RES 9776
Real Estate Finance
Spring 2011
M/W 06:00-7:15pm
Room: building 22, 137 East 22nd, Room 203
Code: MW6
Instructor: Professor Ko Wang
Office: C-412, building 22, 137 East 22nd Street
Phone: (646) 660-6930 (Real Estate Department)
(646) 660-6939 (Direct Line)
Fax: (646) 660-6931 (Real Estate Department)
(646) 660-6995 (Direct Line)
E-mail: ko.wang@baruch.cuny.edu
Website: http://faculty.baruch.cuny.edu/kwang/
Office Hours: M/W 7:15 – 8:15 pm, or by appointment
Course Description and Objectives
This course examines selected techniques and issues in the area of real estate finance.
Special emphasis will be placed on the design and valuation of mortgage instruments. Federal
housing policies and institutional details of mortgage policies will not be emphasized. This class
will be conducted using a lecture format. While my lectures will follow the table of contents of the
textbook rather closely, there are times when supplemental readings will be required.
The first 3 weeks of the course review the fundamentals of real estate finance. The next 12
weeks consider in detail three important issues in real estate finance: (1) residential real estate
finance, which includes the valuation of alternative (creative) mortgage securities; (2) commercial
real estate finance, which includes the ownership structure for financing real estate holding and
valuation of mortgage-backed securities; and (3) special topics in real estate finance, which includes
mortgage underwriting, portfolio and agency problems, and secondary markets.
Course Prerequisites
The prerequisite for this class is FIN9770 or equivalent. Students are assumed to have
completed, as a background for the course, an introductory course in finance and in quantitative
analysis. It is important for students to have a clear understanding of the time value of money
concept and knowledge of how to use the spreadsheet before taking this class. Knowing how to
use a calculator to solve present value problems (but without a clear understanding of the
underlying concept) is not sufficient for tackling the course material of this class. In this
class, I will not teach students how to use a (or any) calculator or spreadsheet.
Course Materials:
(C):
(O):
(N):
(F):
"Real Estate Finance: Theory and Practice", 6th edition, by Terrence Clauretie and G. Stacy
Sirmans, 2010.
This book surveys the basic issues in real estate finance and investment, as such, it
serves as a very good reference material for this class. My lectures will not follow the
book very closely and I will rely heavily on my handouts (approximately 50% and
50%). Consequently, examination questions will not come directly from the
textbook. However, I still suggest that students purchase the textbook because it
provides very good back ground information for class discussions.
"Real Estate Investment Trust: Structure, Performance, and Investment Opportunities",
Oxford University Press (New York), 2003, by Su Han Chan, John Erickson, and Ko Wang.
This book provides a systematic and comprehensive look at the REIT Industry, as
such, it serves as a good reference book for students who are interested in pursuing
more on this topic. This is a reference text and is not a required book for this
class.
A package of lecture notes that can be downloaded from my website. This package
contains a rough draft of my lecture notes. I will follow the notes very closely in my
lectures. It is necessary to obtain a password to obtain the files. The web site address is
http://faculty.baruch.cuny.edu/kwang/classes/courses.htm. When you try to download the
files, you will first see a login window. After you see the login window, type the
following:
Enter Password: ********
I will announce the password in the class.
There are a total of 10 sets of lecture notes for this class. They are:
N1: Introduction. PDF
N1: Mortgage Concept. PDF
N2: Development of Mortgage Market. PDF
N3: Alternative Mortgages. PDF
N4: Creative Financing. PDF
N5: Secondary Mortgage Market. PDF
N6: Underwriting and Foreclosure. PDF
N7: Development and Construction Loans. PDF
N8: Capital Decisions. PDF
N9: Real Estate Return and Risk. PDF
N10: REIT Performance. PDF
A package of Excel files:
This package contains the spreadsheet programs I used to derive some of the tables in
my lecture note for this class. Those files are extremely helpful when a student wants
to know the formula behind each calculation. I believe that a detailed study of the files
will help students understand the course materials. Students can also download the
Excel files from my website by following the same procedure described in section
(N).
F1: Time Value of Money. Excel Document
F2: Sinking Fund & Mortgage Constant. Excel Document
2
F3: Mortgage Concept. Excel Document
F4: Monthly Amortization. Excel Document
F5: IRR & MIRR Calculation. Excel Document
F6: Mortgage Amortization & Variations. Excel Document
F7: Adjustable Rate Mortgages. Excel Document
F8: Graduate Payment Mortgage. Excel Document
F9: Price Level Adjustment Mortgage. Excel Document
F10: Reverse Annuity Mortgage. Excel Document
F11: Pledged Account Mortgage. Excel Document
F12: Discount Points. Excel Document
F13: Assumption Loan. Excel Document
F14: Mortgage backed Bond. Excel Document
F15: CMO & IOPO Calculations. Excel Document
F16: Construction & Development Loans. Excel Document
Course Structure and Classroom Procedures
There will be two mid-term exams and one final exam. The mid-term exam will be held
during regular class hours and the final exam will be comprehensive. The exam format will
consist of two components: in-class and take-home. The in-class exam will be a combination of
problems and conceptual questions. The take-home exam will be problems that require intensive
calculations and students are expected to use spreadsheets to solve the problems (see appendix A
for sample questions).
The evaluation of class participation consists of two components: class discussion and
quizzes. There are no specific rules on how to score points for the class discussions. A student's
grade in this category is solely based on the instructor's objective judgement. However, a
meaningful question to the instructor as well as the ability and willingness to answer the
instructor's questions will definitely improve your performance. The quiz, if there is any, will be
very simple. The grade of the quiz will be counted as a part of the Class Participation.
