© JR DeLisle, Ph. D.
Lecture 1: Introduction to Real Estate Finance
by
James R. DeLisle, Ph.D.
January 5, 2010
Real Estate Finance
Lecture Overview
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© JR DeLisle, Ph. D.
Course Organization
Critical Thinking
The Economic Problem: an Example in Critical Thinking
Other Real Estate Trends/Issues
• Real Estate Process Review
Real Estate Finance
Course Overview
© JR DeLisle, Ph. D.
• Course Background
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Course Objectives
Timetable
Computer and Technology Requirements
Grading Strategy and Policy
Project Decision: Rationale and Alternatives
• Organization of Real Estate Finance 2010
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Part 1: Residential Finance
Part 2: Commercial Property Finance
Part 3: Capital Markets
Part 4: Institutional Finance
Real Estate Finance
Course Objectives
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© JR DeLisle, Ph. D.
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
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Develop Understanding of Real Estate Financial Markets
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Cultivate Appreciation for Capital Markets
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Market fundamentals: products and processes
Market Decision-making: players and market drivers
Residential Finance & Income Property Finance
Construction and Development Finance
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
Finance and Investments Text
© JR DeLisle, Ph. D.
• 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
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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)
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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
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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
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4
2
2
2
1
Multiple Choice/Matching Quizzes & calculated quizzes on fundamentals of real estate finance
Mortgage Spreadsheet Modeling: fixed rate and variable rate mortgages
DCF Modeling: Enhancement to Excel model with rent roll, partnerships and portfolio integration
Argus Cases. Argus Model for an individual project and a portfolio project.
Final Exam. Individual paper in which students explore a contemporary issue in real estate finance
Grading Components
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Quizzes
Financial Modeling: Mortgages
DCF Modeling
Argus/Portfolio Decision Support
– Final Exam
– Class Participation and Forum
4
2
2
2
24%
20%
30%
20%
1
10%
6%
Real Estate Finance
© JR DeLisle, Ph. D.
Course Objectives
• Develop a conceptual understanding of:
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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
How we Got Where we Are?
© JR DeLisle, Ph. D.
Real Estate Finance
Critical Thinking
© JR DeLisle, Ph. D.
Real Estate Finance
Feasibility Analysis: Critical Problem Solving
© JR DeLisle, Ph. D.
Real Estate Finance
Legal Elements of Real Estate
© JR DeLisle, Ph. D.
Legal Description by Metes & Bounds
Marker
© JR DeLisle, Ph. D.
N 0o0” E100’
Thence
E 0o0: 140’
Thence to
POB
Thence
S 0o0: 120’
Real Estate Process
Legal Description: Irregular Shapes
© JR DeLisle, Ph. D.
Real Estate Process
Real Estate Finance
© JR DeLisle, Ph. D.
Players and Perspectives
Interdisciplinary Spectrum: A Life Cycle Approach
© JR DeLisle, Ph. D.
Disposition/
Redevelop
$
Acquisition
/Production
Planning
Feasibility
Marketability
Appraisal
Engineering
Architectural
Environmental
Legal
Cost Estimation
Negotiations
Operation
Construction Mgmt.
Quality Controls
Project Mgmt.
Architectural Oversight
Cost Mgmt.
Construction Financing
Inspections
Pre-leasing
Releases
Final Inspection
or
Sourcing if Existing
Portfolio Mgmt.
Asset Mgmt.
Leasing
Tenant Improvements
Tenant Relations
Property Mgmt.
Accounting/Reporting
Engineering
Financial Mgmt.
Time
Hold/Sell Analysis
Marketing
Valuation
Buyer Selection
Broker Management
Negotiations
Closing
Real Estate Process
Space
Producers
Static
Linkages
Environment
Which Market Segments?
© JR DeLisle, Ph. D.
S…. E….. L ….
Anomolous
Lifestyles
Space
Consumers
Metro Fringes
Infrastructure
Providers
Affluent Suburbia
Upscale City Singles
Real Estate Finance
Major Market Core
Second City Leaders
Real Estate Process
© JR DeLisle, Ph. D.
Land Use Controls
Land Use Controls: Taking vs. Police Power
© JR DeLisle, Ph. D.
Building Envelopes: A Modular Approach
© JR DeLisle, Ph. D.
• Site Size
Land Use
Controls
• Lot Coverage Ratio (LCR)
Eminent
Domain
LUC
Taking
Public Good vs.
