bru6169x_fm.qxd
12/30/2003
12:40 PM
Page i
Real Estate
Finance and
Investments
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page ii
The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate
Stephen A. Ross
Franco Modigliani Professor of Finance and
Economics
Sloan School of Management
Massachusetts Institute of Technology
Consulting Editor
Ross, Westerfield, and Jordan
Essentials of Corporate Finance
Fourth Edition
FINANCIAL MANAGEMENT
Smith
The Modern Theory of Corporate
Finance
Second Edition
Adair
Excel Applications for Corporate Finance
First Edition
Benninga and Sarig
Corporate Finance: A Valuation Approach
Block and Hirt
Foundations of Financial Management
Eleventh Edition
Ross, Westerfield, and Jordan
Fundamentals of Corporate Finance
Sixth Edition
White
Financial Analysis with an Electronic
Calculator
Fifth Edition
INVESTMENTS
Brealey and Myers
Principles of Corporate Finance
Seventh Edition
Bodie, Kane, and Marcus
Essentials of Investments
Fifth Edition
Brealey, Myers, and Marcus
Fundamentals of Corporate Finance
Fourth Edition
Bodie, Kane, and Marcus
Investments
Sixth Edition
Brooks
FinGame Online 4.0
Cohen, Zinbarg, and Zeikel
Investment Analysis and Portfolio
Management
Fifth Edition
Bruner
Case Studies in Finance: Managing for
Corporate Value Creation
Fourth Edition
Chew
The New Corporate Finance: Where
Theory Meets Practice
Third Edition
Chew and Gillan
Corporate Governance at the Crossroads:
A Book of Readings
First Edition
DeMello
Cases in Finance
Grinblatt and Titman
Financial Markets and Corporate
Strategy
Second Edition
Helfert
Techniques of Financial Analysis: A Guide
to Value Creation
Eleventh Edition
Higgins
Analysis for Financial Management
Seventh Edition
Kester, Ruback, and Tufano
Case Problems in Finance
Twelfth Edition
Ross, Westerfield, and Jaffe
Corporate Finance
Seventh Edition
Corrado and Jordan
Fundamentals of Investments: Valuation
and Management
Third Edition
Farrell
Portfolio Management: Theory and
Applications
Second Edition
Hirt and Block
Fundamentals of Investment Management
Seventh Edition
FINANCIAL INSTITUTIONS
AND MARKETS
Cornett and Saunders
Fundamentals of Financial Institutions
Management
Rose and Hudgins
Bank Management and Financial Services
Sixth Edition
Rose
Money and Capital Markets: Financial
Institutions and Instruments in a Global
Marketplace
Eighth Edition
Santomero and Babbel
Financial Markets, Instruments, and
Institutions
Second Edition
Saunders and Cornett
Financial Institutions Management:
A Risk Management Approach
Fourth Edition
Saunders and Cornett
Financial Markets and Institutions:
A Modern Perspective
Second Edition
INTERNATIONAL FINANCE
Beim and Calomiris
Emerging Financial Markets
Eun and Resnick
International Financial Management
Third Edition
Levich
International Financial Markets: Prices
and Policies
Second Edition
REAL ESTATE
Brueggeman and Fisher
Real Estate Finance and Investments
Twelfth Edition
Corgel, Ling, and Smith
Real Estate Perspectives: An Introduction
to Real Estate
Fourth Edition
Ling and Archer
Real Estate Principles: A Value Approach
First Edition
FINANCIAL PLANNING
AND INSURANCE
Allen, Melone, Rosenbloom, and Mahoney
Pension Planning: Pension,
Profit-Sharing, and Other Deferred
Compensation Plans
Ninth Edition
Crawford
Life and Health Insurance Law
Eighth Edition (LOMA)
Harrington and Niehaus
Risk Management and Insurance
Second Edition
Hirsch
Casualty Claim Practice
Sixth Edition
Kapoor, Dlabay, and Hughes
Personal Finance
Seventh Edition
Williams, Smith, and Young
Risk Management and Insurance
Eighth Edition
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page iii
Real Estate
Finance and
Investments
Twelfth Edition
William B. Brueggeman,
Ph.D.
Corrigan Chair in Real Estate
Edwin L. Cox School of Business
Southern Methodist University
Jeffrey D. Fisher, Ph.D.
Charles H. and Barbara F. Dunn Professor
of Real Estate
Kelley School of Business
Indiana University
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page iv
REAL ESTATE FINANCE & INVESTMENTS
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020.
