Introduction to real estate
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Introduction to Real Estate. History and Concepts. Place vs. Property Rights. Is property ownership natural? Is property ownership desirable? What does ownership entail? How has ownership been used? What can history tell us?. Ancient History. Old Babylonian Period, Iraq.

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Introduction to real estate

Introduction to Real Estate

History and Concepts


Place vs property rights

Place vs. Property Rights

  • Is property ownership natural?

  • Is property ownership desirable?

  • What does ownership entail?

  • How has ownership been used?

  • What can history tell us?


Ancient history

Ancient History

  • Old Babylonian Period, Iraq.

  • “In the presence of these witnesses

  • 36 meters square of fallow land from Adad-nuri

  • And Samas-rimeni his sone

  • Sin-Remeni bought

  • 14 shekels of silver, for its full price he paid (weighed)


Document reverse

Document Reverse

  • Witnesses:

    • Nin-melam

    • Ubaia son of Abu-wedum

    • Manum son of Ilanum

    • Etel-pi-Sin son of Sesani

    • Harri-

    • Sin- the equerry

    • Samas-abimu

    • Sin-apil-Sin son of Idin-ili

    • Idin-Estar shepherd of ?

    • Gis-u-a

    • Ipkusa son of Sin-maba

    • Ubaiatumu son of Aputum

    • Idissum-Kamarki

    • Harizum so of la-

    • Damu-ellassu the equerry


Contract

Contract

  • Transfer of ownership (allowing?)

    • Defined quantity of land (where)

    • Full price in weighed silver (why full?)

    • Record of an act

    • Role of witnesses (who were they?)

    • Why so many?

    • Why no date?


China

China

  • 82-character inscription

  • Gebo purchased 30 plots of land from Pengsheng in exchange for four horses.

  • The inscription indicates that they had the land surveyed and drew up a written agreement which was then divided between them.


Introduction to real estate

  • Ceremonial Vessel

  • Bronze Inscription

  • Bronze model of bi-partite deed contract (from later dynasty)


Mortgages

Mortgages

  • Mirashu clan and contingent clan

  • 500 B.C. Nippur. 423 death of Atraxerxes

  • Sogdanius vs. Ochus - Darius II.

  • Mortgage Defaults financed revolution


Excavation of nippur

Excavation of Nippur


Real estate as rights

Real Estate as Rights

  • Property: Thing that can be used, enjoyed, conveyed

  • Property Rights: Rights that can be exercised or conveyed by owner

  • Interests in Property: created by owner, pledge or encumber property without giving up ownership.


Estates

Estates

  • How and how rights are owned

  • Estate in possession (or not)

  • Freehold vs. Leasehold

  • Fee simple: free to divide, encumber etc.

  • Leasehold estate: years vs. year to year

    • Lessee leases property from lessor.

  • Title, deed

    • General warranty, special warranty, quitclaim


Title

Title

  • Capital does not exist without title.

  • Capital without title is “dead.”

  • Process of transfer and development matters.

  • Separates first world from third world.


Introduction to real estate

Procedure to gain access to desert land for construction purposes and to register property rights in Egypt (6-14 years)


Title freeing up capital

Title: Freeing up Capital

  • Mortgages free up capital in household savings. “Securitization.”

  • Real estate as fundamental asset.


Land banks

Land Banks

  • Depreciation of Silver (1600’s)

  • Land as fixed capital asset:

  • anti-inflation

  • Scottish proposal: Law 1705

  • Examples from New England:

  • 1686, 1733 –New London

  • Goal: to provide money backed by real asset.


Henry george 1839 1897 freehold vs leasehold

Henry George (1839-1897)Freehold vs. Leasehold

We have reached the deplorable circumstance where in large measure a very powerful few are in possession of the earth's resources, the land and its riches and all the franchises and other privileges that yield a return. These positions are maintained virtually without taxation; they are immune to the demands made on others. The very poor, who have nothing, are the object of compulsory charity. And the rest -- the workers, the middle-class, the backbone of the country -- are made to support the lot by their labor.


Rights to personal enjoyment

Rights to Personal Enjoyment

  • People’s rights vs. personal rights

  • Elimination of private property

  • In its aftermath?


Real estate as an asset

Real Estate as an Asset

Features and valuation


What s special about real estate as an asset class

What's Special About Real Estate as an Asset Class?

