Download Finance 430.01, Real Estate Investment

University of North Carolina at Greensboro
Bryan School of Business and Economics
Department of Finance & Accounting
Finance 430.01, Real Estate Investment
Fall 2006
Instructor:
Place:
Time:
Office:
Office Phone:
Home Phone:
Email (Work):
Email (Home):
Office Hours:
G. Jason Goddard
Room 111, Joseph M. Bryan School of Business & Economics
Wednesday (6:00 PM to 8:50 PM)
Room 344E, Bryan Building (336) 334-4318, ([email protected])
(336) 747-8594 (best way to reach me during business hours)
(336) 765-1613 (after 5 PM weekdays, and weekends)
[email protected] (during business hours)
[email protected] (after 5 PM weekdays & weekends)
By Appointment Only
Course Textbook:
Real Estate Finance and Investments
Brueggeman/Fisher, Twelfth Edition
Hewlett Packard 10B or 10B II
Finance 315, Admission into an approved program
Course may be taken as a replacement for FIN 325
Required Calculator:
Prerequisites:
Course Description
Introduction to the foundations and practices in real estate investment. The principal
emphasis is on real estate investment principles and concepts, the investment environment,
financial analysis, and practical applications. The Real Estate Investments course is an
elective in the Finance Department for students interested in learning how to effectively
determine the relative risk levels of different commercial and residential investment
properties. The course will first focus on discussing essential elements of finance, and will
then move into the analysis of investment real estate properties from the perspective of an
individual investor, as well as that of a commercial bank lender.
Course Learning Objectives
1. Understand the major legal rights and interests in real estate that may be conveyed or
used as security for mortgage loans.
2. Understand the use of fixed-rate, constant payment mortgages (CPM), constant
amortization mortgages (CAM), and graduated payment mortgages (GPM), and how
payments are calculated.
3. Understand the real estate appraisal process and the three major approaches to value.
4. Explain the valuation fundamentals of income producing property.
5. Explain the difference between the discounted cash flow and direct capitalization
techniques of income producing property valuation.
6. Describe the importance and use of commercial leases.
7. Project the cash flows from a commercial real estate project.
8. Understand the taxation of real estate income.
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9. Analyze the cash flows from a real estate investment project, both before- and aftertax.
10. Compute the impact of financial leverage on real estate returns and risks.
11. Utilize concepts such as internal rate of return, net present value, and capitalization
rates to analyze income-producing property.
12. Understand the role of real estate investment trusts (REITs) and their role in a welldiversified portfolio.
Class Attendance
This course meets one time per week, for a total of 16 class meetings. Since the course only
meets once per week, failure to attend class regularly will have a negative impact on your test
performance. The class discussions form the basis for the tested materials, so missing more
than a couple of classes during the term is highly discouraged. Missing class will also
adversely affect your class participation grade. Those who come to class regularly and on
time, make positive contributions to class discussion, and ask relevant and insightful
questions will earn a strong participation grade. Please note that the last day to drop the
course and receive a full refund is August 18. The last day to drop the course without
academic penalty is October 6. Should any of our sessions be cancelled due to weather or
any other reason, students are still responsible for all material for that night’s session.
The power point slides for each class session will be posted on Black Board for your review.
Grading
There will be three exams in the course. Exam I and Exam II will be a mixture of true/false,
multiple choice, and problems. The final exam will be a real world application utilizing the
direct capitalization valuation technique for two investments, and to then determine which is
the better investment using the techniques that we have learned in the course. All exams will
be closed book/closed notes and will be held in class on the assigned day.
Exam I
Exam II
Final Exam
Class Contribution
25%
25%
30%
20%
Total
Grading Scale
94-100 A
90-93 A87-89 B+
83-86 B
September 20
November 1
December 6
Includes Case Discussions, Article
Summary, & Off-Campus Student
Housing Worksheet (due October 25)
100%
80-82 B77-79 C+
73-76 C
70-72 C-
67-69
63-66
60-62
< 60
D+
D
DF
Article Summary & UNC-G Off-Campus Student Housing Occupancy Study
Part of your class participation grade will be the completion of one article summary of a topic
relevant to the class, as well as the completion of the UNC-G Off-Campus Student Housing
Occupancy Worksheet. The article summary will be given orally in the class, and should be
concerning any topic that involves investment real estate, the state of the local economy, or
other topics that are discussed during the course of the semester. Students will be placed in
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one of ten groups, and each group member will present a different article that the other group
members on the assigned class session.
