lecture 1: introduction to real estate finance
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Lecture 1: Introduction to Real Estate Finance. by James R. DeLisle, Ph.D. January 5, 2010. Lecture Overview. Course Organization Critical Thinking The Economic Problem: an Example in Critical Thinking Other Real Estate Trends/Issues Real Estate Process Review. Course Overview. - PowerPoint PPT PresentationTRANSCRIPT
Real Estate Finance
© JR DeLisle, Ph. D.
Lecture 1: Introduction to Real Estate Finance
byJames R. DeLisle, Ph.D.
January 5, 2010
Real Estate Finance
© JR DeLisle, Ph. D.
Lecture Overview
• Course Organization• Critical Thinking• The Economic Problem: an Example in Critical Thinking• Other Real Estate Trends/Issues
• Real Estate Process Review
Real Estate Finance
© JR DeLisle, Ph. D.
Course Overview
• Course Background– Course Objectives– Timetable– Computer and Technology Requirements– Grading Strategy and Policy– Project Decision: Rationale and Alternatives
• Organization of Real Estate Finance 2010– Part 1: Residential Finance– Part 2: Commercial Property Finance– Part 3: Capital Markets– Part 4: Institutional Finance
Real Estate Finance
© JR DeLisle, Ph. D.
Course Objectives
• Foster Creative thinking and Problem-solving– Helping students Systematically think about financial decisions related to real estate– Develop ability to model a variety of financial decisions
• Develop Understanding of Real Estate Financial Markets– Market fundamentals: products and processes– Market Decision-making: players and market drivers– Residential Finance & Income Property Finance– Construction and Development Finance
• Cultivate Appreciation for Capital Markets– Sources and Uses of Capital– Capital Flows to Real Estate– Private Market– Public Market
• Develop Individual and Team-based Problem solving skills– Emerging Trends: class discussion of emerging issues and trends– Financial modeling: team-based modeling and application of appropriate tools
• Excel Modeling• Argus Decision-support
Real Estate Finance
© JR DeLisle, Ph. D.
Finance and Investments Text
• Hard Copy– Brueggeman and Fisher, Real Estate Finance and Investments,
13th Edition, Irwin, (2008)• On-line Resources
– General Resources• Excel Spreadsheet with selected examples from Chapter problems.• Argus Data Files & Argus Free Trial Link
– Chapter Resources• New Articles and Weblinks. A listing of Internet resources• Quizzes. A series of 10 questions per chapter with automatic
grading.• PowerPoint Presentations.
Real Estate Finance
© JR DeLisle, Ph. D.
Supplemental Materials
• Cases and Review material from Real Estate Process– Time Value of Money & Primer on Mathematics of Real Estate Finance,” (DeLisle)– Case 1: Building Envelope– Case 2: Total Replacement Cost– Case 3: Frontdoor/Backdoor Analysis– Case 4: Alternative Use Analysis– Case 5: Discounted Cash Flow
• Problems in Real Estate Finance (hyperlinked files)– Problem Set 1: Basic Time Value of Money– Problem Set 2: Basic Mortgage Finance– Problem Set 3: Intermediate Mortgage Finance– Problem Set 4: Basic Corporate Real Estate Decisions
• Argus Guides/Portfolio Case Studies– A Guide to Argus– Case Study in Argus
• Glossary of Real Estate Finance Terms
Real Estate Finance
© JR DeLisle, Ph. D.
Course Organization: Grading Policy
• Grading Philosophy– Basis: curved– Emphasis: achievement vs. process/speed
• Metrics– 4 Multiple Choice/Matching Quizzes & calculated quizzes on fundamentals of real estate
finance– 2 Mortgage Spreadsheet Modeling: fixed rate and variable rate mortgages– 2 DCF Modeling: Enhancement to Excel model with rent roll, partnerships and portfolio
integration– 2 Argus Cases. Argus Model for an individual project and a portfolio project.– 1 Final Exam. Individual paper in which students explore a contemporary issue in real
estate finance
• Grading Components– Quizzes 4 24%– Financial Modeling: Mortgages 2 20%– DCF Modeling 2 30%– Argus/Portfolio Decision Support 2 20%– Final Exam 1 10%– Class Participation and Forum 6%
Real Estate Finance
© JR DeLisle, Ph. D.