Immobility

  • Location is key characteristic

  • Local economic issues prevail in valuation i.e. city-wide employment

  • Micro economic conditions might prevail i.e. street locus

  • Localized knowledge and expertise

  • Subject to local laws, restrictions and conditions

  • Uniqueness of location


Undeveloped

Undeveloped

  • All potential

  • Infinitely lived so timing is crucial

  • Option value to development

  • Land is only as valuable as the associated property rights

  • Building as physical asset


Developed

Developed

  • Depreciating asset

  • Development decision re. capacity choice

  • Hard to conceal or disguise

  • Long development time

  • Relatively expensive

  • Indivisibility of building/land

  • Uniqueness of building makes pricing difficult

  • Requires financing

  • Requires syndication


What s important about real estate

What's Important About Real Estate?

  • Big business : 10% of U.S. economy

  • Component of balance sheets of all businesses as asset or lease liability.

  • Everyone's home >65% of households own.

  • Major securitization of the bond market.

  • Major personal asset and/or liability.

  • >6% of institutional investment portfolios


Securitization

Securitization

  • MBS revolution in 80's pass-throughs

  • High-tech revolution in 90's strips. I.O.'s

  • REIT IPO billions each year.

  • CMBS a major fixed income class

  • Emerging derivatives market


How it works

How it Works

  • Land

    • primary and ancillary righrts

    • Timing of Development & Construction

  • Development

    • Choice: Office, Industrial, Retail, Residential Highest and best use

    • Financing

    • Syndication

  • Management

    • Bridge Permanent Management Leasing

  • Turnover

  • Maintenance

  • Transaction

  • Valuation

  • Marketplace

  • Negotiation

  • Taxes Demolition Alternative use


Introduction to real estate

Land

  • Primary and ancillary rights

  • Timing of Development & Construction


Development

Development

  • Choice: Office, Industrial, Retail, Residential

  • Highest and best use

  • Financing

    • Debt/Equity choice

    • Syndication, partnership structure

    • Development loan

    • Bridge loan


Management

Management

Leasing

  • Tenants

  • Lease terms

  • “bundle” of leases

  • Turnover

  • Maintenance


  • Transaction

    Transaction

    • Valuation

    • Marketplace

    • Negotiation

    • Or demolition and reversion to land


    Methods of valuation

    Methods of Valuation

    • Comparables

    • Replacement Value

    • Discounted Future Cash Flows


    Sources of value

    Sources of Value

    • Land & Other rights

    • Building Leases

    • Options -- granted and owned

    • Strategic Advantage

    • Mortgage "Put"


    Leases

    Leases

    • Lessor: “A person who rents property to another under a lease. (Landlord)”

    • Asking vs. effective rent

    • Term of the Lease

      • Base Rent

      • Expense Responsibility

      • Participating Income

      • Renewal Option

      • Expense Stops

      • CPI Adjustment

    • Office = "Net" or "Triple Net" “A lease providing that the tenant pay for all maintenance expenses, plus utilities, taxes, and insurance. This results in lower risk for investors, who usually form a limited partnership.”


    Example the century tower

    Example: The Century Tower

    • New Haven Office Building at Church and Grove

    • Class A Office Space

    • 24 Floors

    • Ground Floor Retail

    • Parking

    • 285,000 Net Leasable Area

    • Built in 1989, For a price of $50 million

    • Mortgaged & Repossessed

    • Fully Leased with professional offices @ $15 per square foot

    • Flagship Tenant at $10, other tenants at $20

    • Flagship Lease of 7 years, Other Leases at 3 years


    Discount rates

    Discount Rates

    • CAPM possibilities - systematic risk

    • Comparable possibilities

    • Cash flow risk

    • Building like a bond portfolio

    • convertibility

    • re-investment risk & lease renewal

    • diversification & risk

    • borrower risk pass-through


    Performance measures

    Performance Measures

    • Price Per Square Foot

      • Gross and Rentable

    • Cap Rate : NOI/Price

      • Going in

      • Going out


    Performance measures cont

    Performance Measures (cont)

    • Equity Dividend Rate

      • BTCF1/ Equity Investment

    • Debt Coverage Ratio

      • NOI/MTG PMT

    • NPV

      • Profitability: PV/Initial Investment

    • IRR

      • Modified IRR


    Issues with pro forma

    Issues with Pro Forma

    • Single forecast

    • Discount rate choice

    • Assumptions about resale

    • Lacks dynamics and risk

    • Not tied to real economy


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