DUSP Courses 1998

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11.431J Real Estate Finance & Investment

MIT-CENTER FOR REAL ESTATE

REAL ESTATE FINANCE AND INVESTMENT 11.431J/15.426J

FALL 1999

Primary Instructor: Professor Timothy Riddiough

Office: W31-310, Center for Real Estate

Phone/Fax/E-mail: 253-5131/258-6991/tjridd@mit.edu

Office Hours: 4-5 TR or by appointment

Recitation Instructor: Tod McGrath

Office: W31-310, Center for Real Estate

Phone/Fax/E-Mail: 521-8546/542-4499/tmcgrath@mcallalmy.com

Office Hours: Immediately after recitation

Teaching Assistant: Tom Davidoff

Office: W31-310

Phone/Fax/E-Mail: 253-2040/258-6991/tomd@mit.edu

Office Hours: 5-6 T or by appointment

Course Description and Objectives

In this course we focus on the financial characteristics of direct commercial real estate investment, primarily from the perspectives of the individual or institutional investor. The basic approach is to regard commercial real estate as a particular (and very important) industry class or sector, and then apply modern finance theory in a manner that results in intelligent management strategy and decision-making. My role in the lectures is to introduce and develop concepts that can be applied to a wide variety of financial and investment issues. The role of the guest speaker is complement the lectures by providing real world expertise that fleshes out related concepts. Tod McGrath's primary role in recitation is to help bridge theory and practice through case studies and panel discussions with industry professionals. Through scheduled assignments and question/answer periods, Tom Davidoff will handle issues related to analytical foundations, assignment and exam reviews, and grading.

Course Requirements

Texts: Real Estate Finance and Investment, Brueggeman and Fisher, Irwin, 10th Edition

Principles of Corporate Finance, Brealey and Myers, McGraw-Hill, 5th Edition

Other Reading Material: A supplemental reading packet and a copy of the lecture notes can be purchased at Graphic Arts (Building 11-004)

Financial Calculator Required (HP brand is suggested)

Course Policies

No late assignments are accepted, unless cleared in advance with the instructor.

Exam regrades will be considered, but we reserve the right to regrade the entire exam.

Teamwork is stressed with respect to completion of the case studies. Consequently, we will ask that you vary the composition of your group for each case study.

Course Grading

Problem Assignments 20%

Case Assignments 20%

Mid-Term Exam 20%

Final Exam 35%

Class Participation 5%

100%

Examination Dates

Mid-Term: 10/14, 5:30-7:30 p.m. Final: 12/14, 1:30-4:30 p.m.

Problem/Case Assignment Topics and Dates

Assignment #1: Review of Finance Concepts Assignment #4: Investment Analysis II

Date Assignment: 9/23 Date Assigned: 11/11

Date Due: 9/30 Date Due: 11/24

Assignment #2: Mortgage Basics Case Study I: Investment Analysis

Date Assigned: 9/30 Date Assigned: 10/21

Date Due: 10/7 Date Due: 11/4

Assignment #3: Investment Analysis I Case Study II: Financial Distress

Date Assigned: 10/28 Date Assigned: 11/18

Date Due: 11/11 Date Due: 12/2

MIT-CENTER FOR REAL ESTATE

REAL ESTATE FINANCE AND INVESTMENT 11.431J/15.426J

FALL 1999

Date Lecture Topic and Readings

Comments/perspective are shown in italics. Use these comments to help prepare for lectures and recitation sections.

9/9 R Overview: Introduction/Recent History in Commercial Real Estate Equity and Debt Markets

We will spend the first 45 minutes or so getting acquainted and going over the syllabus. Then I will give you a brief history of real estate finance, with particular emphasis on making the connection between financing and development.

Brueggeman & Fisher, Chapter 1, pp.1-9.

Standard introductory stuff. Skim.

Brealey & Myers, Chapter 1, pp.3-10.

Ditto.

Packet: "What Have We Learned From the 1980s Experience," Anthony Downs, in Salomon Brothers Real Estate Research Report: Real Estate Investment, July, 1991.

This article is a nice summary of the sins committed in the 1980's, and why they needn't happen again.

9/14 T Overview: Recent History Continued/Emerging Trends

A continuation of the previous discussion. I will bring you up-to-date on happenings in real estate financing.

