present value.
When using the internal rate of return,
the most appropriate approach is toaccept the proposal having the higherinternal rate of return, providing it isgreater than the predetermined rate.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
181/280
181
Investment Decisions andDecision RulesMutually
Dependent Proposals
Investment proposals aremutually dependentifacceptance of one forces theinvestor to accept the other.Acquisition of more than oneproperty at a time requiresconsideration of results fromalternative combinations.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
182/280
182
Investment Decisions andDecision RulesMutually
Dependent Proposals
Group mutually dependent ventures
into consolidated units, and treat eachunit as a single investment venture
Accept mutually dependentcombination having the highest netpresent value
If packages differ in amount of initialequity cash expenditure, compare theprofitability indexes of thecombinations
If internal rate of return method is
being used, accept the combinationhaving the highest calculated return
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
183/280
183
Investment Value and
Investment Strategy
Investment value is value ofan income producing propertyto a particular investor
Prospective investors will bemotivated to buy if they
believe their subjectiveinvestment value is greaterthan the amount they willhave to pay for a property
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
184/280
184
Investment Value and
Investment Strategy
Owners will be motivated tosell if they believe they willreceive more than theirproperties are worth to themas elements in their personalinvestment portfolios
The greater the spreadbetween investment valueand transaction price for both
buyer and seller, the greaterthe possible increase in bothinvestors wealth
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
185/280
185
Risk in Real Estate
Investment
Chapter 15
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
186/280
186
Major Risk Elements
Financial risk
Insurable risk
Business risk
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
187/280
187
Figure 15.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
188/280
188
Controlling Risk
Risk analysis
Invest in less risky projects Eliminates opportunities for
extraordinary profits
Financial market assignsappropriate level of return to
each opportunity,commensurate with level of riskperceived
In an efficient market, the onlyway to reduce risk associated
with single investment venturesis to choose a venture with alower expected return
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
189/280
189
Figure 15.4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
190/280
190
Controlling Risk
Real estate markets tend tobe somewhat less efficientthan are organized securitiesmarkets. Real estate investorswho can exploit marketinefficiencies are able to reapextraordinary profits withoutshouldering commensuratelygreater risk.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
191/280
191
Controlling Risk
Investors can control riskexposure by considering therelationship between assetsalready held and potentialnew acquisitions.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
192/280
192
Controlling Risk
Real estate investors areforced to make assumptionsabout a ventures ability to
generate income over anextended period. Risk is oftenviewed as the possibility ofvariance betweenassumptions and actualoutcomes.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
193/280
193
Controlling Risk
Lease agreements oftenpermit landlords to shift somerisk to tenants.
Hedging may also reduce risk.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
194/280
194
Risk Preferences and
Profit Expectations
Rational investors prefer ahigher to a lower return for agiven level of risk; for aspecified level of return theyprefer less risk to more risk
They accept additional riskonly if accompanied byadditional expected
investment rewards
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
195/280
195
Figure 15.6
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
196/280
196
Risk Preferences and
Profit Expectations
Configuration of risk-rewardindifference curves will depend
upon the individual investorspersonal attitude toward risk.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
197/280
197
Risk Preferences and
Profit Expectations
The more risk averse theindividual, the more steeply
sloped the indifference curveshowing that persons
preference
The indifference curve of an
investor who is indifferenttoward risk has no curvature atall
Some investors may be willingto trade expected return for theopportunity to bear greater risk,and will therefore have adownward-sloping risk rewardindifference curve
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
198/280
198
Successful Insurance Firms
as Rational Risk Takers
Allow insured parties tosubstitute the certainty of asmall loss for the uncertaintyof a larger, possiblycatastrophic loss
Astute risk management Risk takers by design
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
199/280
199
Measuring Risk
Rational investors willseek to determine theamount of risk associatedwith an investmentopportunity and willdecide upon a minimumexpected return that willjustify the perceived risk
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
200/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
201/280
201
Measuring Risk
Traditional risk-adjustment techniquesshare a seriousshortcomingthey do notpermit quantification ofthe risk element.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
202/280
202
Traditional Risk-
Adjustment Methods
Chapter 16
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
203/280
203
The Payback-Period
Approach
Payback period is the timerequired for cash inflows from
an investment to equal theoriginal cash outlay. Proponents of this technique
adjust for risk by varying the
minimum acceptable paybackperiod.
Inadequate method
Desirability of real estateopportunities often depend
heavily upon expected gainfrom disposal
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
204/280
204
Risk-Adjusted Discount
Rate
Involves varying the discountrate to reflect risk perception;the higher the perceived risk,the greater the size of thediscount rate.