The completion of the UNC-G Off-Campus Student Housing Worksheet will be integral to
the determination of market vacancy and rental rates for our class session on underwriting
apartment buildings on November 8. Each student will individually be responsible for
completing the one page worksheet. Group members are responsible for following up during
the semester to make sure that the majority of students are not completing the worksheet on
the same student housing property. The completed worksheet is due by October 25.
Class Contribution
Class contribution points will be awarded based on the quality of the content added to the
class discussions as opposed to the quantity of the content added. Questions posed by
students should be relevant to the material being covered in the class, and the Instructor will
make an effort to learn students’ names as early as possible in the semester. A student will
receive class contribution points for coming to class prepared and adding to the discussion
with meaningful, insightful comments. What I am looking for is evidence that students are
integrating the textbook material with the supplemental material covered during class time.
Class Procedures
The content of this course will be conveyed through a mix of lectures, discussions, and cases.
Each approach in the mix is designed to develop and elaborate on the content of the assigned
readings. Students are expected to knowledgeably discuss the assigned readings, to raise any
questions that they have about the readings, and to participate in the class discussions. The
Power Point slides for each chapter detail the types of problems that will be on the exams.
The non-problem oriented test questions will come from the text and our in-class discussions.
Since the course meets once per week for a total of two hours and fifty minutes, we will
usually break around 7:30 for 15 minutes. Each lecture will contain a discussion of current
events, discussion of topics that are directly related to the chapter being discussed on a given
evening, and the discussion of select problems from the end of the chapter. If we do not
cover all of the bullet points for a given lecture, the student is still responsible for the
material on the exams. Should class be cancelled for any reason, the students are
responsible for all material (slides to be posted on Black Board).
Biographical sketch of the Instructor
G. Jason Goddard obtained his undergraduate degree in Finance from UNC-G, and obtained
his MBA also from the Bryan school. His MBA studies focused on international business
and service operations management. The instructor is a current editorial board member of the
Journal of Asia-Pacific Business. The instructor is currently employed full-time at Wachovia
Bank, where he has been a commercial lender for the past 11 years. He is currently
employed as Vice President in the Real Estate Risk Advisor group in Winston-Salem. He has
been a senior lender for commercial real estate at Wachovia for the past four years.
Finally, the bullet points for each night’s sessions highlight the talking points of the lectures
for that evening. Testing material will come primarily from these topics, but students are
highly encouraged to read the text as all of the material in an assigned chapter is fair game
for the exams.
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Class
1
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Date
FIN 430 Course Schedule (Fall 2006)
Topic
Aug. 16
Course Introduction
Introduction and review of class syllabus
What are property rights?
Compare and contrast the forms of leasehold estates
Discuss the importance of title assurance
Differentiate between the various methods of title assurance
Assigned Reading
Ch. 1
Class
Date
Topic
2
Aug. 23
Financing Notes & Mortgages
 Define a mortgage note
 Define and explain the mortgage and deed of trust
 Identify different mortgage clauses
 Explain and identify what constitutes mortgage default & foreclosure
 Define and explain the different forms of bankruptcy
Assigned Reading
Ch. 2
Class
Date
Topic
3
Aug. 30
The Interest Factor in Financing
 Define the time value of money
 Calculate the present value and future value of a single sum
 Calculate the present value and future value of an annuity
 Calculate the effective annual yield for a series of cash flows
 Define internal rate of return (IRR)
Assigned Reading
Ch. 3, Group 1
Class
Date
Topic
Assigned Reading
4
Sept. 6
Fixed Rate Mortgage Loans
Ch. 4, Group 2
 Discuss the determinants of interest rates
 Discuss the various forms of risk for a lender
 Compare and contrast CPM, CAM, and GPM
 Differentiate between the effective cost of borrowing & the lender’s effective yield
 Calculate discount points, loan origination fees, and the loan constant
Class
Date
Topic
Assigned Reading
5
Sept. 13
Demographic Analysis
Ch. 7, Group 3
 Discuss the importance of market research
 Elaborate on the determinants of the supply and demand for investment real estate
 What are the three forms of property valuation?