Packet: Emerging Trends in Real Estate 1999, PriceWaterhouseCoopers and Lend Lease

This is the most recent report. Read closely, as these reports accurately gauge current thinking in real estate finance and investment from an institutional perspective.

9/16 R Mortgage Basics: Borrower Screening and Loan Underwriting Considerations

We will cover basic financial underwriting ratios used to qualify borrowers for debt financing.

Brueggeman & Fisher, Chapter 6, pp.172-184.

Short and sweet-from a residential lending perspective.

Date Lecture Topic and Readings

9/21 T Mortgage Basics: Fixed-Rate Mortgages

We will consider an extended example involving a fixed rate mortgage to illustrate concepts.

Brueggeman & Fisher, Chapter 4, pp.85-111.

Very basic, but relevant.

9/23 R Mortgage Basics: Adjustable-Rate Mortgages

Fixed rate and adjustable rate mortgages are the most popular loan types in the U.S., so we need know something about them.

Brueggeman & Fisher, Chapter 5, pp.125-130, 134-158.

The lecture roughly follows the chapter.

9/28 T Mortgage Basics: The Mortgage Contract, Default and Foreclosure

Here we briefly consider the legal side of the debt contract, but still from an economic perspective. The basic tension is between wary lenders who want maximum protection from those dishonest borrowers, and borrowers who want to max out on the debt and accumulate cheap options from those greedy lenders.

Brueggeman & Fisher, Chapter 2, pp.21-46.

Standard material, but important. The lecture will discuss these readings. If you are an attorney, and proud of it, please don't be shy about joining in the class discussion.

9/30 R Mortgage Basics: Strategic Considerations with Loan Workout

I will take you through some mental gymnastics with respect to renegotiation strategy on financially distressed loans. When the goin' gets tough, self interest gets goin'.

Packet: "Assessing the Causes and Consequences of Loan Defaults and Workouts," Joseph Philip Forte, Real Estate Finance, 1992, Vol. 9, pp.11-28, Fall.

A nice practitioner-type article on workout.

10/5 T Mortgage Basics: The Choice Between Traditional and Conduits Loans

This lecture is meant to introduce you to conduit lending and the conduit securitization process. We will analyze mortgage choice from the borrower's perspective.

Packet: "Forces Changing Real Estate For At Least a Little While: Market Structure and Growth Prospects of the Conduit-CMBS Market," Tim Riddiough, MIT/CRE.

Provides background of the conduit-CMBS market. Worth reading and non-technical.

Date Lecture Topic and Readings

10/7 R Analysis of Income Property: Space Markets and Leasing Basics

At this point we transition into income property finance. We begin by considering macro-market supply/demand dynamics. This leads into basic lease financing definitions and terminology.

Brueggeman and Fisher, Chapter 8, pp.242-251, 257-260.

Basic but important.

Brealey and Myers, Chapter 26, pp.739-758.

Deals with leasing more generally, but good background material. Can probably skim.

10/12 T Analysis of Income Property: Leasing Strategy

In this lecture we consider subtler aspects to leasing strategy, both from the lessee and lessor perspective.

Packet: "Leasing Risk, Financing Risk, and Capital Structure Decisions," Paul D. Childs, Steven H. Ott, and Timothy J. Riddiough, 1997, Mimeo, MIT.

Technical. Try to follow arguments from an intuitive standpoint and ignore the Greek letters.

Packet: "Simple Theory of Lease Maturity Choice," Timothy J. Riddiough, 1995, Mimeo, MIT.

Some ideas to get you thinking about why tenants may prefer different lease maturities.

10/14 R Analysis of Income Property: Expenses, NOI and the Connection Between Space Market and Asset Market Equilibrium

Understanding the theory behind capitalization rates is important, and will be the main focus of this lecture. Capitalizing rental streams also makes the connection between space markets and asset markets.

Brueggeman & Fisher, Chapter 9, pp.285-290, Chapter 10, pp.311-314.

Short and basic.

Brealey and Myers, Chapter 4, pp.59-67.

Read closely--we will dwell on these perpetuity formulas in lecture.

