Real Estate Finance
Fall 2015
URPL–GP–2639-001
URPL–GP–263-001 (all students must register for the lab/discussion section)
Thursdays, 6:45 – 8:25PM; Lab from 8:35 – 9:35PM
Place: GODD B06
Date of First Session: September 3rd, 2015
Instructors:
Eric Enderlin
Deputy Commissioner, Development
Department of Housing Preservation and Development
100 Gold Street, 9-A1
New York, NY 10038
Email: fee1@nyu.edu
Michael Lear
Vice President, Community Investments
The Community Development Trust
1350 Broadway, Suite 700
New York, NY 10018
Email: mjl410@nyu.edu
Teaching Assistant:
Kevin Schmidt
kevin.schmidt@nyu.edu
Office hours: by appointment. Please email ahead of time to schedule.
Course Objective:
The course will:
1. familiarize students with the key elements of the real estate development
process and the pro forma (cash flow model);
2. enable students to identify and recognize the varied financial and non-financial
objectives of the developers and other players in the real estate
finance/development process;
3. establish a meaningful framework within which real estate developments can
be analyzed from both a quantitative and qualitative perspective.
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Course Description:
The development and redevelopment of urban real estate, especially housing, is
examined from a public policy perspective. Through case studies, students learn
the acquisition and development process and master the basics of project-level
real estate economics. Emphasis is on the financial structure of real estate
ventures, including tax efforts, and how a variety of public policies can influence
private development activity.
Through lectures, case studies, financial modeling, and presentations by
practitioners, students will receive a practical understanding of housing policy,
housing finance, affordable housing finance, and development fundamentals.
The principles taught can be applied to residential and commercial development
throughout the United States.
Students will be introduced to key financial terms and will learn to calculate the
three basic financial rewards generated by successful real estate projects: cash
flow, tax benefits and future benefits (from sale of the property). They will learn to
prepare project budgets, size debt and equity sources, and calculate discounted
cash flow analyses utilizing the Net Present Value and Internal Rate of Return
measures of return methods.
The focus will be both at the macroeconomic and capital markets level as well as
how the issues impact individual project finance. The course will provide
substantial foundation and background for broader study in real estate finance.
Every real estate project, and especially affordable housing projects, has hidden
partners: the federal government and, in New York City, the state and city
government. Although the course is focused on finance and financing
techniques, it will consider the role of the public sector in regulating and creating
incentives for the development and financing of market and affordable multifamily
rental housing in particular.
This course covers a large amount of material in a relatively short period of time.
The lab/discussion section will provide time on a weekly basis to serve as:
1. Spillover time in the event that the additional time is required to cover the
lecture material and review of assignments and case studies.
2. Further discussion of materials from class, or previous classes, as requested
by students.
3. Extra time to cover math/Excel issues, as requested by students.
Prerequisites:
Core-GP 1021: Financial Management for Public, Nonprofit, & Health
Organizations
Core-GP 1018: Microeconomics for Public Management, Planning & Policy
Analysis
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This class will rely heavily on Excel - basic Excel skills are necessary. A preclass excel exercise will be due on the first day of class. Extra help sessions will
be held during the lab period(s) if needed for students who want extra assistance
after this assignment. Students with backgrounds in the basics of finance,
economics and quantitative analysis will have an advantage in mastering course
materials.
Any in-class Excel examples will be posted on the class website - and students
should bring their laptops or tablet computers so they can follow along in class.
Course expectations:
Students must be willing to work with numbers and spreadsheets. Basic algebra
skills will be sufficient for any quantitative work required in the course. Students
will be required to design and use simple spreadsheets once the underlying
concepts and calculation methodologies are understood. By the conclusion of the
course, students will be expected to have acquired the knowledge base and skill
set necessary to analyze and prepare a development pro-forma, a discounted
cash flow property valuation, an analysis of investor returns and a sources and
uses of funds statement.
The distribution and submission of course assignments will be handled through
NYU Classes.
