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Real Estate Finance & Investments
This text continues to be the leader in its field with the most comprehensive coverage available and more challenging end-of-chapter problems than its competitors. This book is the "cornerstone" of real estate finance texts,and will continue to be by maintaining its strengths while keeping up with industry trends. For the Real Estate Finance/Investments course. Real Estate Finance is generally an elective for finance majors at both the undergraduate and MBA level. However,students are required to have taken an introductory finance class.
832 pages, Hardcover
First published January 1, 1993
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January 19, 2010
Read this for the class I took at work.
June 30, 2021
I have an English degree but took a class on finance as a prerequisite to a certificate. This book was a hard to read on a grammar front. I had to read things several times to really understand it and even then I had to look up on the internet. Reading a textbook is always a chore. Use it as a guide instead.
Read
January 27, 2024the term real in real estate comes from the term realty, which has, for centuries, meant land and all things permanently attached
personalty, which includes all intangibles and movable things (e.g., automobiles, shares of stock, bank accounts, patents).
The term estate has evolved to mean “all that a person owns,” including both realty and personalty.
As the number of disputes increased, a pragmatic solution evolved requiring that all transactions involving real estate be evidenced by a written, signed contract in order to be enforceable. This requirement was included as part of the Statute of Frauds and Perjuries, which was passed in England in 1677 with the intent of reducing the number of disputes and questionable transactions brought before the court.
fixtures. These are items that were once personal property but have become real property because they have either been attached to the land or building in a somewhat permanent manner or are intended to be used with the land and building on a permanent basis. Examples include built-in dishwashers, furnaces, and garage door openers.
Title assurance refers to the means by which buyers of real estate “(1) learn in advance whether their sellers have and can convey the quality of title they claim to possess, and (2) receive compensation if the title, after transfer, turns out not to be as represented.
A general warranty deed is the most commonly used deed in real estate transactions and the most desirable type of deed from the buyer’s perspective. It offers the most comprehensive warranties about the quality of the title.
The American Land Title Association (www.alta.org), founded in 1907, is the national trade association for the title insurance industry.
reserves sufficient to meet insured losses
In general, mechanics’ liens give unpaid contractors, workers, and material suppliers the right to attach a lien on the real estate to which they added their labor or materials. To obtain the payment owed them, they may foreclose such liens by forcing a judicial sale of the encumbered property.
The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) have adopted joint standardized mortgage forms for the purpose of facilitating secondary-market transactions on a nationwide basis.
The new purchaser may be willing to accept the transfer of mortgage if he or she thinks the value of the property exceeds the balance due on the mortgage. The risk is that the new buyer will default, and the seller will again have responsibility for the debt and get the property back.
Thus, the buyers may have little to lose by taking a chance on acquiring the property subject to the mortgage. If it turns out to be a good investment, they will continue to make payments on the debt, but if they find that the value of the property is unlikely to exceed the mortgage debt within a reasonable time frame, they can simply stop making payments and let the sellers reacquire the property. Thus, we see that in this situation buyers of the property “subject to” a mortgage have in effect purchased an option.
a junior mortgagee with a $10,000 lien considers to be worth more than $50,000. If the junior lienor does not bid for the property
English maxim of “redeem up, but foreclose down.”
Payment of property taxes is an obligation of the mortgagor. As such, taxes constitute a prior lien against the security. Transfers of title always take into account accrued but unpaid taxes.
bankruptcy under Chapters 7, 11, and 13 of the Bankruptcy Code
real-estate-law.freeadvice.com—Many good FAQs about real estate law. Legal advice written by lawyers for nonlawyers.
Most calculations are carried out to at least six decimal places, then final monetary amounts are rounded back to two decimal places.
www.bankrate.comthat has interest rates on certificates of deposit (CDs) and see what the current rate is for a five-year CD
The concept of present value is based on the idea that money has time value. Time value simply means that if an investor is offered the choice between receiving $1 today or receiving $1 in the future, the proper choice will always be to receive the $1 today because this $1 can be invested in some opportunity that will earn interest, which is always preferable to receiving only $1 in the future. In this sense, money is said to have time value. When determining how much should be paid today for an investment that is expected to produce income in the future, we must apply an adjustment called discounting to income received in the future to reflect the time value of money. The concept of present value lays the cornerstone for calculating mortgage payments, determining the true cost of mortgage loans, and finding the value of an income property, all of which are very important concepts in real estate finance.