Copyright © 2005, 2002, 1997, 1993, 1989, 1981, 1977, 1973, 1969, 1965, 1961, 1954 by The McGraw-Hill Companies, Inc. All rights
reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system,
without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic
storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 CCW/CCW 0 9 8 7 6 5 4
ISBN 0-07-286169-X
Vice president and editor-in-chief: Robin J. Zwettler
Publisher: Stephen M. Patterson
Editorial assistant: Meghan Grosscup
Executive marketing manager: Rhonda Seelinger
Lead producer, Media technology: Kai Chiang
Project manager: Susanne Riedell
Senior production supervisor: Michael R. McCormick
Design coordinator: Mary E. Kazak
Lead supplement producer: Becky Szura
Senior digital content specialist: Brian Nacik
Cover design and photo: Jon Resh/Viper Press
Typeface: 10/12 Times Roman
Compositor: GAC Indianapolis
Printer: Courier Westford
Library of Congress Cataloging-in-Publication Data
Brueggeman, William B.
Real estate finance and investments / William B. Brueggeman, Jeffrey D. Fisher.
p. cm.— (The McGraw-Hill/Irwin series in finance, insurance, and real estate)
Includes index.
ISBN 0-07-365809-X (alk. paper)
1. Mortgage loans—United States. 2. Real property—United States—Finance. I. Fisher,
Jeffrey D. II. Title. III. Series.
HG2040.5.U5 B78 2002
332.7'2—dc21
www.mhhe.com
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page v
Preface
Interest in real estate has increased dramatically in recent years as the various ways of investing in and financing real estate continue to evolve. There are a myriad of alternative
ways of making equity investments in real estate, ranging from purchasing properties like an
apartment building, either as an individual or in a partnership, to investing in publicly traded
companies called real estate investment trusts (REITs) that develop and own hundreds of
apartment properties throughout the nation. Investments can also be made in mortgages used
to finance real estate, ranging from making a mortgage loan (as a lender) or purchasing a
publicly traded mortgage-backed security (residential or commercial). This book prepares
readers to understand the risks and rewards associated with these various ways of investing
and financing both residential and commercial real estate. These concepts and techniques
are important for all careers related to real estate, such as investing, financing, appraising,
consulting, managing real estate portfolios, leasing, managing property, analyzing site location, and managing corporate real estate. It is also applicable for those who just want to better understand real estate for their own personal investment and financing decisions.
Excel Spreadsheets and ARGUS Software—NEW Student CD
The book is rigorous yet practical and blends theory with application to real world problems illustrated through the use of a financial calculator, Excel spreadsheets, and software
designed to analyze real estate income property. A CD that accompanies this edition of the
book contains Excel spreadsheets that are provided to assist students in their understanding
of many of the chapter examples and exhibits displayed throughout the text. Students can
modify these spreadsheets to solve many of the end-of-chapter problems. In this way, students do not have to design spreadsheets to solve each problem set.
A trial version of the ARGUS software is also included on the CD. ARGUS is a Windowsbased program that is widely used throughout the real estate investment industry to solve
complex lease-by-lease investment and valuation problems. Examples containing leases are
included in several problems in various chapters. Data files have been replicated so that these
examples may be modified to accommodate homework problems at the end of chapters.
Internet Tools and Assets
Making informed real estate investment and financing decisions depends on being able to
get useful information on national and local market trends, interest rates, available investment and financing alternatives, and opinions from experts about the outlook for various
real estate sectors. The evolution of the Internet has provided a rich source of information
to real estate investors and lenders, and knowing how to find information on the web is an
important part of the “due diligence” that should be done before making a real estate investment, investing in a real estate–related company, or even just purchasing and financing
a home.
New to this edition are Web App boxes that provide examples of finding relevant information on the Internet related to the chapter material. The Web App boxes provide practical examples of the types of data and other resources that are available on the internet used
by real estate lenders and investors. This also provides a way for readers to stay current on
many of the topics discussed in the book.
Also new to the twelfth edition are URLs that students can use to research various topics in the real estate discipline. Look for these at the end of each chapter.
v
bru6169x_fm.qxd
vi
12/30/2003
12:40 PM
Page vi
Preface
McGraw-Hill/Irwin has a new Internet resource called Real Estate Online. Real Estate
Online lets you stay current and expand your knowledge about the real estate field through
online discussion questions, articles, and exercises. Access to this and other student/instructor’s resources, including a new online quiz feature, is available at www.mhhe.com/bf12e.