Private Loss
Partial Taking
Safety, health
& welfare
• Height Restrictions
• Parking Requirements
– Parking Index
– SF/Stall
• Floor Area Ratio (FAR)
Real Estate Process
Real Estate Process
Real Estate Finance
Parcel Research
© JR DeLisle, Ph. D.
Real Estate Finance
TRCm
© JR DeLisle, Ph. D.
Real Estate Finance
Money-Time Dimension of Real Estate Value
Backdoor Model: Reverse Engineered
© JR DeLisle, Ph. D.
© JR DeLisle, Ph. D.
Market
RCR=Budget to
Real Estate
Value
/ Rate
Gross Income
Income
* NIR
Land
Hard & Soft Costs
TRCj
Real Estate Process
Frontdoor Model: Sequence
© JR DeLisle, Ph. D.
Value
* Rate
Gross Income
Income
/ NIR
Land
Hard & Soft Costs
TRCm
Real Estate Process
Real Estate Finance
© JR DeLisle, Ph. D.
Frontdoor Model
Frontdoor Model: Sequence
© JR DeLisle, Ph. D.
Value
* Rate
Gross Income
Income
/ NIR
Land
Hard & Soft Costs
TRCm
Real Estate Process
Real Estate Finance
© JR DeLisle, Ph. D.
Backdoor Model
Backdoor Model: Reverse Engineered
© JR DeLisle, Ph. D.
Market
RCR=Budget to
Real Estate
Value
/ Rate
Gross Income
Income
* NIR
Land
Hard & Soft Costs
TRCj
Real Estate Process
Real Estate Finance
Social Responsibility
© JR DeLisle, Ph. D.
Irretrievable Commitment
Of Scarce Resources
Real Estate Finance
Appraisal Objective and Process
© JR DeLisle, Ph. D.
Real Estate Finance
Appraisal Theory and Application
© JR DeLisle, Ph. D.
Real Estate Finance
Market Analysis
© JR DeLisle, Ph. D.
Real Estate Finance
Market Segmentation & Product Stratification
© JR DeLisle, Ph. D.
Real Estate Finance
Alternative Uses
© JR DeLisle, Ph. D.
Real Estate Finance
H&B Use and Most Fitting Use
© JR DeLisle, Ph. D.
Real Estate Finance
TMV
© JR DeLisle, Ph. D.
Real Estate Finance
Risk Management
© JR DeLisle, Ph. D.
Real Estate Finance
© JR DeLisle, Ph. D.
Mortgage Cycle
© JR DeLisle, Ph. D.
Mortgage Risks: Acquisition Stage
Planning/
Application
Disposition
Acquisition
Disposition
Acquisition
© JR DeLisle, Ph. D.
Mortgage Life Cycle Management
Planning/
Application
Operation
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Operation
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Mortgagee’s Concerns
• Probability of Default
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• Severity of Default
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
Real Estate Process
Real Estate Process
© JR DeLisle, Ph. D.
Mortgage Risks: Disposition Stage
© JR DeLisle, Ph. D.
Mortgage Risks: Operation Stage
Disposition
Acquisition
Planning/
Application
Planning/
Application
• Timing
Operation
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Disposition
Acquisition
Operation
– Duration: actual term vs. contract term
– Prepayment Penalties: yield maintenance
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
• Transfer
– Loan assumption: timing, risk
– Borrower substitution
• Foreclosure
Real Estate Process
– Monitor
– manage and pursue/protect claims
Real Estate Finance
Real Estate Process
Mortgage Loans
© JR DeLisle, Ph. D.
Real Estate Finance
Traditional Mortgage Amortization Patterns
© JR DeLisle, Ph. D.
Interest vs. Principal S hare of Payments
Traditional Mortgage Assumptions
© JR DeLisle, Ph. D.
INT vs. PRIN
PP
T otal Payment
100%
* LV
Pi
Total Payment
80%
PMT
INT
PRIN
60%
40%
20%
Real Estate Finance
0%
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
Term
AmortizationSSchedule
chedule
Amortization
Balance
Principal Balance Principal
T otal
Payment
Interest
$250,000
$250,000
$200,000
$200,000
Dollars
Dollars
$150,000
$150,000
$100,000
$100,000
$50,000
$50,000
1
12
23
3
4
4
5
5
6
6
7
7
8
8
9
91
10 0
1
11 1
1
12 2
1 31 3
1 41 4
1 51 5
1 61 6
1 71 7
1 81 8
1 91 9
2 02 0
2 12 1
2 22 2
2 32 3
2 42 4
2 52 5
2 62 6
2 72 7
2 82 8
2 92 9
3 03 0
$0$0
Time
Time
Real Estate Finance
DCF
© JR DeLisle, Ph. D.