This is done in our problem by taking the reciprocal of the interest factor for the compound value of $1 at 6 percent, 1 1.06 or .943396, and multiplying it by the future value of the investment to find its present value. We can now say that $10,600 received at the end of one year, when discounted by 6 percent, has a present value of $10,000. Alternatively, if we are offered an investment that promises to yield $10,600 after one year and we want to earn a 6 percent annual return, we should not pay more than $10,000 for the investment
the problem involves equal payments (P) or deposits made at equal time intervals. This series of deposits or payments is defined as an annuity.
symbol Σ represents the “sum of” that series and is simply a shortcut notation to be used in place of writing 1 + i repetitively.
The factor .163797 is referred to in real estate finance as a sinking-fund factor (SFF)
the nominal interest rate on any investment is partially determined by the real interest rate plus a premium for the expected rate of inflation.
the interest only loan, is sometimes called a zero amortizing loan. As we have discussed, in this case the pay rate will equal the accrual rate. Consequently, the loan balance at the end of each month will remain the same as the original loan amount. The full, original, loan amount will have to be paid at maturity.
these “take-downs” are also referred to as “draws.” In recent years, RAMs have also become important to the home-owning population as they approach retirement and seek ways to supplement their retirement income.
It should be noted that losses incurred by lenders result in gains to borrowers. Of course, one could argue that if interest rates declined, then lenders would gain. However, when this occurs, borrowers usually try to refinance their loans. This pattern implies that with fixed interest rate lending, risk bearing may not be “symmetric,” or evenly balanced; that is, lenders bear the risk of loss when interest rates increase, which may not be equally offset by gains if interest rates decline because borrowers can usually prepay loans and will do so when interest rates decline. This problem has motivated lenders and borrowers to use interest rate caps and floors
When the actual start rate is very low when compared to the expected start rate, it is usually an indication that lenders are actively competing and are willing to offer a lower initial rate of interest (teaser rate) in order to attract borrowers. One additional issue that borrowers must determine is whether they are getting a true discount or whether the lower rate of interest will be deferred interest which will be added to the loan balance.
Because it is inefficient for lenders to make loans with low loan-to-value ratios
Private mortgage insurance is a way of getting a loan thatisgreater than an 80 percent loan-to-value ratio. Companies like Mortgage Guarantee Insurance Corporation (www.mgic.com) offer such loans.
We cannot solve directly for the solution because there are two unknowns.
Suppose that the prepayment penalty of 2 percent must be paid on the existing loan, and the lender who is making the new loan available also requires an origination fee of $2,500 plus $25 for incidental closing costs if the new loan is made. Should the borrower refinance?
a well-known interest rate index (e.g., the prime rate).
added security provided by second liens
The wraparound rate of 10 percent is, in effect, a weighted average of the rate on the existing loan (8 percent) and the rate on a second mortgage (15.5 percent). The weighted average is (90,000 120,000 8%) (30,000 120,000 15.5%) 9.875 percent, or about 10 percent. This is often referred to as a “blended rate”
estimated that housing and related services account for as much as 15 percent of total U.S. output
(1) first-time home purchasers tend to be 28–32 years of age, (2) households tend to sell their first home and purchase a different home (upgrade) by age 40, and (3) potential purchases of vacation or second homes usually occur by age 48–52. Retirement homes are usually considered when households reach 60 years of age or older.
Tax Treatment of Second or Vacation Homes:
B. If the property is owned for personal use and rented for 14 days or less per year, no rents or expenses must be reported.
C. If the property is owned for both personal use and rented, all rental income must be reported and all expenses can be deducted. Personal use cannot exceed 14 days or 10% of the number of days for which it was rented (whichever is greater).
refinancing, in which case there may be no federal income taxes to pay because refinancing is not a “taxable event.” This example also clearly illustrates why investing in housing financed with mortgage loans has provided an extremely powerful financial incentive for households, particularly those interested in long-term wealth accumulation. Consider the research done by economists on the so-called “wealth effect.”