Plan of the Twelfth Edition
This edition is organized in five major sections:
Part I introduces real estate investment and financing by reviewing important legal concepts related to ownership rights and real estate notes and mortgages. The importance of the
interest factor in financing is also reviewed. Many students will have been exposed to this
material in other courses; however, this chapter provides a framework for many of the applications that are specifically applied to real estate throughout the book.
Part II of this edition focuses on the financing of residential properties. It includes the
various types of mortgages and ways to analyze financing alternatives. A new chapter,
Chapter 7, has been added in this edition that evaluates single family housing as an investment. This chapter discusses factors that affect the demand for housing and discusses how
to analyze whether a residence should be rented or owned based on market rents, tax considerations, expected price appreciation, and other factors.
Part III turns to investment analysis and financing of income properties, including the
importance of leases, valuation of income properties, various financing alternatives, risk
analysis, and disposition decisions. The role of real estate for corporations not in the real
estate business who must make lease versus own decisions is also discussed. Excel spreadsheets, as well as the ARGUS software, are integrated throughout this section of the text.
Part IV discusses the analysis of construction and land development projects. These projects differ from the analysis of existing projects in previous chapters due to the additional
risk introduced by the development process. These risks and expected returns are discussed
for both lenders and investors. This includes understanding how construction and land development loans are structured, including how the developer receives advances, or “draws,”
during development and how they are repaid.
Part V discusses alternative real estate investment vehicles such as partnerships, joint
ventures, residential and commercial mortgage backed securities (CMBS), and real estate
investment trusts (REITs). This allows readers to see all the different ways that investments
can be made in real estate aside from simply buying a property. Readers will also see how
“derivatives” can be created using real estate (or mortgages on real estate) as collateral. The
last chapter considers the importance of real estate in a diversified investment portfolio that
includes stocks and bonds. This provides readers with an understanding of how portfolio
managers and institutional investors view real estate.
Supplements
Several ancillary materials are available for instructor use. These include:
• Instructor’s Manual—developed by Jeffrey Fisher and William Brueggeman.
• Test Bank—developed by Jeffrey Fisher and William Brueggeman.
• PowerPoint slides—developed by Tom Epperson, Auburn University.
Acknowledgements
We would like to thank several people who contributed to the twelfth edition revision. We
thank the following reviewers for their valuable input:
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page vii
Preface vii
•
•
•
•
•
•
Macus Allen, Florida Atlantic University.
David Downs, University of Georgia.
Karl Guntermann, Arizona State University.
Theron Nelson, University of North Dakota.
Rosemarie Ottomanelli, New York University.
Shiawee Yang, Northeastern University.
In addition, we are grateful to Robert Martin, MAI, who helped prepare the ARGUS examples used in the book. Ron Donohue with the Homer Hoyt Institute helped revise the
chapter on Real Estate Investment Trusts. Charles Johnson and Aaron Temple helped with
the web references. Jacey Leonard helped prepare the Excel templates. Mary Zotos and Jill
Taylor helped in the preparation and submission of the manuscript.
Our thanks to the book team at McGraw-Hill/Irwin for their help in developing the new
edition: Steve Patterson, Publisher; Meghan Grosscup, Editorial Assistant; Rhonda
Seelinger, Marketing Manager; Kai Chiang, Media Producer; Susanne Riedell, Project
Manager; Michael McCormick, Production Supervisor; Mary Kazak, Designer; and Becky
Szura, Supplement Producer.
We also continue to be indebted to people who have contributed to previous editions, especially the late Henry E. Hoagland, who wrote the first edition of this book and Leo D.
Stone, who participated in several editions. Finally, we thank all of the adopters of the previous editions of the book who, based on their feedback, have made us feel that we have
helped them prepare students for a career in real estate.