The following filename convention is required:
Lastname_assignmentname.filetype
Course format/Organization:
The course will be a mix of lecture-discussions and case studies. The first
section of the course will be lectures and exercises intended to impart the basic
skills required for effective real estate investment analysis. The second section of
the course is a series of case studies intended to hone and sharpen the students'
practical skills and abilities. There will be regular assignments to reinforce the
concepts introduced in class, a midterm case study project, and a final project
that integrates the skills gained throughout the course.
Active classroom participation by students is required throughout the course and
a substantial component of the course grade.
The real estate finance and development process is extraordinarily complex and
is not a task accomplished by one person alone. Project development generally
requires the effort of several professionals working in concert. Therefore,
students are encouraged to form groups consisting of 3 to 4 people. Students are
encouraged to discuss the readings, study questions and case assignments in
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preparation for each class within these groups. While each student is expected to
individually submit the written assignments, these assignments may be
discussed within the context of the group. The mode and format of these group
sessions (i.e. conference calls, e-mail, meetings, etc.) shall be left to the
discretion of the members.
Notwithstanding anything to the contrary above, each student should individually
prepare all readings, problem sets, written assignments, and case studies prior to
each class.
Grading:
Grades will be determined in accordance with the following criteria:
Class Participation and Attendance
Assignments and Case Studies
Midterm - Angus Cartwright Case Study
End term Negotiation Game
20%
40%
20%
20%
A detailed breakdown of the weightings for specific assignments/cases is below.
Assignment
Weight
Participation/Attendance
20%
Pre-class
2%
HW 1
3%
HW 2
3%
Gilbert
5%
HW 3
5%
Warren
10.0%
Millegan
12.0%
Midterm
20%
End Term Negotiation Game
20%
Total
100.0%
20%
40%
20%
20%
100.0%
All assignments must be submitted on designated due dates by the beginning of
each class period. No extensions will be granted except for University-wide shut
downs. Because we will often review some or all of an assignment on the day it
is due in class, we cannot accept late submissions of assignments. All
assignments must be submitted in order to receive a course grade.
Required Text and Readings
1. Digital course pack, including the HBS case studies and required readings
(https://cb.hbsp.harvard.edu/cbmp/access/38653518).
2. Additional readings and problem sets to be distributed in class through the
course of the semester.
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Attendance:
Attendance and participation are required.
Course Policies:
Responsibility
Students are responsible for all assignments, even if they are absent. Late
papers, failure to complete the readings assigned for class discussion, and lack
of preparedness for in-class discussions and presentations will jeopardize your
successful completion of this course and will be a consideration is grading. Late
submissions of homework and case studies will be reduced a minimum of one
letter grade per day.
Participation
Class participation is an essential part of class and includes: keeping up with
reading, contributing meaningfully to class discussions, active participation in
group work, and coming to class regularly and on time.
NYU Classes
Use of NYU Classes will be an important resource for this class. Students should
check it for announcements before coming to class each week. All materials, for
the primary course, and potentially additional examples that are covered in the
Lab/Discussion section, will be posted to the
Delays
In rare instances, we may be delayed arriving to class. With two instructors, this
is unlikely to occur. However, if we have not arrived by the time class is
scheduled to start, you must wait a minimum of thirty minutes for our arrival. In
the event that we will miss class entirely, a sign will be posted at the classroom
indicating your assignment for the next class meeting.
Student Course Ratings
Later in the semester, students are asked to provide feedback for each of their
courses. Instructors rely on course rating surveys for feedback on the course and
teaching methods, so they can understand what aspects of the class are most
successful in teaching students, and what aspects might be improved or changed
in future. Without this information, it can be difficult for an instructor to reflect
upon and improve teaching methods and course design.
Academic Integrity
Students will comply with NYU’s Academic Integrity Policy, which can be found
here: http://www.nyu.edu/about/policies-guidelines-compliance/policies-andguidelines/academic-integrity-for-students-at-nyu.html
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NYU Wagner’s Academic Code can be found here:
http://wagner.nyu.edu/students/policies/academic-code
Course Outline and Assignment Schedule:
Please note that the course outline and assignment schedule remains subject to
change prior to and during the semester. Any changes will be announced inclass or posted to NYU Classes.