(1) natural advantages (e.g., seaport, minerals, low-cost energy, and beaches), (2) employee characteristics such as a highly trained, educated workforce (e.g., location of universities, workforce training in technical industries), and/or (3) proximity to many major consumer markets (e.g., transportation hub). Regional examples would include high-tech research and development (California, Seattle, Boston), oil and gas exploration (Houston), communication and computer assembly (Austin, San Diego), medical technology/clinics (Minnesota, Boston), and production of entertainment (Los Angeles).
www.census.gov:
• Housing construction permits
• Construction starts
• Housing units under construction
• Housing units completed
• Quarterly survey of housing vacancies
gauge the likelihood of any short-run price movement that may affect the estimate of value
Default risk may be fully assumed by the lender, shared by the lender and a third-party insurer, or fully assumed by a third-party insurer or guarantor.
FNMA and FHLMC (Fannie Mae and Freddie Mac). these two government-sponsored enterprises (GSEs) dominate the secondary residential mortgage market in the United States.
lenders may be willing to grant a loan request in excess of 80 percent of value with a condition that the borrower purchase mortgage insurance against default risk. Many firms provide this insurance for a premium, which is paid by the borrower
Lenders are not allowed to earn or pay the borrower interest on the initial deposit or monthly payments made into the escrow account.
the composite rate (the index plus the margin)
large warehouses choose a location in an area that will minimize delivery expenses
the vast majority of real estate used by business firms is leased and not owned.
One general exception to the above observations may occur if a single tenant-user requires its own facilities for its corporate headquarters or must have unique features such as high-tech labs, specialized computer installations, security, or other features that are unique. In these very special cases, ownership may be preferred to leasing.
Triple net, or net, net, net leases. As in the single and double net lease, in addition to paying operating expenses, taxes, and insurance, the tenant also agrees to pay certain recurring capital outlays for repairs, alterations, and modifications to the interior of the leased building space. (Triple net leases are commonly used by tenants occupying large amounts of space in warehouse/industrial properties or office buildings. In these cases, tenants may require the flexibility to modify, move fixtures, and reconfigure the interior space in order to operate their business efficiently.
rents specified in leases may be flat, stepped up, indexed, or based on some level of business performance.
Retail properties derive much of their value from the landlord’s ability to lease to a mix of tenants that attract shoppers. Key indicators of the success of a retail property include sales per square foot of rentable space and customer traffic counts. When developing retail properties, owners usually complete a trade area analysis. This study uses the population, age, and income of potential customers.
percentage rent lease. The rationale for this usually occurs when, in spite of high traffic counts and sales volumes, in-line tenants believe that the base rents being asked by the property owner are relatively high. In these cases, tenants may prefer to negotiate a lower base rent and agree to pay additional rents (referred to as overage rents) if their business in the retail property is successful. The additional rent is based on a percentage of the retail sales above some breakpoint sales level.
kick out clause, which specifies that the tenant must achieve a certain level of sales per square foot within a specific period of time (e.g., two years), otherwise either the property owner or the tenant may terminate the lease.
A signage clause confers the right to display a name inside and/or outside of the building or in the mall ways.
exclusivity clause limits the ability of the property owner to lease space in the building to competitors
estoppel certificate
The question of whether or not it is a good investment will depend on the future growth in rents, income, and property values.
the Hypothetical Hills apartment complex
Land value is determined by its highest and best use
A common measure of this risk is the debt coverage ratio (DCR). Lenders typically want the first-year debt coverage ratio to be at least 1.2.
The Tax Act of 1993 introduced a second exception to the PAL rules that provides relief for real estate brokers, sales associates, and other real estate professionals who can demonstrate “material involvement in the real estate business.”13 These individuals are eligible to deduct unlimited real estate losses (1) if more than half of all personal services they perform during the year are for real property trades or businesses in which they materially participate, and (2) if they perform more than 750 hours of service per year in those real estate activities.
payroll employment and other data collected from the U.S. Department of Labor (http://www.dol.gov/).