10/19 T Analysis of Income Property: Debt, Taxes and Capital Structure

For some of you, this is will be the first of several repetitions on this important topic. The reason we spend so much time on capital structure decisions is because evaluating the tradeoffs between equity and debt financing has traditionally been ignored with private investment, but is now quite relevant to many investors.

Brealey and Myers, Chapter 17. pp.447-466; Chapter 18, pp.474-509.

These are very important readings. Reread them several times until you are a believer.

Date Lecture Topic and Readings

10/21 R Analysis of Income Property: Reversion, Before and After-Tax Cash Flows, Sensitivity Analysis

This is where we pull discounted cash flow analysis together.

Brueggeman and Fisher, Chapter 10, pp.315-347; Chapter 11, pp.356-372, Chapter 12, pp.391-403.

There are numerous performance measures and sensitivity analysis methods that are not covered in class (because much of it is overkill), but it is worth being exposed to a variety of more or less useful performance measures (i.e., tools for your toolbox).

Brealey and Myers, Chapter 10, pp.239-265.

Excellent discussion of the pros and cons of fancy methods of sensitivity analysis.

10/26 T Analysis of Income Property: Debt Security Design and Alternative Financing Mechanisms

We will discuss two alternatives to traditional commercial mortgage finance: the participating mortgage and lease-backed security financing.

Brueggeman & Fisher, Chapter 11, pp.372-380.

We will follow this discussion in class.

Packet: "Real Estate Lease-Backed Securities," John McMurray and Sam Mundel, MIT/CRE student thesis, 1997, pp.7-21.

A good student thesis on lease-backed securities.

10/28 R Sourcing Equity Capital: Limited Partnerships

Tod McGrath, Senior Vice President, McCall & Almy

Tod discuss the advantages and disadvantages of the limited partnership structure as well as take you through some of the intricacies of limited partnership accounting.

Brueggeman & Fisher, Chapter 12, pp.393-418.

This chapter is very thorough and the extended example helps the reader through the accounting nuances.

11/2 T Sourcing Equity Capital: Syndicating the LIHTC

Jenny Netzer, Boston Financial

This is where creative finance and housing policy fuse together. Jenny will discuss recent trends in this important supply-side program.

Packet: "The Credit for Low-Income Housing: Whose Shelter Is It?," Charles T. Carlisle, Real Estate Finance, 1987, Vol.3, pp.44-58, Winter.

Good introduction to the low-income housing tax credit. Read closely, and think about why it is natural that this credit is syndicated through limited partnerships.

Date Lecture Topic and Readings

11/4 R Real Estate Development: The Development Process and Development as an Option

I will first briefly overview the development process. I will then discuss development as an investment option. This option pricing perspective is quite powerful, as it provides insight into development decision making at both the micro and macro levels.

Brueggeman & Fisher, Chapter 15, pp.478-483.

A short overview of the development process.

Brealey and Myers, Chapter 21, pp.599-604.

Good discussion of timing flexibility with investment.

Packet: Investment Under Uncertainty, Avanish K. Dixit and Robert S. Pindyck, 1994, Chapters 1-2, pp.3-55, Princeton University Press Publ., 1st Ed.

Worth rereading to nail down essential concepts. The land valuation example discussed in lecture comes almost directly from this reading.

11/9 T Real Estate Development: The Determinants of Development Activity and Commercial Real Estate Asset Market Equilibrium

In this lecture we examine asset market equilibrium. This allows us to examine the determinants of commercial real estate construction. In general, the results suggest that developers behave according to predictions of the option model.

Packet: "The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data," Steve Holland, Steve Ott, and Tim Riddiough, MIT/CRE Manuscript.

We will follow the outline of this paper relatively closely in lecture.

Packet: "Effects of Uncertainty on the Investment Decision: An Examination of the Option-Based Investment Model Using Japanese Real Estate Data," Jiro Yoshida, MIT/CRE Masters Thesis, 1999.

Similar to the above reading, except that Japanese data are examined instead of U.S. data.

11/11 R Holiday

11/16 T Real Estate Development: Construction Financing of Commercial and Residential Development

We will begin by discussing the process of monitoring and risk managing the construction loan process. Then we will work through examples that illustrate both construction lending on a single commercial development and land lending on multi-lot residential development.

Brueggeman and Fisher, Chapter 15, pp.483-513, Chapter 16, pp.524-554.

