REAL Real Estate Finance & Investments Course Syllabus for Spring 2014

Transcription

1 REAL Real Estate Finance & Investments Course Syllabus for Spring 2014 Lectures: Instructor: Office: Office Hours: Phone: Wednesday 6:30pm-9:15pm Koelbel Building, Room 220 Matt Godley Real Estate Center KOBL S350B Wednesday 5:00pm-6:30pm and by appointment (Cell) Description and Objective: This course will concentrate on applying economic and finance concepts to real estate problems. A student who is comfortable with fundamental economic principles and with the mathematics of finance will do well in this course. The lectures will cover topics in mortgage instruments, mortgage markets, residential real estate closing, income property analysis, financial leverage, real estate valuation, securitization, and real estate investments. The student will analyze income properties using Microsoft s Excel and ARGUS Financial Software. Students are required to use ARGUS-DCF in this class. ARGUS-DCF is widely used throughout the real estate industry by equity investors, lenders, commercial brokers, appraisers and property managers to analyze and manage income producing (e.g. apartments and commercial) properties. The students will receive some instruction on how to use ARGUS-DCF during class. Required Materials: 1. A financial calculator or spreadsheet program that has the ability to compute present and future values, periodic payments to amortize debt, net present value and internal rate of return. The student must bring the calculator to every class. 2. Text: Real Estate Finance and Investments, by Brueggeman and Fisher (BF). Fourteenth Edition. McGraw-Hill Irwin, Inc ISBN Course materials, including copies of the PowerPoint slides used in class, are available on Desire2Learn. 1

2 4. Students are required to use ARGUS-DCF for this class. The software is installed in the student labs (Rooms 320 and 380). You may purchase a student license of ARGUS-DCF for $99. Instructions for purchasing a student license will be provided later in the semester. Please Note System Requirements for the student license: Windows PC or Macintosh computer running an Emulator or Bootcamp Windows XP or better Internet Explorer 7.0 or better ARGUS has recently initiated the ARGUS Software Certification (ASC) Program for Universities. Students who are serious about a career in real estate are STRONGLY ENCOURAGED to obtain certification. This certification will differentiate you in the market for recently minted Real Estate undergraduates. Professor Thibodeau is ASC. Disability Statement: If you qualify for accommodations because of a disability, please submit to your professor a letter from Disability Services in a timely manner (for exam accommodations provide your letter at least one week prior to the exam) so that your needs can be addressed. Disability Services determines accommodations based on documented disabilities. Contact Disability Services at or by at dsinfo@colorado.edu. If you have a temporary medical condition or injury, see Temporary Medical Conditions: Injuries, Surgeries, and Illnesses guidelines under Quick Links at Disability Services website and discuss your needs with your professor. Absences Due to Religious Observances: Campus policy regarding religious observances requires that faculty make every effort to deal reasonably and fairly with all students who, because of religious obligations, have conflicts with scheduled exams, assignments or required attendance. If you have a conflict with a test or assignment for this course because of a religious obligation, see me to schedule an alternative date. See full details at Classroom Behavior: Students and faculty each have responsibility for maintaining an appropriate learning environment. Those who fail to adhere to such behavioral standards may be subject to discipline. Professional courtesy and sensitivity are especially important with respect to individuals and topics dealing with differences of race, color, culture, religion, creed, politics, veteran's status, sexual orientation, gender, gender identity and gender expression, age, disability, and nationalities. Class rosters are provided to the instructor with the student's legal name. I will gladly honor your request to address 2