20–34 years of age represent the largest percentage of renters
interest rate swaps may be used to achieve the equivalent of a fixed interest rate.
The lender will consider the borrower’s ability to pay should income from the property be insufficient to pay debt services. However, in many cases borrowers and lenders may agree that a nonrecourse clause will be included in the note. This clause releases the borrower from personal liability and makes the property the sole source of security for the loan. To obtain a nonrecourse provision, lenders will usually require an additional fee and/or a higher interest rate as compensation for this lesser amount of loan security.
equity participation loans, also referred to as participations or equity kickers.
One of the most straightforward ways of analyzing risk is to perform a sensitivity analysis,or awhat-if analysis. rental rate, vacancy rates, operating expenses, and the expected resale price. A sensitivity analysis starts with a base case. “most likely” case
real option on the land. The land can remain vacant (perhaps it is leased to a farmer so that it generates some income). Thus, the developer has an option either to construct or not to construct a building depending on economic conditions in the future. It is important to note that we are not talking about the developer getting an option from the seller of the land to purchase the land after some point in time.
In the 1970s, Starker ultimately prevailed in his challenge and, as a consequence, IRC Section 1031 was modified to allow for the nonsimultaneous exchange of properties in qualifying taxdeferred exchanges. This was an important change, as it gave much more flexibility to investors considering the use of exchanges.
As long as the investor can earn more than 2.80 percent on his money each year until the 2nd property is sold, the exchange is desirable
(1) When should a property be sold? (2) Should a property be renovated?
the ability of acquirers to take over asset-rich companies, write up the value of acquired real estate assets to market, and then depreciate their values over shorter lives (provided by the Economic Recovery Tax Act of 1981) clearly provided an artificial stimulus to takeover activity in the early 1980s. Such a stimulus was removed, however, with the Tax Reform Act of 1986.
carrying costs (interest on loans, taxes, etc.)
Cumulative distribution means that if total funds in any given year are insufficient to give the investor-partner his preferred yield, the liability to do so carries over to the next year. In these cases, in subsequent years, an investor would receive any funds that should have been paid in prior years before the developer/operator begins to receive any cash from current operations.
The concept of real estate syndication extends generally to any group of investors who have combined their financial resources with the expertise of a real estate professional for the common purpose of carrying out a real estate project.
The vast majority of U.S. government securities are issued for a stated maturity and are generally not callable. In other words, they are generally issued to run until maturity.
periodically “mark the mortgage collateral to the market”
REIT’s stated investment policy. In most cases, the fees are well in excess of 10 percent, leaving less than 90 cents on the dollar to be invested in properties.
FFO stands for funds from operations, which most analysts consider the REIT equivalent of earnings
valuation methods, we have:
Gordon dividend growth model
FFO multiple
Net asset value (NAV)
Historic returns are only used as one indication of what might be realistic to expect in the future.
personalty, which includes all intangibles and movable things (e.g., automobiles, shares of stock, bank accounts, patents).
The term estate has evolved to mean “all that a person owns,” including both realty and personalty.
As the number of disputes increased, a pragmatic solution evolved requiring that all transactions involving real estate be evidenced by a written, signed contract in order to be enforceable. This requirement was included as part of the Statute of Frauds and Perjuries, which was passed in England in 1677 with the intent of reducing the number of disputes and questionable transactions brought before the court.
fixtures. These are items that were once personal property but have become real property because they have either been attached to the land or building in a somewhat permanent manner or are intended to be used with the land and building on a permanent basis. Examples include built-in dishwashers, furnaces, and garage door openers.
Title assurance refers to the means by which buyers of real estate “(1) learn in advance whether their sellers have and can convey the quality of title they claim to possess, and (2) receive compensation if the title, after transfer, turns out not to be as represented.
A general warranty deed is the most commonly used deed in real estate transactions and the most desirable type of deed from the buyer’s perspective. It offers the most comprehensive warranties about the quality of the title.