Risk-adjusted discount rate iscomposed of a risk-free rateplus a risk premium
Probably most commonly usedapproach, but fatally flawed
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
205/280
205
Certainty-Equivalent
Technique
Instead of best estimate of
future cash flows, substitutesan amount that leaves theclient indifferent betweenexpected receipt of the bestestimate and absolutecertainty of receiving thesubstitute amount. Substituteamount (certainty equivalent)
is discounted at the risk-freerate.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
206/280
206
Partitioning Present
Values
Real estate investments arevalued solely for theanticipated future stream ofbenefits ownership bestows.Real estate investment can beseen as the purchase of a setof assumptions about apropertys ability to produce a
benefit stream (after-tax cash
flow).
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
207/280
207
Partitioning Present
Values
Factors contributing to flowinclude:
income tax consequences
loan amortization
change in property value overprojected holding period
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
208/280
208
Partitioning Present
Values
Investment value can be dividedinto present value of equity and
present value of debt. Presentvalue of equity position can also bepartitioned into its componentparts.
Expressing each component as apercentage of total permits the relativeimportance of each to be assessed.
Components that comprise majorsegments of the total present vale ofthe equity position will merit extendedanalysis.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
209/280
209
Sensitivity Analysis
Sensitivity analysis is a logicalextension of partitioning to
determine what portions of theforecast merit furtherrefinement. Revels how possible forecasting
error will affect the presentvalue of actual after-cash flows.
Consists of altering componentsof the forecast one at a time,and studying the impact on
investment value or presentvalue of the equity position.
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
210/280
210
Contemporary Risk
Measures
Chapter 17
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
211/280
211
Probability as a Risk
Measure
Probability the chance ofoccurrence associated withany possible outcome.Probabilities associated withany possible occurrencerange from zero to one.
If probability equals zero, eventcertainly will not occur
A probability ofone indicatescertainty of occurrence
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
212/280
212
Probability as a Risk
Measure
Decisions are divisible: Certaintyonly one possible
outcome; decisions basedsolely on the decision makerspreference between certainalternatives
Risk-probabilities associatedwith various possible outcomesare either known or can beestimated
Uncertaintyprobabilities are
neither known or estimable;implies unknown number ofpossible outcomes
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
213/280
213
Probability as a Risk
Measure
Uncertainty is not measurable
As better informationbecomes available, uncertainelements can be converted torisk factors by incorporating
into analysis their associatedprobability distributions
Analysts generate informationto estimate the probability of
occurrence of each risk
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
214/280
214
Probability as a Risk
Measure
Estimating future cash flowsfrom real estate ventures ispart art and part science.
No way to determine future,instead develop informedestimates
Couple estimates withprobability estimate
Multiple law of probabilityusedto determine the probability of
occurrence of an event whoseoutcome depends in turn on theoutcome of some prior event
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
215/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
216/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
217/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
218/280
218
Interpreting Risk
Measures
Variance weighted averageof the squared differencesbetween each possibleoutcome and the expectedoutcome:
n V = (CFx CF)2 Px
x=1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
219/280
219
Interpreting Risk
Measures
V is variance
CFx is value of the xthpossible outcome
CF is expected value
Px is related probability
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
220/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
221/280
221
Figure 17.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
222/280
222
Figure 17.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
223/280
223
Figure 17.4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
224/280
224
Figure 17.5
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
225/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
226/280
226
Risk Management in a
Portfolio Context
Chapter 18
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
227/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
228/280
228
Modern Portfolio Theory
and Risk Management
Systematic market riskreflection of market prices;
can only by reduced inefficient market by acceptinglower expected returns
Unsystematic riskfunction ofcharacteristics of particularproperties, such as locationand design; can be eliminated
by diversifying the assets in aportfolio
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
229/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
230/280
230
Modern Portfolio Theory
and Risk Management
Among universe of possibleportfolios, the subset thatrepresents the best-obtainable combinations ofrisk and return represent theefficient frontier, which can bealtered by:
Mixing a risk-free asset into therisky portfolio
Incorporating borrowing into theanalysis
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
231/280
231
Figure 18.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
232/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
233/280
233
Figure 18.4
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
234/280
234
Real Estate
Diversification Strategies
Geographic localepicking localeswhere the real estate cycle is not
highly correlated Product typeincluding a range of
buildings such as apartments,retail, industrial, office
Product-life cycleincluding someproperties that are near the end oftheir life-cycle, some that havereached a stabilized growth path,and others that are in the earlystages of development and growth
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
235/280
235
Investment Feasibility
Analysis
Chapter 19
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
236/280
236
The Nature of the
Feasibility Question
Feasibility analysis attemptsto estimate the probability ofsuccess of a specificproposed course of action
Formal or informal
Early step in investment ordevelopment process
Involves estimating the amountand timing of required cashexpenditures and expected
cash inflows, and anassessment of the degree ofconfidence that attaches to theestimates
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
237/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
238/280
238
Figure 19.1
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
239/280
239
The Nature of the
Feasibility Question
Feasibility analysis problems:
With a predetermined site,investigate alternative uses
With a predetermined use,investigate alternative sites
With predetermined funds,investigate alternativeinvestment opportunities
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
240/280
240
The Nature of the
Feasibility Question
Limitations should beidentified and defined inanalysis
Limits of resources
Values, goals, and objectives
Physical characteristics of sites Society, through ordinances and
regulatory oversight
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
241/280
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
242/280
242
Preliminary FinancialFeasibility
Analysis should be viewed ascontinuous process
To be feasible, project mustbe attractive both to equityinvestors and to mortgage
lenders Preliminary financial feasibility
deals with the thresholdquestions concerning a
proposed venture (solvencytesting)
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
243/280
243
Figure 19.2
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
244/280
244
Figure 19.3
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
245/280
245
Format for a Feasibility
Report
Organization should reflectpurpose; designed to facilitate use.