I will follow the basic outline of these readings in lecture.

Date Lecture Topic and Readings

11/18 R Real Estate Development: Managing Interest Rate Risk

Most construction loans are floating rate, which adds even more risk to the development process. Many developers don't care to take on this additional risk, and often consider interest rate risk management methods to neutralize downside risk. We will examine interest rate hedging to illustrate the ideas.

Brealey & Myers, Chapter 25, pp.707-729.

A useful introduction to managing risk.

Packet: Brueggeman & Fisher, 9th Edition Chapter 18 Appendix, pp.632-641.

A nice simplified introduction to hedging. The lecture will closely follow this reading.

11/23 T Institutional Investment: Rationale, Early Evidence, and Critique

This lecture considers the classical rationale for commercial real estate in the investment portfolio (diversification benefits) and considers the pros and cons of the argument.

Packet: Roger G. Ibbotson and Laurence B. Siegel, 1984, "Real Estate Returns: Comparison with Other Investments," AREUEA Journal 12, pp. 219-242.

A classic early study that looks at risk and return of commercial real estate relative to stocks and bonds. We will be discussing it in depth, so read closely.

Packet: David Hartzell, John Hekman and Mike Miles, 1986, "Diversification Categories in Investment Real Estate," AREUEA Journal 14, pp. 230-254.

Examines diversification within real estate by property type.

Packet: David J. Hartzell, David G. Shulman and Charles H. Wurtzebach, 1987, "Refining the Analysis of Regional Diversification of Income-Producing Real Estate," Journal of Real Estate Research 2, pp. 85-9.

This one looks at regional diversification within real estate.

11/25 R Holiday

11/30 T Institutional Investment: Risk and Return Measurement Issues With Direct Investment

In this lecture we learn about the evils of appraisal smoothing, and a method for correcting it.

Packet: Jeffrey D. Fisher, David M. Geltner and R. Brian Webb, 1994, "Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods," Journal of Real Estate Finance and Economics 9, pp. 137-164.

Read this article closely, as most of the lecture is structured around it.

Date Lecture Topic and Readings

12/2 R Institutional Investment: Market Organizational Structure

We will review the old and new approaches to pension fund investment and how the investment infrastructure is organized.

Packet: "The Graaskamp Roundtable," PREA Quarterly, Spring 1998.

A revealing discussion of institutional investment based on a roundtable of past Graaskamp award winners.

12/7 T Institutional Investment: Long-Run Performance and The Choice Between Direct Investment and Public Market Investment Vehicles

We will examine the results of a well-done student thesis that compares the long-run investment performance of the NCREIF index with an index of equity REIT performance.

Packet: "A Risk-Adjusted Performance History of Public and Private Market Real Estate Investment 1978-97," Mark Moriarity and PJ Yeatman, MIT/CRE Thesis, 1999.

The lecture will discuss the results of this thesis in detail, so worth reading.

12/9 R Wrap Up and Review for Final

We will conduct a brief wrap-up and then review for the final exam.

MIT-CENTER FOR REAL ESTATE

REAL ESTATE FINANCE AND INVESTMENT 11.431J/15.426J

FALL 1999

Date Recitation Topic/Responsibility

9/9 R-R Review of Basic Finance Concepts (Davidoff)

9/16 R-R Review of Basic Finance Concepts (Davidoff)

9/23 R-R Review of Basic Finance Concepts (Davidoff)

Assignment #1 Out

9/30 R-R Review Mortgage Basics (Davidoff)

Assignment #1 In

Assignment #2 Out

10/7 R-R Review for Exam (Davidoff)

Assignment #2 In

10/14 R-R Mid-Term Examination (Davidoff)

10/21 R-R Panel Discussion: Assessing Current Market Conditions/Leasing Strategy (McGrath)

Case Study I Out (Investment Analysis)

10/28 R-R Return Exam and Discuss (Davidoff)

Assignment #3 Out

11/4 R-R Case Study I In/Discussion (McGrath)

11/11 R-R Assignment #3 In/Discussion (Davidoff)

Assignment #4 Out

11/18 R-R Panel Discussion: New Development Outlook (McGrath)

Case Study II Out (Financial Distress and Redevelopment)

11/25 R-R Holiday

Assignment #4 In (Due 11/24)