 Compare and contrast gross potential income (GPI), effective gross income (EGI), and net
operating income (NOI)
 Elaborate on the components of the direct capitalization income approach valuation
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Class
6
Date
Sept. 20
Topic
Exam I
(Chapters 1-4, 7)
Assigned Reading
None
Test I
Class
Date
Topic
Assigned Reading
7
Sept. 27
Intro. To Income Producing Properties
Ch. 9, Group 4
 What can J.K. Galbraith teach us about financial forecasting?
 Elaborate on the different classifications of investment real estate
 What are the “four food groups” of investment real estate?
 Elaborate on the “QQD” cash flow framework developed in class
 Discuss the various market assessment tools
 Elaborate on the importance of leases in investment real estate analysis
 Discuss the financial components of leases
 Calculate the effective rent of a lease
Class
Date
Topic
Assigned Reading
8
Oct. 4
Valuation of Income Properties
Ch. 10, Group 5
 Outline the steps in the appraisal process
 Discuss how an appraised value is determined using the 3 forms of value
 What is a capitalization rate and how is it determined?
 Compare and contrast the discounted cash flow model & the direct capitalization model
 Define and discuss how a discount rate is calculated
 Elaborate on the highest & best use analysis
Class
Date
Topic
Assigned Reading
9
Oct. 11
Investment Analysis
Ch. 11, Group 6
 Discuss the stages of the real estate cycle
 Elaborate on the various investment strategies
 Calculate a before tax internal rate of return (BTIRR)
 Compare and contrast internal rate of return (IRR) and net present value (NPV)
 What are the three forms of taxable income?
 Calculate net operating income for multiple years
Class
Date
Topic
Assigned Reading
10
Oct. 18
Financial Leverage & Financing Alternatives
Ch. 12, Group 7
 Elaborate on the positive and negative effects of financial leverage
 Discuss how risk and leverage are related
 Calculate the after tax internal rate of return (ATIRR)
 What are the bank requirements for underwriting investment real estate?
 Discuss the various provisions associated with debt financing
 Compare and contrast participation loans, accrual loans, and convertible mortgages
 Calculate prepayment penalties and define the lock out period
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Class
11
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Date
Oct. 25
Topic
Risk Analysis
Assigned Reading
Ch. 13, Group 8
Discuss the various forms of risk
Describe the due diligence process for a lender and an investor
Elaborate on the components & importance of sensitivity analysis
Discuss the different strategies of portfolio management
Understand how to partition the IRR and why this is important for an investor
Elaborate on the real options approach to investing
Calculate the expected return, variance, and standard deviation for competing investments
UNC-G Off-Campus Occupancy Study Worksheet is Due
Class
12
Date
Nov. 1
Topic
Test II (Ch. 9-13)
Assigned Reading
None
Test II
Class
Date
Topic
Assigned Reading
13
Nov. 8
Apartment Case Studies
Case Materials, Group 9
 Elaborate on the investment characteristics of apartment projects
 Utilize the UNC-G Off-Campus Occupancy Worksheet to analyze apartment projects
 Use the direct capitalization income approach valuation for apartment projects
Class
Date
Topic
Assigned Reading
14
Nov. 15
Retail & Office Case Studies
Case Materials, Group 10
 Elaborate on the investment characteristics of retail and office projects
 Use the direct capitalization income approach valuation for retail and office projects
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NOTE: No Class on Wednesday November 22 due to Thanksgiving Break.
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Class
Date
Topic
Assigned Reading
15
Nov. 29
Warehouse/Flex Case Studies
Case Materials
 Elaborate on the investment characteristics of warehouse and flex projects
 Use the direct capitalization income approach valuation for warehouse and flex projects
Class
16
Date
Dec. 06
Topic
Final Exam
Final Exam: Direct Cap Underwriting & Investment Comparisons