3 you by an alternate name or gender pronoun. Please advise me of this preference early in the semester so that I may make appropriate changes to my records. See policies at and at Policy on Discrimination and Harassment: The University of Colorado Boulder (CU-Boulder) is committed to maintaining a positive learning, working, and living environment. The University of Colorado does not discriminate on the basis of race, color, national origin, sex, age, disability, creed, religion, sexual orientation, or veteran status in admission and access to, and treatment and employment in, its educational programs and activities. (Regent Law, Article 10, amended 11/8/2001). CU-Boulder will not tolerate acts of discrimination or harassment based upon Protected Classes or related retaliation against or by any employee or student. For purposes of this CU-Boulder policy, "Protected Classes" refers to race, color, national origin, sex, pregnancy, age, disability, creed, religion, sexual orientation, gender identity, gender expression, or veteran status. Individuals who believe they have been discriminated against should contact the Office of Discrimination and Harassment (ODH) at or the Office of Student Conduct (OSC) at Information about the ODH, the above referenced policies, and the campus resources available to assist individuals regarding discrimination or harassment can be obtained at Honor Code Policy: All students of the University of Colorado at Boulder are responsible for knowing and adhering to the academic integrity policy of this institution. Violations of this policy may include: cheating, plagiarism, aid of academic dishonesty, fabrication, lying, bribery, and threatening behavior. All incidents of academic misconduct shall be reported to the Honor Code Council (honor@colorado.edu; ). Students who are found to be in violation of the academic integrity policy will be subject to both academic sanctions from the faculty member and nonacademic sanctions (including but not limited to university probation, suspension, or expulsion). Other information on the Honor Code can be found at and at Course Requirements and Grading: 1. a take-home ARGUS case study worth 15% of your course grade; 2. two in-class mid-term exams each worth 20% of your course grade; and 3. an in-class cumulative final exam worth 45% of your course grade. The first mid-term exam is scheduled for Wednesday, February 12 and the second exam is scheduled for Wednesday, March 19. The take-home ARGUS problem will be assigned on Wednesday, April 2 and is due at 6:30pm on Wednesday, April 9. The final exam is mandatory and currently scheduled for Wednesday, May 7. All students must take each exam at the scheduled time. If a student has a valid excuse for missing an exam (i. e. a death in the family), then I will simply place a greater weight on the final exam. I will make exceptions for religious holidays. 3

4 Schedule of Classes, Course Outline and Assignments Class Meeting #1: Wednesday, January 15, 2014 I. Introduction A. Organization of the Course B. Course Objectives/Finance Overview II. Loans (Chapter 4 PowerPoint.pptx) A. Pure Discount B. Interest Only C. Fixed Rate, Constant Payment Conventional Mortgages 1. Amortization Schedules 2. Expected Yields 3. Effect of Prepayment on Expected Yield 4. Truth in Lending and the Annual Percentage Rate (APR) 5. Computing Points Necessary to Achieve a Desired Yield Assignment: Read Chapter 4 of BF and do Chapter 4 problems 2, 10, 13, 15, and 20 on pages Class Meeting #2: Wednesday, January 22, 2014 D. Introduction to Alternative Financing Instruments (Chapter 5 PowerPoint.pptx) 1. Graduated Payment Mortgages 2. Price Level Adjusted Mortgages 3. Adjustable Rate Mortgages a. Indices b. Margin c. Periodic and lifetime interest rate caps d. Initial Rate e. Expected yield 4. Reverse Annuity Mortgages 5. Payment Option ARMs E. Residential Financial Analysis (Chapter 6 PowerPoint.pptx) 1. Incremental Borrowing Cost 2. Refinancing 3. Market Value of a Loan 4. Effective Cost of Two or More Loans 5. Cash Equivalency 6. Wraparound Loans 7. Buydown Loans Assignment: Read Chapters 5 and 6 of BF. Do problems 1-7 on pages of BF. 4

5 Class Meeting #3: Wednesday, January 29, 2014 III. The Housing Market, Tenure Choice and Residential Closings (Chapter 7 PowerPoint.pptx) A. A Stock-Flow Model B. The Decision to Rent or Buy 1. A Tenure Choice Spreadsheet C. Residential Real Estate Closing (Chapter 8 PowerPoint.pptx) 1. Prorations, Escrow Costs, and Payments to Third Parties 2. RESPA and the Uniform Settlement Statement Assignment: Read Chapters 7 and 8 of BF. The tenure choice problem will be assigned today. Also, do problem 3 on page 253 of BF. Class Meeting #4: Wednesday, February 5, 2014 IV. The 2008 Financial Crisis (Financial Crisis PowerPoint.pptx) A. What Happened? 1. The Mortgage Instruments 2. Mortgage Underwriting 3. Subprime Loans B. The Institutions 1. Investment Banks 2. Rating Agencies 3. The Insurers 4. The Federal Government Review for Exam #1. Exam #1 will cover the materials in Chapters 4, 5, 6, 7 and 8 of BF. Class Meeting #5: Wednesday, February 12, 2014 Exam #1. You must have your calculator and a writing instrument to take the exam. Class Meeting #6: Wednesday, February 19, 2014 V. Introduction to Real Estate Markets and Commercial Property Leases (Chapter 9 PowerPoint.pptx) A. Real Estate Markets 1. Property Types 2. Demand for Space 3. Supply of Space a. Existing Stock b. New Construction c. Conversions 4. Equilibrium 5. Cycles a. Property Markets 5