Common format: Title page
Table of contents
List of tables and exhibits
Executive summary
Scope and limitations
Regional and city analysis
Location and site analysis
Market analysis
Financial analysis and cash flowprojections
Conclusions and recommendations
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
246/280
246
Analyzing Subdivision
Proposals
Chapter 20
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
247/280
247
Overview of the
Subdivision Process
Subdivision ventures grow out ofdevelopers perception of unsatisfied
demand for certain types of buildablesites.
Implement site acquisition strategy
Title acquisition, land planning, landsurvey
Physical improvements follow surveyingprocess
Sale
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
248/280
248
Location Decisions
Subdivision location decisionsmust be responsive to needsof ultimate users
Subdividers also need toconsider current and potentialuses of abutting sites
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
249/280
249
Coping with Regulatory
Requirements
Governmental land use control isexercised through zoning laws and
master land use plans. Small-scale subdividers may limit land
acquisition to appropriately zonedtracts
Large-scale subdividers frequently
develop plans requiring extensiverezoning and government approvals
Municipalities seek to influencelevel of subdivision activity through
control over public utilities Capacity
Special assessments
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
250/280
250
Creating the Subdivision
Plan
Contents of land plans vary withsize of developments
Large-scale plans divide area byspecialized use categories
Modest subdivision plans may simplyplot individual sites and makeprovision for utility easements
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
251/280
251
Financing the Project
Subdividers use land acquisition and
development loans to raise capital
Lenders usually disburse loan proceedson piecemeal basis as improvements arecompleted
Most lenders view subdivision loans asmore risky than construction loans
Subdividers depend upon proceeds formland sales for funds to repay loans
Project marketability is vital
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
252/280
252
Development and
Rehabilitation
Chapter 21
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
253/280
253
Overview of Development
Real estate developmentprojects range in complexityand size
Ventures often originate witha concept for finished urban
space; a perception of unmetdemand
Development project may beinvestors desire to use
previously acquired site (asite in search of an idea)
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
254/280
254
Feasibility Analysis
Two sections of feasibilitystudy:
Market research and attemptsto determine physical andlocation characteristics that willhave the greatest consumer
appeal Economics of proposed project
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
255/280
255
Feasibility Analysis
Steps:
Completion of feasibility study
Market research
Search for site
Estimate costs
Estimate value
Estimate operating expenses
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
256/280
256
Financing Real Estate
Development
Construction lenders
Lender risk reduced byrequiring that developersacquire end-loancommitments
If developer cannot obtain anend-loan commitment prior toarranging a construction loan,standby or gap financing may
be used
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
257/280
257
Construction Phase
Construction projects arecarried out on either a customor speculative basis.