12/2 R-R Case Study II In/Discussion (McGrath)

12/9 R-R Discussion of Assignment #4/Review for Final (Davidoff)

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This syllabus may have been updated. To ensure that you're looking at the most recent version, please hit "Reload."
11.431J Real Estate Finance & Investment
MIT-CENTER FOR REAL ESTATE REAL ESTATE FINANCE AND INVESTMENT 11.431J/15.426J FALL 1999 Primary Instructor: Professor Timothy Riddiough Office: W31-310, Center for Real Estate Phone/Fax/E-mail: 253-5131/258-6991/tjridd@mit.edu Office Hours: 4-5 TR or by appointment Recitation Instructor: Tod McGrath Office: W31-310, Center for Real Estate Phone/Fax/E-Mail: 521-8546/542-4499/tmcgrath@mcallalmy.com Office Hours: Immediately after recitation Teaching Assistant: Tom Davidoff Office: W31-310 Phone/Fax/E-Mail: 253-2040/258-6991/tomd@mit.edu Office Hours: 5-6 T or by appointment Course Description and Objectives In this course we focus on the financial characteristics of direct commercial real estate investment, primarily from the perspectives of the individual or institutional investor. The basic approach is to regard commercial real estate as a particular (and very important) industry class or sector, and then apply modern finance theory in a manner that results in intelligent management strategy and decision-making. My role in the lectures is to introduce and develop concepts that can be applied to a wide variety of financial and investment issues. The role of the guest speaker is complement the lectures by providing real world expertise that fleshes out related concepts. Tod McGrath's primary role in recitation is to help bridge theory and practice through case studies and panel discussions with industry professionals. Through scheduled assignments and question/answer periods, Tom Davidoff will handle issues related to analytical foundations, assignment and exam reviews, and grading. Course Requirements Texts: Real Estate Finance and Investment, Brueggeman and Fisher, Irwin, 10th Edition Principles of Corporate Finance, Brealey and Myers, McGraw-Hill, 5th Edition Other Reading Material: A supplemental reading packet and a copy of the lecture notes can be purchased at Graphic Arts (Building 11-004) Financial Calculator Required (HP brand is suggested) Course Policies No late assignments are accepted, unless cleared in advance with the instructor. Exam regrades will be considered, but we reserve the right to regrade the entire exam. Teamwork is stressed with respect to completion of the case studies. Consequently, we will ask that you vary the composition of your group for each case study. Course Grading Problem Assignments 20% Case Assignments 20% Mid-Term Exam 20% Final Exam 35% Class Participation 5% 100% Examination Dates Mid-Term: 10/14, 5:30-7:30 p.m. Final: 12/14, 1:30-4:30 p.m. Problem/Case Assignment Topics and Dates Assignment #1: Review of Finance Concepts Assignment #4: Investment Analysis II Date Assignment: 9/23 Date Assigned: 11/11 Date Due: 9/30 Date Due: 11/24 Assignment #2: Mortgage Basics Case Study I: Investment Analysis Date Assigned: 9/30 Date Assigned: 10/21 Date Due: 10/7 Date Due: 11/4 Assignment #3: Investment Analysis I Case Study II: Financial Distress Date Assigned: 10/28 Date Assigned: 11/18 Date Due: 11/11 Date Due: 12/2 MIT-CENTER FOR REAL ESTATE REAL ESTATE FINANCE AND INVESTMENT 11.431J/15.426J FALL 1999 Date Lecture Topic and Readings Comments/perspective are shown in italics. Use these comments to help prepare for lectures and recitation sections. 9/9 R Overview: Introduction/Recent History in Commercial Real Estate Equity and Debt Markets We will spend the first 45 minutes or so getting acquainted and going over the syllabus. Then I will give you a brief history of real estate finance, with particular emphasis on making the connection between financing and development. Brueggeman & Fisher, Chapter 1, pp.1-9. Standard introductory stuff. Skim. Brealey & Myers, Chapter 1, pp.3-10. Ditto. Packet: "What Have We Learned From the 1980s Experience," Anthony Downs, in Salomon Brothers Real Estate Research Report: Real Estate Investment, July, 1991. This article is a nice summary of the sins committed in the 1980's, and why they needn't happen again. 