6 b. Capital Markets B. Commercial Property Leases 1. Base Rent 2. Rent Changes 3. Percent of Sales 4. Reimbursed Expenses VI. Income Property Analysis (Chapter 11 PowerPoint.pptx) A. Computing After Tax Cash Flows from Operations for Income Producing Properties 1. Net Operating Income 2. Before Tax Cash Flow From Operations 3. Business Expenses a. Amortization of Loan Fees b. Mortgage Interest c. Depreciation 4. The Passive Activity Loss Limitation 5. After Tax Cash Flow From Operations Assignment: Read Chapters 9 and 11 of BF. Do problems 1, 3, 4 and 5 on pages of BF. Class Meeting #7: Wednesday, February 26, 2014 B. Computing After Tax Cash Flows from Reversion for Income Producing Properties 1. Before Tax Cash Flow from Reversion 2. Taxation of the Gain from the Sale of Income Producing Properties 3. After Tax Cash Flow from Reversion C. The Investment Decision 1. The Internal Rate of Return 2. Net Present Value 3. Financial Ratios VII. Financing Income Producing Properties (Chapter 12 PowerPoint.pptx) A. Financial Leverage B. Participation Loans C. Accrual Loans D. Convertible Mortgages Assignment: Read Chapter 12 of BF. Do problems 1, 5, 6, 7, and 8 on pages of BF. Class Meeting #8: Wednesday, March 5, 2014 IX. Valuation (Chapter 10 PowerPoint.pptx) A. Introduction 1. Define market value 2. Techniques for estimating market value B. Market Comparison 1. Find similar properties that recently sold (comparables) 6

7 2. Price the comparables as if they had subject property characteristics 3. Reconcile market value estimates 4. Apartment property example C. Cost 1. Land costs a. acquisition b. site development costs 2. Building (improvement) costs a. reproduction cost b. depreciation i. physical ii. functional iii. economic 3. Add land value to depreciated reproduction cost D. Income approaches 1. Overall capitalization a. Relationship between capitalization rates and discount rates 2. Discounted cash flow methods a. Property DCF (unleveraged) b. Before tax equity DCF (leveraged) c. After tax equity DCF (leveraged) 3. Office property example. Assignment: Read Chapter 10 of BF. Valuation problems will be assigned today. Class Meeting #9: Wednesday, March 12, 2014 X. Risk (Chapter 13 PowerPoint.pptx) A. Sensitivity Analysis B. Partitioning the IRR C. Lease Risk D. Introduction to Real Options Assignment: Read Chapter 13 of BF. Review for Exam #2. Exam #2 will cover the material in Chapters 10, 11, 12 and 13 of BF. Class Meeting #10: Wednesday, March 19, 2014 Exam #2. You must have your calculator and a writing instrument to take the exam. 7