William B. Brueggeman
Jeffrey D. Fisher
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page viii
Brief Contents
Preface 000
12 Financial Leverage and Financing
Alternatives 000
PART ONE
13 Risk Analysis
Introduction 000
14 Disposition and Renovation of Income
Properties 000
1 An Introduction to Real Estate Investment:
Legal Concepts 000
2 Financing: Notes and Mortgages
000
3 The Interest Factor in Financing
000
000
15 Financing Corporate Real Estate
000
PART FOUR
Financing Proposed Projects 000
PART TWO
16 Financing Project Development
Financing Residential Properties 000
4 Fixed Rate Mortgage Loans
17 Financing Land Development
Projects 000
000
5 Adjustable Rate and Variable Payment
Mortgages 000
PART FIVE
6 Residential Financial Analysis 000
Alternative Real Estate Investment
Vehicles 000
7 Single Family Housing: Pricing,
Investment, and Tax Considerations
000
8 Underwriting and Financing Residential
Properties 000
PART THREE
Financing Income Properties (Debt and
Equity) 000
9 Introduction to Income-Producing
Properties: Leases and the Market for
Space 000
10 Valuation of Income Properties: Appraisal
and the Market for Capital 000
11 Investment Analysis and Taxation of
Income Properties 000
viii
000
18 Partnerships, Joint Ventures, and
Syndications 000
19 The Secondary Mortgage Market: PassThrough Securities 000
20 The Secondary Mortgage Market: CMOs
and Derivative Securities 000
21 Real Estate Investment Trusts
(REITs) 000
22 Real Estate Investment Performance and
Portfolio Considerations 000
INDEX 000
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page ix
Table of Contents
PART ONE
INTRODUCTION 0
Chapter 1
An Introduction to Real Estate Investments:
Legal Concepts 0
Property Rights and Estates 0
Definition of Estate 0
Classification of Estates 0
Examples of Freehold Estates 0
Estates Not Yet in Possession 0
Leasehold Estates 0
Interests and Easements 00
Assurance of Title 00
The Meaning of Title 00
Deeds 00
Methods of Title Assurance 00
Abstract and Opinion Method 00
The Title Insurance Method 00
Recording Acts 00
Limitations on Property Rights 00
Chapter 2
Financing Notes and Mortgages 00
Notes 00
The Mortgage Instrument 00
Definition of a Mortgage 00
Relationship of a Note to a Mortgage 00
Interests That Can Be Mortgaged 00
Minimum Mortgage Requirements 00
Important Mortgage Clauses 00
Assumption of Mortgage 00
Acquiring Title “Subject to” a Mortgage 00
Property Covered by a Mortgage 00
Junior Mortgages 00
Recording of Mortgages 00
Other Financing Sources 00
Seller Financing 00
Land Constraints 00
Default 00
What Constitutes Default 00
Alternatives to Foreclosure: Workouts 00
Restructuring the Mortgage Loan 00
Transfer of Mortgage to a New Owner 00
Voluntary Conveyance 00
Friendly Foreclosure 00
Prepackaged Bankruptcy 00
Foreclosure 00
Judicial Foreclosure 00
Redemption 00
Sales of Property 00
Effects of Foreclosure on Junior Lienors 00
Deficiency Judgment 00
Taxes in Default 00
Bankruptcy 00
Chapter 7 Liquidation 00
Chapter 11 00
Chapter 13 00
Chapter 3
The Interest Factor in Financing 00
Compound Interest 00
Compound or Future Value 00
Use of Compound Interest Tables 00
Use of Financial Calculators 00
Present Value 00
A Graphic Illustration of Present Value 00
Using Calculators for Finding Present Values 00
Compound or Future Value of an Annuity 00
Use of Compound Interest Factors for Annuities 00
Present Value of an Annuity 00
Use of the Present Value of an Annuity Factors 00
Accumulation of a Future Sum 00
Investments with Single Receipts 00
Determining Yields or Internal Rates of Return on
Investments 00
Yields on Investment Annuities 00
Effective Annual Yields: Extensions 00
Solving for Annual Yields with Partial Periods: An
Extension 00
PART TWO
FINANCING RESIDENTIAL
PROPERTIES 00
Chapter 4
Fixed Rate Mortgage Loans 00
Determinants of Mortgage Interest Rates: A Brief
Overview 00
ix
bru6169x_fm.qxd
x
12/30/2003
12:40 PM
Page x
Table of Contents
The Real Rate of Interest: Underlying
Considerations 00
Interest Rates and Inflation Expectations 00
Interest Rates and Risk 00
A Summary of Factors Important to Mortgage
Pricing 00