9/14 T Overview: Recent History Continued/Emerging Trends A continuation of the previous discussion. I will bring you up-to-date on happenings in real estate financing. Packet: Emerging Trends in Real Estate 1999, PriceWaterhouseCoopers and Lend Lease This is the most recent report. Read closely, as these reports accurately gauge current thinking in real estate finance and investment from an institutional perspective. 9/16 R Mortgage Basics: Borrower Screening and Loan Underwriting Considerations We will cover basic financial underwriting ratios used to qualify borrowers for debt financing. Brueggeman & Fisher, Chapter 6, pp.172-184. Short and sweet-from a residential lending perspective. Date Lecture Topic and Readings 9/21 T Mortgage Basics: Fixed-Rate Mortgages We will consider an extended example involving a fixed rate mortgage to illustrate concepts. Brueggeman & Fisher, Chapter 4, pp.85-111. Very basic, but relevant. 9/23 R Mortgage Basics: Adjustable-Rate Mortgages Fixed rate and adjustable rate mortgages are the most popular loan types in the U.S., so we need know something about them. Brueggeman & Fisher, Chapter 5, pp.125-130, 134-158. The lecture roughly follows the chapter. 9/28 T Mortgage Basics: The Mortgage Contract, Default and Foreclosure Here we briefly consider the legal side of the debt contract, but still from an economic perspective. The basic tension is between wary lenders who want maximum protection from those dishonest borrowers, and borrowers who want to max out on the debt and accumulate cheap options from those greedy lenders. Brueggeman & Fisher, Chapter 2, pp.21-46. Standard material, but important. The lecture will discuss these readings. If you are an attorney, and proud of it, please don't be shy about joining in the class discussion. 9/30 R Mortgage Basics: Strategic Considerations with Loan Workout I will take you through some mental gymnastics with respect to renegotiation strategy on financially distressed loans. When the goin' gets tough, self interest gets goin'. Packet: "Assessing the Causes and Consequences of Loan Defaults and Workouts," Joseph Philip Forte, Real Estate Finance, 1992, Vol. 9, pp.11-28, Fall. A nice practitioner-type article on workout. 10/5 T Mortgage Basics: The Choice Between Traditional and Conduits Loans This lecture is meant to introduce you to conduit lending and the conduit securitization process. We will analyze mortgage choice from the borrower's perspective. Packet: "Forces Changing Real Estate For At Least a Little While: Market Structure and Growth Prospects of the Conduit-CMBS Market," Tim Riddiough, MIT/CRE. Provides background of the conduit-CMBS market. Worth reading and non-technical. Date Lecture Topic and Readings 10/7 R Analysis of Income Property: Space Markets and Leasing Basics At this point we transition into income property finance. We begin by considering macro-market supply/demand dynamics. This leads into basic lease financing definitions and terminology. Brueggeman and Fisher, Chapter 8, pp.242-251, 257-260. Basic but important. Brealey and Myers, Chapter 26, pp.739-758. Deals with leasing more generally, but good background material. Can probably skim. 10/12 T Analysis of Income Property: Leasing Strategy In this lecture we consider subtler aspects to leasing strategy, both from the lessee and lessor perspective. Packet: "Leasing Risk, Financing Risk, and Capital Structure Decisions," Paul D. Childs, Steven H. Ott, and Timothy J. Riddiough, 1997, Mimeo, MIT. Technical. Try to follow arguments from an intuitive standpoint and ignore the Greek letters. Packet: "Simple Theory of Lease Maturity Choice," Timothy J. Riddiough, 1995, Mimeo, MIT. Some ideas to get you thinking about why tenants may prefer different lease maturities. 10/14 R Analysis of Income Property: Expenses, NOI and the Connection Between Space Market and Asset Market Equilibrium Understanding the theory behind capitalization rates is important, and will be the main focus of this lecture. Capitalizing rental streams also makes the connection between space markets and asset markets. Brueggeman & Fisher, Chapter 9, pp.285-290, Chapter 10, pp.311-314. Short and basic. Brealey and Myers, Chapter 4, pp.59-67. Read closely--we will dwell on these perpetuity formulas in lecture. 