Course Objectives
• Develop a conceptual understanding of:– Real estate market at the macro and micro levels,– Linkages between the spatial and capital markets,– Integration of property, asset and portfolio management, and– Roles, drivers, and decision-making processes of major classes of space users,
producers, and investors.• Cultivate an appreciation for:
– Sustainable development, operation, transaction and investment, and– Integrate related disciplines to support real estate decision-making with the
appropriate breadth and depth of inquiry.• Be able to make decisions drawing on:
– Industry best practices, academic and theoretical concepts, and an– Understanding of basic technical and analytical tools.
Real Estate Finance
© JR DeLisle, Ph. D.
How we Got Where we Are?
Real Estate Finance
© JR DeLisle, Ph. D.
Critical Thinking
Real Estate Finance
© JR DeLisle, Ph. D.
Feasibility Analysis: Critical Problem Solving
Real Estate Finance
© JR DeLisle, Ph. D.
Legal Elements of Real Estate
Real Estate Process
© JR DeLisle, Ph. D.Legal Description: Irregular Shapes
Real Estate Process
© JR DeLisle, Ph. D.Legal Description by Metes & Bounds
N 0o0” E100’
ThenceS 0o0: 120’
ThenceE 0o0: 140’Thence to
POB
Marker
Real Estate Finance
© JR DeLisle, Ph. D.
Players and Perspectives
Space Producers
Space Consumers
Infrastructure Providers
Linkages
Environment
Static
S…. E….. L ….
Real Estate Process
© JR DeLisle, Ph. D.Which Market Segments?
Upscale City Singles
Major Market Core
Metro Fringes
Second City Leaders
Affluent Suburbia
AnomolousLifestyles
Real Estate Process
© JR DeLisle, Ph. D.Interdisciplinary Spectrum: A Life Cycle Approach
Time
$
Portfolio Mgmt.Asset Mgmt.LeasingTenant ImprovementsTenant RelationsProperty Mgmt.Accounting/ReportingEngineeringFinancial Mgmt.
Construction Mgmt.Quality ControlsProject Mgmt.Architectural OversightCost Mgmt.Construction FinancingInspectionsPre-leasingReleasesFinal Inspection
orSourcing if Existing
FeasibilityMarketabilityAppraisalEngineeringArchitecturalEnvironmentalLegalCost EstimationNegotiations
Hold/Sell AnalysisMarketingValuationBuyer SelectionBroker ManagementNegotiationsClosing
Planning Acquisition/Production
Operation
Disposition/Redevelop
Real Estate Finance
© JR DeLisle, Ph. D.
Land Use Controls
Real Estate Process
© JR DeLisle, Ph. D.Land Use Controls: Taking vs. Police Power
Land Use Controls
Eminent Domain
LUC
Taking
Partial Taking
Public Good vs. Private Loss
Safety, health & welfare
Real Estate Process
© JR DeLisle, Ph. D.Building Envelopes: A Modular Approach
• Site Size
• Lot Coverage Ratio (LCR)
• Height Restrictions
• Parking Requirements– Parking Index– SF/Stall
• Floor Area Ratio (FAR)
Real Estate Finance
© JR DeLisle, Ph. D.
Parcel Research
Real Estate Finance
© JR DeLisle, Ph. D.
TRCm
Real Estate Finance
© JR DeLisle, Ph. D.
Money-Time Dimension of Real Estate Value
Real Estate Process
© JR DeLisle, Ph. D.Backdoor Model: Reverse Engineered
Land
Hard & Soft Costs
TRCj
Value
Income
/ Rate
* NIRGross Income
Market
RCR=Budget to Real Estate
Real Estate Process
© JR DeLisle, Ph. D.Frontdoor Model: Sequence
Land
Hard & Soft Costs
TRCm
Value
Income
* Rate
/ NIR
Gross Income
Real Estate Finance
© JR DeLisle, Ph. D.