Development of Mortgage Payment Patterns 00
Early Mortgage Lending Patterns 00
The Constant Amortization Mortgage Loan (CAM) 00
Fully Amortizing Constant Payment Mortgage Loans
(CPM) 00
Constant Payment and Constant Amortization Loans:
A Comparison 00
Determining Loan Balances 00
Loan Closing Costs and Effective Borrowing Costs: Fully
Amortized Loans 00
Truth-in-Lending Requirements and the Annual
Percentage Rate 00
Loan Fees and Early Repayment: Fully Amortized
Loans 00
Charging Fees to Achieve Yields, or Pricing CPMs 00
Other Loan Patterns 000
Partially Amortizing Constant Payment Loans 000
Zero Amortization or “Interest Only” Loans 000
Increasing Loan Balances, or Negative
Amortization 000
Amortization Schedules and Callable Loans 000
Inflation and Mortgage Pricing Problems 000
Effects on Lenders and Borrowers 000
The Graduated Payment Mortgage (GPM) 000
Reverse Annuity Mortgages (RAMs) 000
Appendix
Graduated Payment Mortgages—Extensions 000
Chapter 5
Adjustable Rate and Variable Payment
Mortgages 000
ARMs and Lender Considerations 000
The Price Level Adjusted Mortgage (PLAM) 000
PLAM: Payment Mechanics 000
ARMs: An Overview 000
ARMs Illustrated 000
Problems Lenders and Borrowers Face with ARMs 000
Risk Premiums, Interest Rate Risk, and Default Risk
on ARMs 000
Expected Yield Relationships and Interest Rate
Risk 000
ARM Payment Mechanics 000
Expected Yields on ARMs: A Comparison 000
Shared Appreciation Mortgages 000
Chapter 6
Residential Financial Analysis 000
Incremental Borrowing Cost 000
Early Repayment 000
Origination Fees 000
Incremental Borrowing Cost versus a Second
Mortgage 000
Relationship between the Incremental Cost and the
Loan-to-Value Ratio 000
Differences in Maturities 000
Loan Refinancing 000
Early Repayment: Loan Refinancing 000
Effective Cost of Refinancing 000
Borrowing the Refinancing Costs 000
Early Loan Repayment: Lender Inducements 000
Market Value of a Loan 000
Effective Cost of Two or More Loans 000
Second Mortgages and Shorter Maturities 000
Effect of Below Market Financing on House
Prices 000
Assuming a Lower Loan Balance 000
Cash Equivalency 000
Cash Equivalency: Smaller Loan Balance 000
Cash Equivalency: Concluding Comments 000
Wraparound Loans 000
Buydown Loans 000
Appendix
After-Tax Effective Interest Rate 000
Chapter 7
Single Family Housing: Pricing, Investment,
and Tax Considerations 000
Overview 000
Growth in House Prices 000
Demographics 000
Income and Employment 000
Renting versus Owning 000
Supply Overview 000
The Influence of Neighborhoods/Municipalities 000
Capitalization Effects: Price Premiums 000
Pricing Property: Appraisals 000
Chapter 8
Underwriting and Financing Residential
Properties 000
Underwriting Default Risk 000
Classification of Mortgage Loans 000
Conventional Mortgage Loans 000
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page xi
Table of Contents
Insured Conventional Mortgage Loans 000
FHA Insured Mortgage Loans 000
VA Guaranteed Mortgage Loans 000
The Underwriting Process 000
Borrower Income 000
Verification of Borrower Assets 000
Assessment of Credit History 000
Estimated Housing Expense 000
Other Obligations 000
Compensating Factors 000
The Underwriting Process Illustrated 000
Underwriting Standards—Conventional and Insured
Conventional Mortgages 000
Underwriting Standards—FHA Insured Mortgages 000
Underwriting Standards—VA Guaranteed
Mortgages 000
Underwriting and Loan Amounts—A Summary 000
The Closing Process 000
Fees and Expenses 000
Prorations, Escrow Costs, and Payments to Third
Parties 000
Statutory Costs 000
Requirements under the Real Estate Settlement and
Procedures Act (RESPA) 000
Settlement Costs Illustrated 000
Federal Truth-in-Lending (FTL) Requirements 000
Truth-in-Lending Sample Disclosure 000
Establishing the APR under Federal th-in-Lending
Requirements 000
ARMs and Truth-in-Lending Disclosure 000
PART THREE
FINANCING INCOME PROPERTIES
(DEBT AND EQUITY) 000
Chapter 9
Introduction to Income-Producing
Properties: Leases and the Market for
Space 000
Property Types 000
Regional Economic Influences on Property
Values 000
Analogy with the Law of Comparative Advantage 000
Economic Base Analysis—Location Quotients 000