10/19 T Analysis of Income Property: Debt, Taxes and Capital Structure For some of you, this is will be the first of several repetitions on this important topic. The reason we spend so much time on capital structure decisions is because evaluating the tradeoffs between equity and debt financing has traditionally been ignored with private investment, but is now quite relevant to many investors. Brealey and Myers, Chapter 17. pp.447-466; Chapter 18, pp.474-509. These are very important readings. Reread them several times until you are a believer. Date Lecture Topic and Readings 10/21 R Analysis of Income Property: Reversion, Before and After-Tax Cash Flows, Sensitivity Analysis This is where we pull discounted cash flow analysis together. Brueggeman and Fisher, Chapter 10, pp.315-347; Chapter 11, pp.356-372, Chapter 12, pp.391-403. There are numerous performance measures and sensitivity analysis methods that are not covered in class (because much of it is overkill), but it is worth being exposed to a variety of more or less useful performance measures (i.e., tools for your toolbox). Brealey and Myers, Chapter 10, pp.239-265. Excellent discussion of the pros and cons of fancy methods of sensitivity analysis. 10/26 T Analysis of Income Property: Debt Security Design and Alternative Financing Mechanisms We will discuss two alternatives to traditional commercial mortgage finance: the participating mortgage and lease-backed security financing. Brueggeman & Fisher, Chapter 11, pp.372-380. We will follow this discussion in class. Packet: "Real Estate Lease-Backed Securities," John McMurray and Sam Mundel, MIT/CRE student thesis, 1997, pp.7-21. A good student thesis on lease-backed securities. 10/28 R Sourcing Equity Capital: Limited Partnerships Tod McGrath, Senior Vice President, McCall & Almy Tod discuss the advantages and disadvantages of the limited partnership structure as well as take you through some of the intricacies of limited partnership accounting. Brueggeman & Fisher, Chapter 12, pp.393-418. This chapter is very thorough and the extended example helps the reader through the accounting nuances. 11/2 T Sourcing Equity Capital: Syndicating the LIHTC Jenny Netzer, Boston Financial This is where creative finance and housing policy fuse together. Jenny will discuss recent trends in this important supply-side program. Packet: "The Credit for Low-Income Housing: Whose Shelter Is It?," Charles T. Carlisle, Real Estate Finance, 1987, Vol.3, pp.44-58, Winter. Good introduction to the low-income housing tax credit. Read closely, and think about why it is natural that this credit is syndicated through limited partnerships. Date Lecture Topic and Readings 11/4 R Real Estate Development: The Development Process and Development as an Option I will first briefly overview the development process. I will then discuss development as an investment option. This option pricing perspective is quite powerful, as it provides insight into development decision making at both the micro and macro levels. Brueggeman & Fisher, Chapter 15, pp.478-483. A short overview of the development process. Brealey and Myers, Chapter 21, pp.599-604. Good discussion of timing flexibility with investment. Packet: Investment Under Uncertainty, Avanish K. Dixit and Robert S. Pindyck, 1994, Chapters 1-2, pp.3-55, Princeton University Press Publ., 1st Ed. Worth rereading to nail down essential concepts. The land valuation example discussed in lecture comes almost directly from this reading. 11/9 T Real Estate Development: The Determinants of Development Activity and Commercial Real Estate Asset Market Equilibrium In this lecture we examine asset market equilibrium. This allows us to examine the determinants of commercial real estate construction. In general, the results suggest that developers behave according to predictions of the option model. Packet: "The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data," Steve Holland, Steve Ott, and Tim Riddiough, MIT/CRE Manuscript. We will follow the outline of this paper relatively closely in lecture. Packet: "Effects of Uncertainty on the Investment Decision: An Examination of the Option-Based Investment Model Using Japanese Real Estate Data," Jiro Yoshida, MIT/CRE Masters Thesis, 1999. Similar to the above reading, except that Japanese data are examined instead of U.S. data. 11/11 R Holiday 11/16 T Real Estate Development: Construction Financing of Commercial and Residential Development We will begin by discussing the process of monitoring and risk managing the construction loan process. Then we will work through examples that illustrate both construction lending on a single commercial development and land lending on multi-lot