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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. 2 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 3 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. 4 Class 1 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 5 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 6 Class 11 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 _____________________________________________________________________________ NOTE: No Class on Wednesday November 22 due to Thanksgiving Break. _____________________________________________________________________________ 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