Supply and Demand Analysis 000
Local Market Studies of Supply and Demand 000
Location and user-Tenants 000
The Business of Real Estate 000
The “Market” for Income-Producing Real Estate 000
xi
Leases 000
General Lease Terms for Specific Property Types 000
Financial Contents of Leases 000
Effective Rents 000
Income Potential—Real Estate Assets 000
Vacancy 000
Chapter 10
Valuation of Income Properties: Appraisal
and the Market for Capital 000
Valuation Fundamentals 000
Appraisal Process and Approaches to Valuation 000
Sales Comparison Approach 000
Income Capitalization Approach 000
Capitalization Rate 000
Direct Capitalization—A Note of Caution 000
Discounted Present Value Techniques 000
Selection of a Discount Rate (r) 000
Using Approximations to Estimate Reversion Values 000
Land Values: Highest and Best Use Analysis 000
Volatility in Land Prices 000
“Highest and Best Use” Analysis 000
Mortgage Equity Capitalization 000
Reconciliation: Sales Comparison and Income
Capitalization Approaches 000
Exploring the Relationships between Changing Market
Conditions, Cap Rates, and Property Values 000
A Closing Note on Cap Rates and Market
Conditions 000
A Word of Caution—Simultaneous Effects of Real
Estate Market Forces and Interest Rates on Property
Values 000
Valuation of a Lease Fee Estate 000
Cost Approach 000
Valuation Case Study—Oakwood Apartments 000
ARGUS Solution 000
Chapter 11
Investment Analysis and Taxation of Income
Property 000
Motivation for Investing 000
Real Estate Market Characteristics and Investment
Strategies 000
“The Real Estate Cycle” 000
Investment Strategies 000
Marketing Investments: Projecting Cash Flows 000
Office Building Example 000
Base Rent 000
CPI Adjustment 000
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page xii
xii Table of Contents
Expense Stops 000
Net Operating Income 000
Expected Outlays for Replacements and Capital
Improvements 000
Estimated Sale Price 000
Introduction to Investment Analysis 000
Internal Rates of Return 000
Present Value 000
ARGUS Solution 000
Introduction to Debt Financing 000
Before-Tax Cash Flow from Sale 000
Summary of Investment Analysis Calculations 000
Taxation of Income-Producing Real Estate 000
Taxable Income from Operation of Real Estate 000
Depreciation Allowances 000
Loan Points 000
Tax Liability and After-Tax Cash Flow 000
Taxable Income from Disposal of Depreciable Real
Property 000
After-Tax Investment Analysis 000
After-Tax Cash Flow from Operations 000
After-Tax Cash Flow from Sale 000
After-Tax IRR 000
Effective Tax Rate 000
A Note about Passive Losses 000
Special Expectations to PAL Rules 000
Chapter 12
Financial Leverage and Financing
Alternatives 000
Introduction to Financial Leverage 000
Conditions for Positive Leverage—Before Tax 000
Conditions for Positive Leverage—After Tax 000
Break-Even Interest Rate 000
Leverage and the Incremental Cost of Debt 000
Risk and Leverage 000
Underwriting Loans on Income Properties 000
Market Study and Appraisal 000
Borrower Financials 000
The Loan-to-Value Ratio 000
The Debt Coverage Ratio 000
Other Loan Terms and Mortgage Covenants 000
Alternatives to Fixed Rate Loan Structures 000
Participation Loans 000
Lender Motivations 000
Investor Motivations 000
Participation Example 000
Sale-Leaseback of the Land 000
Effective Cost of the Sale-Leaseback 000
Interest-Only Loans 000
Accrual Loans 000
Structuring the Payment for a Target Debt Coverage
Ratio 000
Convertible Mortgages 000
Lender’s Yield on Convertible Mortgage 000
Comparison of Financing Alternatives 000
Monument Office Example—ARGUS Solution
with a Loan 000
Chapter 13
Risk Analysis 000
Introduction 000
Comparing Investment Returns 000
Types of Risk 000
Due Diligence in Real Estate Investment Risk
Analysis 000
Sensibility Analysis 000
Partitioning the IRR 000
Variations on Returns and Risk 000
Retail Case Study—Westgate Shopping Center 000
Westgate Shopping Center Scenario Analysis 000
Westgate Shopping Center—ARGUS Analysis 000
Lease Rollover Risk 000
Market Leasing Assumptions with Renewal
Probabilities 000
Market Rent 000
Months Vacant 000
Leasing Commissions 000
Tenant Improvements 000