Custom
Speculative
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
258/280
258
Construction Phase
Construction companiesexpand and contract size inresponse to economicconditions and differences inscale of projects
General contractors Subcontract tasks
Contract with user; Generalcontractors contract with
subcontractors General contractors coordinate
work and oversees progress
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
259/280
259
Overview of
Rehabilitation
Begins with existing structuresin need of extensiverenovation
Takes deteriorated orfunctionally obsolete buildingand improves its physical
condition or brings it up tomodern design standards
Gentrification impetus for muchrehabilitation activity
Prime areas seem to be olderinner-city neighborhoods withconvenient transportation links
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
260/280
260
Incentive for
Rehabilitation
Profit expectations
Tax legislation rewards
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
261/280
261
Judging Feasibility of
Rehabilitation Proposals
Analysis of rehabilitationproposals
Cost estimates Subtracting all costs and
expected profit from estimatedvalue as completed leaves the
amount available for purchaseof property
If property can be purchasedfor less, project is feasible; if
cost is greater, project notfeasible
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
262/280
262
Industrial Property, OfficeBuilding and Shopping
Center Analysis
Chapter 22
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
263/280
263
Investing in Industrial
Buildings
Industrial buildings have theadvantages of reliable, credit-worthy tenants, long-termleases, and opportunities toshift many operatingexpenses to tenants
Business operators, short oncapital, prefer to channelresources into business
expansion rather than realestate ownership
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
264/280
264
Demand for Industrial
Space
Largely a function of demandfor products produced by
industrial sector Periodic shifts in demand for
industrial space of varioustypes and in different
locations reflect alterations incomposition of the industrialsector Growth in service and
technology Decrease for products of heavy
industry
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
265/280
265
Locations Factors
Near fuel or power supply
Near markets
Footlose Industries
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
266/280
266
Types of Industrial
Buildings
No official classificationsystem for industrial buildings.Can be characterized bynature of buildings
construction or type of tenantit attracts:
Heavy industrial buildings
Loft buildings
Modern one-story structures
Incubator Buildings
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
267/280
267
Investing in Office
Buildings
Dramatic growth in service sector hasincreased demand
Demand for office space is a deriveddemandrelated to demand for servicessupplied by occupants of office buildings
Unlike owner-owned office buildings,investor-owned buildings tend to be more
functional and less luxurious Multi-year leases
Options to renew on occupied space
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
268/280
268
Investing in Shopping
Centers
Investors and developershave long provided favorablelease terms to anchortenantsmajor stores thatattract customers
Recently, developers haveallowed major tenants toconstruct their own buildings
on sites leased from owners
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
269/280
269
Lease Arrangement in
Shopping Centers
Owners set base rental rate andincrease rental rates as tenants
sales volume increases(percentage clause)
Large shopping center tenantstypically lease space on net basis,
paying all expenses associatedwith operation of their space;smaller tenants often pay ownutility expenses
Shopping center tenants often paycommon area maintenance fee
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
270/280
270
Types of Shopping
Centers
Neighborhood shoppingcenters
Community shopping centers
Regional shopping malls
Super regional shopping malls
Lifestyle centers
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
271/280
271
Real Estate Investment
Trusts
Chapter 23
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
272/280
272
REIT Regulations
REITS are organized ascorporations or trusts; eachREIT is chartered in the statein which it is headquarteredand is subject to regulationsand statutes of that state
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
273/280
273
REIT Regulations
REITS are subject toprovisions of IRS code, whichspecify minimum conditionsunder which they will begranted the special incometax status to which they owetheir popularity with investors
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
274/280
274
REIT Regulations--IRS
Shares must be held by at least 100persons, and five or fewer shareholderscannot own 50 percent or more of theshares during the last half of any taxyear
REIT must be a passive investor ratherthan active participant in propertyoperations
At least 75 percent of assets mustconsist of real estate, mortgage notes,cash, cash items, or governmentsecurities, and at least 75 percent ofgross income must come from rents,
mortgage investment income, and gainson the sale of real estate
At least 90 percent ofordinary incomemust be distributed to shareholders
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
275/280
275
REIT Ownership
Shareholders have approximatelysame rights as stockholders in
any other corporation Shareholders elect trustees or
directors to conduct REITinvestment and businessactivities
Trustees and directors hiremanagers to conduct generalaffairs
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
276/280
276
REIT Management
Some REITs hire internalmanagers, or external advisors
Advisors may select propertymanagers to oversee operationof rental property
North American Securities
Administrators Association, in aStatement of Policy on RealEstate Investment Trusts thatwas adopted April 28, 1981,provides guidelines for setting
advisory fees
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
277/280
277
REIT Assets
Equities accounted forapproximately 72 percent of total
REIT assets in 2001; mortgageloans accounted for about 11percent; balance held as cash ormiscellaneous other assets
Equity REITs invest primarily inreal estate equities; mortgageREITs invest primarily inmortgage secured loans; hybrid
REITs favor a balance betweenequities and mortgage loans
-
7/29/2019 Fin. 355 - All Chapters - Has Adobe - WLB Modified
278/280
278
REIT as Investment
Vehicles
Shareholders benefit from:
Limited liability
Centralized management Continuity of entity life