residential development. Brueggeman and Fisher, Chapter 15, pp.483-513, Chapter 16, pp.524-554. I will follow the basic outline of these readings in lecture. Date Lecture Topic and Readings 11/18 R Real Estate Development: Managing Interest Rate Risk Most construction loans are floating rate, which adds even more risk to the development process. Many developers don't care to take on this additional risk, and often consider interest rate risk management methods to neutralize downside risk. We will examine interest rate hedging to illustrate the ideas. Brealey & Myers, Chapter 25, pp.707-729. A useful introduction to managing risk. Packet: Brueggeman & Fisher, 9th Edition Chapter 18 Appendix, pp.632-641. A nice simplified introduction to hedging. The lecture will closely follow this reading. 11/23 T Institutional Investment: Rationale, Early Evidence, and Critique This lecture considers the classical rationale for commercial real estate in the investment portfolio (diversification benefits) and considers the pros and cons of the argument. Packet: Roger G. Ibbotson and Laurence B. Siegel, 1984, "Real Estate Returns: Comparison with Other Investments," AREUEA Journal 12, pp. 219-242. A classic early study that looks at risk and return of commercial real estate relative to stocks and bonds. We will be discussing it in depth, so read closely. Packet: David Hartzell, John Hekman and Mike Miles, 1986, "Diversification Categories in Investment Real Estate," AREUEA Journal 14, pp. 230-254. Examines diversification within real estate by property type. Packet: David J. Hartzell, David G. Shulman and Charles H. Wurtzebach, 1987, "Refining the Analysis of Regional Diversification of Income-Producing Real Estate," Journal of Real Estate Research 2, pp. 85-9. This one looks at regional diversification within real estate. 11/25 R Holiday 11/30 T Institutional Investment: Risk and Return Measurement Issues With Direct Investment In this lecture we learn about the evils of appraisal smoothing, and a method for correcting it. Packet: Jeffrey D. Fisher, David M. Geltner and R. Brian Webb, 1994, "Value Indices of Commercial Real Estate: A Comparison of Index Construction Methods," Journal of Real Estate Finance and Economics 9, pp. 137-164. Read this article closely, as most of the lecture is structured around it. Date Lecture Topic and Readings 12/2 R Institutional Investment: Market Organizational Structure We will review the old and new approaches to pension fund investment and how the investment infrastructure is organized. Packet: "The Graaskamp Roundtable," PREA Quarterly, Spring 1998. A revealing discussion of institutional investment based on a roundtable of past Graaskamp award winners. 12/7 T Institutional Investment: Long-Run Performance and The Choice Between Direct Investment and Public Market Investment Vehicles We will examine the results of a well-done student thesis that compares the long-run investment performance of the NCREIF index with an index of equity REIT performance. Packet: "A Risk-Adjusted Performance History of Public and Private Market Real Estate Investment 1978-97," Mark Moriarity and PJ Yeatman, MIT/CRE Thesis, 1999. The lecture will discuss the results of this thesis in detail, so worth reading. 12/9 R Wrap Up and Review for Final We will conduct a brief wrap-up and then review for the final exam. MIT-CENTER FOR REAL ESTATE REAL ESTATE FINANCE AND INVESTMENT 11.431J/15.426J FALL 1999 Date Recitation Topic/Responsibility 9/9 R-R Review of Basic Finance Concepts (Davidoff) 9/16 R-R Review of Basic Finance Concepts (Davidoff) 9/23 R-R Review of Basic Finance Concepts (Davidoff) Assignment #1 Out 9/30 R-R Review Mortgage Basics (Davidoff) Assignment #1 In Assignment #2 Out 10/7 R-R Review for Exam (Davidoff) Assignment #2 In 10/14 R-R Mid-Term Examination (Davidoff) 10/21 R-R Panel Discussion: Assessing Current Market Conditions/Leasing Strategy (McGrath) Case Study I Out (Investment Analysis) 10/28 R-R Return Exam and Discuss (Davidoff) Assignment #3 Out 11/4 R-R Case Study I In/Discussion (McGrath) 11/11 R-R Assignment #3 In/Discussion (Davidoff) Assignment #4 Out 11/18 R-R Panel Discussion: New Development Outlook (McGrath) Case Study II Out (Financial Distress and Redevelopment) 11/25 R-R Holiday Assignment #4 In (Due 11/24) 12/2 R-R Case Study II In/Discussion (McGrath) 12/9 R-R Discussion of Assignment #4/Review for Final (Davidoff)