Please note: Readings are to be done in anticipation of the class under which
they are listed.
*******************************************
Pre-class Assignments, due 9/3:
Practice Homeownership Exercise
Practice Excel Assignment
Read Wall Street Journal article: “In One Home, a Mighty City's Rise and Fall”
and answer questions
9/3
Introduction/Course Overview
• Teacher/Student Introductions and Syllabus overview
• Introduction to Real Estate Finance
• Components of a basic pro forma - vocabulary and basics
• Sources of cash flow
• Review of Wall Street Journal article
• Review Homeownership exercise
• Review pre-class assignment
*******************************************
9/10
The Pro Forma
• Building a 10 year pro forma; calculating NOI and value
• Cap rates
• Leverage and amortization of debt
• Capital Stack
• Before Tax Cash Flow
Required Reading:
Financial Analysis of Real Property Investments to middle of pg 12.
DUE: PROBLEM SET 1: Building a 10 year pro-forma
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*******************************************
9/17
After Tax Cash Flow
• Residual values
• Depreciation and tax benefits
• Calculating AFTC
• Key Financial Ratios and Return Metrics
Required Reading:
Financial Analysis of Real Property Investments to end.
The Gilbert Building case study
DUE: PROBLEM SET 2 - Exercise on constructing a debt constant; amortization
table; income approach to value.
*******************************************
9/24
Operating cash flows, tax benefits, and future value
Introduction to Time Value of Money; Discounted Cash Flow Analysis
• Calculating depreciation and book value
• Calculating residual value, gain on sale, and taxes on sale
• Introduction to Present Value and Future Value
• Discount rates
• Net Present Value and Internal Rate of Return
Required Reading:
HBS Intro to Accumulated Value, Present Value and Internal Rate of Return
DUE: Case 1 - The Gilbert Building
*******************************************
10/1
Time Value of Money
Underwriting Operations, Market Research and Demographic Analysis
• NPV and IRR, review
• Comparison with other market conditions, potential investments
• Underwriting practices
• Absorption rates
• Sensitivity analysis
DUE: PROBLEM SET 3 - TVM exercises
Required Reading:
Case 2 - 943-45 Warren Road
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*******************************************
10/8
Acquisition and Zoning for Development
Review of the Warren Road case
Millegan Creek case introduction
DUE: Case 2 - 943-45 Warren Road. We will walk through the Warren Road
Case solution in the lab period.
Required Reading:
Case 3 - Millegan Creek, potential additional readings TBD
*******************************************
10/15
Capital Markets and Motivations of Real Estate Finance Participants
GUEST SPEAKER: Rich Froehlich, New York City Housing Development
Corporation
Millegan Case - answer any questions
Required Reading:
TBD
*******************************************
10/22
Construction and the Development Budget
Introduction to the Midterm Case Study and team assignments
Required Reading: Case 4 - Angus Cartwright Case Study
DUE: Case 3 - Millegan Creek
*******************************************
10/29
The Development Process
GUEST SPEAKER: Ron Schulman, Best Development Group
Any remaining Lecture time and Lab/Discussion to be set aside for groups to
work on the Midterm
*******************************************
11/5
State of the Nation's Housing
The Financial Collapse
Required Reading: TBD
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*******************************************
11/12
Midterm Presentations (in class)
DUE: Midterm Presentations and Materials - Angus Cartwright
*******************************************
11/19
Affordable Housing: Government Interventions in Housing Markets
Required Reading: TBD
*******************************************
11/26
Thanksgiving Recess
*******************************************
12/3
Negotiation Game Introduction
Groups and Roles Assigned, Case Materials Handed Out
*******************************************
12/10
Negotiations continue in class
DUE: Due diligence materials for Negotiation Game
*******************************************
12/17
Negotiations conclude
Winners are announced
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