Real Estate Finance
Leases as Risk Management
© JR DeLisle, Ph. D.
Real Estate Finance
Capital Market
© JR DeLisle, Ph. D.
Real Estate Finance
REITs and CMBS
© JR DeLisle, Ph. D.
Real Estate Finance
Portfolio Management
© JR DeLisle, Ph. D.
Real Estate Finance
Development
© JR DeLisle, Ph. D.
Real Estate Finance
Timetable as of 1/5/2010
© JR DeLisle, Ph. D.
Timetable: Part 1
Problem Sets/Due Dates
1
1/5
Course Overview
Ch 1: RE Finance
and Process Review Overview
DeLisle, No Bottom, No Net
Graaskamp, Finance Educ. & Risk
Management
Review Cases: located in
Moodle Process Review
1/7
Capital Markets &
Real Estate
2010 Emerging Trends; DeLisle: RE
Asset Class or Sector?
Prob Set1: Basic Time Value of
Money
1/12
Financing Notes &
Mortgages
1/14
Residential
Mortgage Loans
1/19
Residential
Finance; Housing
Affordability
Underwriting
Residential
Property
Discounted Cash
Flow;
Investment
Analysis
Introduction to
Income Property &
Leases
Valuation of
Income Property
Financial Leverage
& Alt. Financing
3
1/21
4
1/26
1/28
5
2/2
2/4
Chapter
Quizzes/Projects Out
Date
2
Topic
Readings/Cases
Wk
Ch 2: Money, Credit
and Rates; Ch 3:
Finance Theory & RE
Ch 4: History of Res
Finance; Ch 5: Postwar
Residential Finance
Ch 6: Alternative
Mortgages
DeLisle, Primer 1: Res. Mortgage
pgs 1-48.
DeLisle: Primer 1: Alt Mortgages
pgs 48-72.
DeLisle, Housing Affordability Cost
Ch 7: Financing and
Property Value; Ch 8-9 Study
Federal Housing
Ch 13: Loan Orig; Ch
14: Mortgage Ins, Title
Insurance
Ch 19: Perm Financing Case 1: FD/BD Analysis
To be assigned
Mortgage Project
1 Base Mtgs. Out;
Quiz 1 Out
Prob Set 2: Intro to Mortgage
Finance
Mortgage Project 1 Due
Quiz 2 Out
Project 2 Alt
Mtgs. Out
Prob Set 3: Intermediate Mtg Fin;
Quiz 1: Due
Mortgage Project 2 Due
Case 2: DCF Analysis
DCF Enhanced
Primer 2: Rent Roll Modeling in
Excel
Project 3: DCF
Leases Out
Quiz 2: Due
Prob Set 4: Intro Corp RE
To be assigned
Ch 15 Value, Leverage
Prob Set 5: Adv Corp RE
Real Estate Finance
© JR DeLisle, Ph. D.
Timetable: Part 2
Wk
Date
6
2/09
Risk Analysis
2/11
Disposition/Renovat To be assigned
ion
Corporate RE
Finance
7
2/16
2/18
8
9
10
11
Topic
Chapter
Readings/Cases
Problem Sets/Due Dates
Ch 12: Controlling
Risk;
Quiz 3: Out
Financing & Land
Development
Ch 18: ADC Loans
Real Estate
Portfolio
Management
Ch 21: RE in a
Portfolio Context
DeLisle, “A Holistic RE
Portfolio Mgmt.”
To be assigned
Primer 3: Argus Project
Analysis
2/23
Quizzes/Projects
Out
Project 3: DCF Leases Due
Argus Model Tutorial
Proj. 4: Argus RRDCF Out
2/25
JVs, Syndications,
Partnerships,
Ch 20: Ownership
Proj. 5 Argus
Portfolio: Out
3/02
Public Equity
Market
Ch 17: Sources of
Funds
Quiz 4: Out
3/04
Secondary Market:
Pass-Throughs
Ch 10: Secondary
Market
3/9
Secondary Market:
CMOs, CMBSs
Ch 11: Valuation of RE Primer 4: Argus Portfolio
Securities
Analysis
3/11
Issues in RE
Finance
Ch 22: Liability, Fraud
and Ethics.
3/15
Finals Week
Project 4: Argus RR-DCF
Final Out
Project 5 Argus: Due
Quiz 3: Due
Final Exam
Final Due 3/21
Real Estate Finance