Course Evaluation
Your final grade will be weighted as follows:
Two Mid-Term Exams:
50%, (25% each)
Final Exam:
40%
Class Participation:
10%
The final class grade will be based on a relative frequency distribution (percentile ranking) of the
total points accumulated over the entire semester. This approach implies that your final grade
will be determined by the relative performance of the students in the class, as well as the overall
performance of the entire class. Class participation will play an important role in your final grade
if you are at the borderline between two grades.
3
Course Policies and General Information
1.
2.
3.
4.
5.
Unless otherwise told, you are NOT responsible for ALL the material in a chapter. Pay
attention to my class lectures and use the textbook as a reference. The overhead
transparencies and class handouts contain the important points in this class. For the
exams, use them as a guide to where your studying should be focused.
I will not take class attendance. However, if you miss classes, it will be
EXTREMELY difficult for you to pass the exams. If you miss a lecture, it will take
you a lot of time to catch up.
NO MAKE-UP EXAM will be given. Should you miss an exam without presenting to
me a legitimate reason prior to the exam, you will be assigned a score of zero for the
exam.
Please pay attention to the university's policy on academic dishonesty.
I will allow a student to drop this class as long as the procedure conforms to the university
withdrawal policy.
4
Tentative Class Schedule
==============================================================
Reading
Date
Topic
Assignments
==============================================================
Jan 31
Introductory Remarks
Chp. 1. N1.
Feb 2
Money, Credit, and Interest Rate
Chp. 2. N1.
Review of Financial Table
Feb 7
Same as Above
Appendix 1, Chp. 3.
Feb 9
Mortgage Concepts
N1. F1. F2. F3. F4.
Feb 14
Property Market
Chp. 3, 4. N2. F5.
Feb 16
Fixed Interest Rate Mortgage
Chp. 4. N2. F6
Feb 21
(Campus Closed)
Feb 23
(Practice Exam)
Feb 28
Post-War Finance
Chp. 5. N2.
Mar 2
Alternative Mortgage Instruments
Chp. 6. N3. F7. F8. F9
Mar 7
(Mid-Term Exam I)
Mar 9
Alternative Mortgage Instruments
Chp. 6. N3. F10. F11
Mar 14
Financing and Property Value
Chp. 7. N4. F12. F13
Mar 16
Financing and Property Value
Chp. 7. N4. F12. F13
Mar 21
Mar 23
Financing and Property Value
Chp. 7. N4. F12. F13
Mar 28
Secondary Mortgage Market
Chp. 10. N5. F14
Mar 30
Secondary Mortgage Market
Chp. 10. N5. F14
Apr 4
(Practice Exam)
Apr 6
Valuation of Mortgage Securities
Chp. 11. N5. F15.
Apr 11
Valuation of Mortgage Securities
Chp. 11. N5. F15.
Apr 13
(Mid-Term Exam II)
Apr 17-26
(Campus Closed)
Apr 27
Controlling Default Risk
Chp. 12. N6
May 2
Loan Origination
Chp. 13. N6..
Default & Mortgage Insurance
Chp. 14. N6.
May 4
Development and Construction Loans
Chp. 18. N7. F16.
May 9
Capital Structure and Sources of Funds
Chp. 15,17. N8. N9.
May 11
International Portfolio and Ethics
Chp. 21,22.
May 16
Real Estate Stock Market
Chp. 20. N10.
REIT Book Chp. 1-12.
May 20-27
(Final Exam)
==============================================================
5
Appendix A: Sample Questions
In-class component:
1.
A borrower can obtain a lower first year interest rate (as compared to the first year interest
rate of a standard fixed-rate mortgage) when she/he selects an adjustable rate mortgage.
Why (5 points)? Note: I will only read your first 30 words.
2.
Given the following information:
A. Original Loan Amount = $300,000.
B. Loan Balance at the end of First Year = $296,800.
C. First Year Debt Service = $45,950.
What is the sinking fund factor of the loan? (5 points).
Hint: To answer this question, you need to figure out the principal payment of the first
year. Show your work for partial credit.
3.
Given the following information,
(1) Fixed-rate mortgage,
(2) Annual interest rate = 12%,
(3) Monthly payment, (or monthly interest rate = 1%),
(4) Amortization period = 30 years (or 360 months),
(5) Original loan amount = $100,000.
Please calculate the annual debt service, annual interest payment, annual principal
payment, and the ending loan balance at end of each year for the next three years.
Specifically, please complete the following amortization table (10 points).
===========================================================
Beginning
Debt
Interest
Principal
Ending
Year
Balance
Service
Payment
Payment
Balance
===========================================================
0
$100,000
NA
NA
NA
NA
1
?
?
?
?
?
2
?
?
?
?
?
3
?
?
?
?
?
============================================================
Note: This mortgage assumes monthly payments. The amortization table is different
from the one using annual payments.
4.
Why would one expect that the cash-equivalent value of an assumable loan would not be
fully capitalized into the house prices (10 points)?
5.
Explain what interest only (IO) and principal only strips are (5 points). Which strip, the
IO strip or the PO strip, is said to have negative duration (1 point)? Why (4 points)?
6
6.
State and explain the two theories of default (2 points). Which theory makes more
"intuitive" sense (3 points)?
Take-home component:
1.
Please re-construct the amortization tables of the five ARMs discussed in class. In
addition, please extend the period from 37 months (as shown in my handouts) to 61
months. Please calculate the monthly IRR and MIRR (FMRR) for each of the 5 ARMs
listed in problem 1 (20 points).
2.
Please re-construct the amortization table of a graduated payment mortgage ($100,000 at
12 percent for 30 years, monthly payment, graduating in payments through the first 10
years) using 10% annual payment growth rate. Please report the amortization table of the
first 181 months (10 points).
7