Frontdoor Model
Real Estate Process
© JR DeLisle, Ph. D.Frontdoor Model: Sequence
Land
Hard & Soft Costs
TRCm
Value
Income
* Rate
/ NIR
Gross Income
Real Estate Finance
© JR DeLisle, Ph. D.
Backdoor Model
Real Estate Process
© JR DeLisle, Ph. D.Backdoor Model: Reverse Engineered
Land
Hard & Soft Costs
TRCj
Value
Income
/ Rate
* NIRGross Income
Market
RCR=Budget to Real Estate
Real Estate Finance
© JR DeLisle, Ph. D.
Social Responsibility
Irretrievable CommitmentOf Scarce Resources
Real Estate Finance
© JR DeLisle, Ph. D.
Appraisal Objective and Process
Real Estate Finance
© JR DeLisle, Ph. D.
Appraisal Theory and Application
Real Estate Finance
© JR DeLisle, Ph. D.
Market Analysis
Real Estate Finance
© JR DeLisle, Ph. D.
Market Segmentation & Product Stratification
Real Estate Finance
© JR DeLisle, Ph. D.
Alternative Uses
Real Estate Finance
© JR DeLisle, Ph. D.
H&B Use and Most Fitting Use
Real Estate Finance
© JR DeLisle, Ph. D.
TMV
Real Estate Finance
© JR DeLisle, Ph. D.
Risk Management
Real Estate Finance
© JR DeLisle, Ph. D.
Mortgage Cycle
Real Estate Process
© JR DeLisle, Ph. D.Mortgage Life Cycle Management
Planning/Application
Acquisition
Operation
Disposition
Mortgagee’s Concerns• Probability of Default• Severity of Default
Real Estate Process
© JR DeLisle, Ph. D.
Mortgage Risks: Acquisition Stage
• Borrower Underwriting– Will to pay– Ability to pay
• Property & Value– Due Diligence: collateral integrity, quality and quantity– Appraisal: value of underlying asset
• Claim– Collateral Commitment: clear title, deed, – Priority of Claim; no intervening liens, recording– Title Assurance/Insurance
Planning/Application
Acquisition
Operation
Disposition
Real Estate Process
© JR DeLisle, Ph. D.Mortgage Risks: Operation Stage
• Administration– Loan Processing: collection, posting, record-keeping– Loan Servicing: disperse payments of taxes, insurance
• Property– Periodic Inspection: property maintained– covenants honored
• Borrower– Additional Encumbrances– Liens; restriction, disclosure
Planning/Application
Acquisition
Operation
Disposition
Real Estate Process
© JR DeLisle, Ph. D.
Mortgage Risks: Disposition Stage
• Timing– Duration: actual term vs. contract term– Prepayment Penalties: yield maintenance
• Transfer– Loan assumption: timing, risk– Borrower substitution
• Foreclosure– Monitor– manage and pursue/protect claims
Planning/Application
Acquisition
Operation
Disposition
Real Estate Finance
© JR DeLisle, Ph. D.
Mortgage Loans
Real Estate Finance
© JR DeLisle, Ph. D.Traditional Mortgage Amortization Patterns
Real Estate Finance
© JR DeLisle, Ph. D.Traditional Mortgage Assumptions
PP* LV
Pi
PMT
INT PRIN
Interest vs. Principal Share of Payments
0%
20%
40%
60%
80%
100%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Term
Tota
l Pay
men
t
INT vs. PRIN Total Payment
Amortization Schedule
$0
$50,000
$100,000
$150,000
$200,000
$250,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Time
Dol
lars
Principal Balance
Amortization Schedule
$0
$50,000
$100,000
$150,000
$200,000
$250,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Time
Dol
lars
Principal Balance Total Payment Interest
Real Estate Finance
© JR DeLisle, Ph. D.
DCF
Real Estate Finance
© JR DeLisle, Ph. D.
Leases as Risk Management
Real Estate Finance
© JR DeLisle, Ph. D.