Industrial Case Study—Worthington Distribution
Center 000
Solution with ARGUS 000
Risk and Leverage 000
A “Real Options” Approach to Investment
Decisions 000
Traditional Approach to Land Valuation 000
Real Option Approach to Land Valuation 000
Real Options Extensions and Strategy 000
Chapter 14
Disposition and Renovation of Income
Properties 000
Disposition Decisions 000
A Decision Rule for Property Disposal 000
IRR for Holding versus Sale of Property 000
Returns to a New Investor 000
Marginal Rate of Return 000
Refinancing as an Alternative to Disposition 000
Incremental Cost of Refinancing 000
Refinancing at a Lower Interest Rate 000
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page xiii
Table of Contents
Renovation as an Alternative to Disposition 000
Renovation and Refinancing 000
Rehabilitation Investment Tax Credits 000
Low-Income Housing 000
Chapter 15
Financing Corporate Real Estate 000
Lease-versus-Own Analysis 000
Leasing versus Owning—An Example 000
Cash Flow from Leasing 000
Cash Flow from Owning 000
Cash Flow from Owning versus Leasing 000
Return from Owning versus Leasing 000
Importance of the Residual Value of Real Estate 000
The Investor’s Perspective 000
A Note on Project Financing 000
Factors Affecting Loan-versus-Lease Decisions 000
The Role of Real Estate in Corporate
Restructuring 000
Sale-Leaseback 000
Refinancing 000
Investing in Real Estate for Diversification 000
Appendix
Real Estate Asset Pricing and Capital Budgeting
Analysis: A Synthesis 000
PART FOUR
FINANCING PROPOSED
PROJECTS 000
Chapter 16
Financing Project Development 000
Introduction 000
Overview: The Planning and Permitting Process 000
The Development of Income-Producing Property 000
Market Risk and Project Feasibility 000
Project Risks 000
Project Development Financing—An Overview 000
Lender Requirements in Financing Project
Development 000
Loan Submission Information for Loan Requests—An
Overview 000
Standby Commitments 000
Contingencies in Lending Commitments 000
The Construction or Interim Loan 000
Methods of Disbursement—Construction Lending 000
Interest Rates and Fees 000
Additional Information for Interim Loan
Submission 000
xiii
Requirements to Close the Interim Loan 000
The Permanent Loan Closing 000
Project Development Illustrated 000
Project Description and Project Costs 000
Market Data and Tenant Mix 000
Pro Forma Construction Costs and Cash Flow
Projections 000
Feasibility, Profitability, and Risk—Additional
Issues 000
Profitability before and after Taxes 000
Sensitivity Analysis, Risk, and Feasibility Analysis 000
Chapter 17
Financing Land Development Projects 000
Characterization of the Land Development
Business 000
The Land Development Process—An Overview 000
Acquisition of Land—Use of the Option Contract 000
Financing and Development 000
Lender Requirements in Financing Land
Development 000
Detailed Cost Breakdowns 000
General Contracts and Subcontracts 000
Residential Land Development Illustrated 000
Market Conditions and Site Plan 000
Estimating Development Cost and Interest Carry 000
Estimating Release Prices per Parcel Sold 000
Loan Request and Repayment Schedule 000
Project Feasibility and Profitability 000
Project IRR and Net Present Value 000
Entrepreneurial Profits 000
Sensitivity Analysis 000
PART FIVE
ALTERNATIVE REAL ESTATE
INVESTMENT VEHICLES 000
Chapter 18
Partnerships, Joint Ventures, and
Syndications 000
Introduction: What Is a Syndicate? 000
Use of the Limited Partnership in Private and Public
Syndicates 000
Private Syndication Problem Illustrated 000
Financial Considerations—Partnership Agreement 000
Operating Projections 000
Statement of Before-Tax Cash Flow (BTCF) 000
Calculation of Net Income or Loss 000
Calculation of Capital Gain from Sale 000
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page xiv
xiv Table of Contents
Capital Accounts 000
Distribution of Cash from Sale of Asset 000
Calculation of After-Tax Cash Flow and ATIRR on
Equity 000
Partnership Allocations and Substantial Economic
Effect 000
Capital Accounts and Gain Charge-Backs 000
Use of the Limited Partnership in Private and Public
Syndication 000