8 Class Meeting #11: Wednesday, April 2, 2014 Introduction to ARGUS Financial Software Assignment: Willowbrook Apartments ARGUS case study (due following class meeting). Class Meeting #12: Wednesday, April 9, 2014 XI. Disposition, Refinancing and Renovation (Chapter 14 PowerPoint.pptx) A. Disposition: IRR for Hold vs. Sell B. Refinancing IRR C. Renovation IRR XII. Corporate Real Estate (Chapter 15 PowerPoint.pptx) A. Lease vs. Own (Unlevered and Levered) 1. Acquisition Cash Flows 2. ATCF from Operations 3. ATCF from Reversion 4. The Return on the Business vs. the Return on the Property B. Sales-leaseback 1. Tax Aspects 2. After Tax Cash Flows from Operations 3. After Tax Cash Flows from Reversion 4. Effective Cost of a Sale-Leaseback Assignment: Read Chapters 14 and 15 of BF. Do problems 1, 2 and 3 on pages and problems 1, 2, and 3 on page 505 of BF. Class Meeting #13: Wednesday, April 16, 2014 XIII. Financing Proposed Projects (Chapter 16 PowerPoint.pptx) A. Financing Project Development: construction loans B. Financing Project Development: Two examples XIV. The Secondary Mortgage Market and Residential Mortgage Backed Securities (RMBSs) A. Operation of the Secondary Mortgage Market (Chapter 19 PowerPoint.pptx) 1. Mortgage securitization a. introduction to pricing the security i. Mortgage Backed Bonds ii. Mortgage Pass Through Securities b. Examples i. GNMA consisting of 20 identical $50,000 loans ii. GNMA consisting of 20 $50,000 loans; 10 with a 9% rate, 10 with 11%. c. MBS terms i. pool factor ii. mortgage balance iii. prepay rates iv. weighted average life 8

9 v. half life vi. duration d. Prepayments i. Why Homeowners Prepay (a) Financial Incentives (b) Socioeconomic Influences (c) Other (Disaster Losses, etc.) ii. Prepayment Models (a) No Prepayments (b) Prepay in 12 (c) Constant Prepay Rates (CPR) (d) FHA Experience (Historical Survival Rates) (e) FHA Multiples (f) Public Securities Administration (PSA) Model Assignment: Read Chapters 16 and 19 of BF. The GNMA MBS problem will be assigned today. Class Meeting #14: Wednesday, April 23, 2014 XV. Commercial Mortgage Backed Securities (Chapter 20_CMBS PowerPoint.pptx) A. Introduction to CMBS 1. What is a CMBS? 2. The market for income property debt 3. Anatomy of a CMBS a. Expected Cash Flows b. Multi-class Sequential Pay Pass Through c. The unrated piece d. The IO piece e. Required subordination 4. CMBS Risks a. Call protection i. lock-outs ii. prepayment penalties/yield maintenance iii. Treasury defeasance b. cross-collateralization c. cross-default d. lock-box 5. Underwriting CMBSs a. Rating Agencies b. CMBS Servicers i. Master servicer ii. Sub-servicer iii. Special servicer B. Rating CMBS 1. Property Cash Flow Adjustments 2. Capitalization Rate Adjustments 9

10 3. Pool Analysis C. Delinquency and Default Risk 1. Default Research 2. ACLI Data 3. Predicting commercial mortgage delinquency and default XVI. Real Estate Investment Trusts (Chapter 21 PowerPoint.pptx) A. Introduction to REITs 1. Legal requirements a. Asset b. Income c. Distribution d. Management 2. Why REITs? a. Taxes b. Liquidity c. Economies of Scale 3. Types of Trusts a. Equity, Debt, Hybrid b. REITs, UPREITs, DownREITs 4. Property Type REITs 5. REIT Capitalization B. Financial Analysis of REITs 1. Funds from Operation (FFO) 2. Net Asset Value 3. Capital Structure a. Leverage b. Finite Life REITs c. Closed vs. Open end REITs C. REIT Growth and Development 1. Internal 2. External D. REIT Examples Assignment: Read pages and Chapter 21 of BF. Do problems 1 and 2 on pages of BF. Class Meeting #15: Wednesday, April 30, 2014 XVII. Real Estate Investment Performance (Chapter 22 PowerPoint.pptx) A. Real Estate Investment Returns 1. Public 2. Private B. Pension Funds and Real Estate C. Real Estate in a Mixed Asset Portfolio 1. Domestic 2. Global 10

11 Assignment: Read Chapter 22 of BF. Review for Final Exam (cumulative of all course material) Class Meeting #16: Wednesday, May 7, 2014 Final Exam. You must have your calculator and a writing instrument to take the exam. 11