Capital Market
Real Estate Finance
© JR DeLisle, Ph. D.
REITs and CMBS
Real Estate Finance
© JR DeLisle, Ph. D.
Portfolio Management
Real Estate Finance
© JR DeLisle, Ph. D.
Development
Real Estate Finance
© JR DeLisle, Ph. D.
Timetable: Part 1Timetable as of 1/5/2010
Wk Date Topic Chapter Readings/Cases Quizzes/Projects Out Problem Sets/Due Dates
1 1/5 Course Overview and Process Review
Ch 1: RE Finance Overview
DeLisle, No Bottom, No NetGraaskamp, Finance Educ. & Risk Management
Review Cases: located inMoodle Process Review
1/7 Capital Markets & Real Estate
Ch 2: Money, Credit and Rates; Ch 3: Finance Theory & RE
2010 Emerging Trends; DeLisle: RE Asset Class or Sector?
Prob Set1: Basic Time Value of Money
2 1/12 Financing Notes & Mortgages
Ch 4: History of Res Finance; Ch 5: Postwar Residential Finance
DeLisle, Primer 1: Res. Mortgage pgs 1-48.
Mortgage Project 1 Base Mtgs. Out; Quiz 1 Out
1/14 Residential Mortgage Loans
Ch 6: Alternative Mortgages
DeLisle: Primer 1: Alt Mortgages pgs 48-72.
Prob Set 2: Intro to Mortgage FinanceMortgage Project 1 Due
3 1/19 Residential Finance; Housing Affordability
Ch 7: Financing and Property Value; Ch 8-9 Federal Housing
DeLisle, Housing Affordability Cost Study
Quiz 2 OutProject 2 Alt Mtgs. Out
Prob Set 3: Intermediate Mtg Fin; Quiz 1: Due
1/21 Underwriting Residential Property
Ch 13: Loan Orig; Ch 14: Mortgage Ins, Title Insurance
4 1/26 Discounted Cash Flow;Investment Analysis
Ch 19: Perm Financing Case 1: FD/BD AnalysisCase 2: DCF Analysis DCF Enhanced
Mortgage Project 2 Due
1/28 Introduction to Income Property & Leases
To be assigned Primer 2: Rent Roll Modeling in Excel
Project 3: DCF Leases Out
Quiz 2: DueProb Set 4: Intro Corp RE
5 2/2 Valuation of Income Property
To be assigned
2/4 Financial Leverage & Alt. Financing
Ch 15 Value, Leverage Prob Set 5: Adv Corp RE
Real Estate Finance
© JR DeLisle, Ph. D.
Timetable: Part 2Wk Date Topic Chapter Readings/Cases Quizzes/Projects
OutProblem Sets/Due Dates
6 2/09 Risk Analysis Ch 12: Controlling Risk;
2/11 Disposition/RenovationCorporate RE Finance
To be assignedQuiz 3: Out Project 3: DCF Leases Due
7 2/16 Financing & Land Development
Ch 18: ADC LoansArgus Model Tutorial
2/18 Real Estate Portfolio Management
Ch 21: RE in a Portfolio Context
DeLisle, “A Holistic RE Portfolio Mgmt.”
8 2/23 To be assigned Primer 3: Argus Project Analysis
Proj. 4: Argus RR-DCF Out
2/25 JVs, Syndications, Partnerships,
Ch 20: Ownership Proj. 5 Argus Portfolio: Out
Project 4: Argus RR-DCF
9 3/02 Public Equity Market
Ch 17: Sources of Funds
Quiz 4: Out
3/04 Secondary Market: Pass-Throughs
Ch 10: Secondary Market
10 3/9 Secondary Market: CMOs, CMBSs
Ch 11: Valuation of RE Securities
Primer 4: Argus Portfolio Analysis
Final Out
3/11 Issues in RE Finance
Ch 22: Liability, Fraud and Ethics.
Project 5 Argus: Due Quiz 3: Due
11 3/15 Finals Week Final Exam Final Due 3/21