Use of Corporate general Partners 000
Private versus Public Syndication 000
Accredited Investors—Regulation D 000
Regulation of Syndicates 000
Investment Objectives and Policies 000
Promoters’ and Managers’ Compensation 000
Investor Suitability Standards 000
Federal and State Securities Authorities 000
Joint Ventures 000
Chapter 19
The Secondary Mortgage Market:
Pass-Through Securities 000
Introduction 000
Evolution of the Secondary Mortgage Market 000
Early Buyers of Mortgage Loans 000
A Secondary Market after 1954 000
FNMA’s Changing Role 000
Chapter 20
The Secondary Mortgage Market: CMOs
and Derivative Securities 000
Introduction 000
Mortgage Pay-Through Bonds (MPTBs) 000
Collateralized Mortgage Obligations 000
CMOs Illustrated 000
CMO Mechanics 000
CMOs: Pricing and Expected Maturities 000
CMO Price Behavior and Payment Rates 000
CMO Tranche Variations 000
Derivatives Illustrated 000
Yield Enhancement 000
IO and PO Strips 000
Convexity 000
Residential Mortgage-Related Securities:
A Summary 000
Residential Mortgage-Related Securities: Some
Closing Observations 000
Commercial Mortgage-Backed Securities
(CMBSs) 000
Rating Commercial Mortgage-Backed Securities 000
Mortgage-Related Securities and REMICs 000
REMICs: Other Considerations 000
Appendix
Duration—An Additional Consideration in Yield
Management 000
The Government National Mortgage Association 000
Mortgage-Backed Securities and the GNMA Payment
Guarantee 000
The Federal Home Loan Mortgage Corporation 000
Operation of the Secondary Mortgage Market 000
Direct Sale Programs 00
The Development of Mortgage-Related Security
Pools 000
Mortgage-Backed Bonds 000
Pricing Mortgage-Backed Bonds 000
Subsequent Prices 000
Mortgage Pass-Through Securities 000
Important Characteristics of Mortgage Pools 000
Mortgage Pass-Through Securities: A general Approach
to Pricing 000
Mortgage Pass-Through Payment Mechanics
Illustrated 000
Prepayment Patterns and Security Prices 000
Prepayment Assumptions 000
The Effects of Prepayment Illustrated 000
Security Prices and Expected Yields 000
Market Interest Rates and Price Behavior on Mortgage
Pass-Throughs 000
A Note on MBBs and MPTs 000
Chapter 21
Real Estate investment Trusts (REITs) 000
Introduction 000
Legal Requirements 000
Tax Treatment 000
Violation Penalties and Status Termination 000
Taxable REIT Subsidiaries 000
Types of Trusts 000
Equity Trusts 000
The Investment Appeal of Equity Trusts 000
Private REITs 000
Importance of FFO (Funds from Operations) 000
REIT Expansion and Growth 000
Important Issues in Accounting and Financial
Disclosure: Equity REITs 000
Tenant Improvements and Free Rents: Effects
on FFO 000
Leasing Communication and Related Costs 000
Use of Straight-Line Rents 000
FFO and Income from Managing Other Properties 000
Types of mortgage Debt and Other Obligations 000
Existence of Ground leases 000
bru6169x_fm.qxd
12/30/2003
12:40 PM
Page xv
Table of Contents
Lease Renewal Options and REIT Rent Growth 000
Occupancy Numbers: Leased Space or Occupied
Space? 000
Retail REITs and Sales per Square Foot 000
Additional Costs of Being a Public Company 000
The investment Appeal of Mortgage REITs 000
Financial Analysis of an Equity REIT Illustrated 000
Chapter 22
Real Estate Investment Performance and
Portfolio Considerations 000
Introduction 000
The Nature of Real Estate Investment Data 000
Sources of Data Used for Real Estate Performance
Measurement 000
REIT Data: Security Prices 000
Hybrid and Mortgage REITs 000
NCREIF Property Index: Property Values 000
Data Sources for Other Investments 000
Cumulative Investment Return Patterns 000
Computing Holding Period Returns 000
Computing Investment Returns 000
Risk, Return, and Performance Measurement 000
Risk-Adjusted Returns: Basic Elements 000
Elements of Portfolio Theory 000
Calculating Portfolio Returns 000
Portfolio Risk 000
Portfolio Weighting: Trading Off Risk and Return 000
Real Estate Returns, Other Investments, and the
Potential for Portfolio Diversification 000
Portfolio Diversification: EREITs and Other
Investments 000
Public versus Private Real Estate Investments 000
Real Estate Performance and Inflation 000
INDEX 000
xv