The American Land Title Association (www.alta.org), founded in 1907, is the national trade association for the title insurance industry.
reserves sufficient to meet insured losses
In general, mechanics’ liens give unpaid contractors, workers, and material suppliers the right to attach a lien on the real estate to which they added their labor or materials. To obtain the payment owed them, they may foreclose such liens by forcing a judicial sale of the encumbered property.
The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) have adopted joint standardized mortgage forms for the purpose of facilitating secondary-market transactions on a nationwide basis.
The new purchaser may be willing to accept the transfer of mortgage if he or she thinks the value of the property exceeds the balance due on the mortgage. The risk is that the new buyer will default, and the seller will again have responsibility for the debt and get the property back.
Thus, the buyers may have little to lose by taking a chance on acquiring the property subject to the mortgage. If it turns out to be a good investment, they will continue to make payments on the debt, but if they find that the value of the property is unlikely to exceed the mortgage debt within a reasonable time frame, they can simply stop making payments and let the sellers reacquire the property. Thus, we see that in this situation buyers of the property “subject to” a mortgage have in effect purchased an option.
a junior mortgagee with a $10,000 lien considers to be worth more than $50,000. If the junior lienor does not bid for the property
English maxim of “redeem up, but foreclose down.”
Payment of property taxes is an obligation of the mortgagor. As such, taxes constitute a prior lien against the security. Transfers of title always take into account accrued but unpaid taxes.
bankruptcy under Chapters 7, 11, and 13 of the Bankruptcy Code
real-estate-law.freeadvice.com—Many good FAQs about real estate law. Legal advice written by lawyers for nonlawyers.
Most calculations are carried out to at least six decimal places, then final monetary amounts are rounded back to two decimal places.
www.bankrate.comthat has interest rates on certificates of deposit (CDs) and see what the current rate is for a five-year CD
The concept of present value is based on the idea that money has time value. Time value simply means that if an investor is offered the choice between receiving $1 today or receiving $1 in the future, the proper choice will always be to receive the $1 today because this $1 can be invested in some opportunity that will earn interest, which is always preferable to receiving only $1 in the future. In this sense, money is said to have time value. When determining how much should be paid today for an investment that is expected to produce income in the future, we must apply an adjustment called discounting to income received in the future to reflect the time value of money. The concept of present value lays the cornerstone for calculating mortgage payments, determining the true cost of mortgage loans, and finding the value of an income property, all of which are very important concepts in real estate finance.
This is done in our problem by taking the reciprocal of the interest factor for the compound value of $1 at 6 percent, 1 1.06 or .943396, and multiplying it by the future value of the investment to find its present value. We can now say that $10,600 received at the end of one year, when discounted by 6 percent, has a present value of $10,000. Alternatively, if we are offered an investment that promises to yield $10,600 after one year and we want to earn a 6 percent annual return, we should not pay more than $10,000 for the investment
the problem involves equal payments (P) or deposits made at equal time intervals. This series of deposits or payments is defined as an annuity.
symbol Σ represents the “sum of” that series and is simply a shortcut notation to be used in place of writing 1 + i repetitively.
The factor .163797 is referred to in real estate finance as a sinking-fund factor (SFF)
the nominal interest rate on any investment is partially determined by the real interest rate plus a premium for the expected rate of inflation.
the interest only loan, is sometimes called a zero amortizing loan. As we have discussed, in this case the pay rate will equal the accrual rate. Consequently, the loan balance at the end of each month will remain the same as the original loan amount. The full, original, loan amount will have to be paid at maturity.
these “take-downs” are also referred to as “draws.” In recent years, RAMs have also become important to the home-owning population as they approach retirement and seek ways to supplement their retirement income.
It should be noted that losses incurred by lenders result in gains to borrowers. Of course, one could argue that if interest rates declined, then lenders would gain. However, when this occurs, borrowers usually try to refinance their loans. This pattern implies that with fixed interest rate lending, risk bearing may not be “symmetric,” or evenly balanced; that is, lenders bear the risk of loss when interest rates increase, which may not be equally offset by gains if interest rates decline because borrowers can usually prepay loans and will do so when interest rates decline. This problem has motivated lenders and borrowers to use interest rate caps and floors
When the actual start rate is very low when compared to the expected start rate, it is usually an indication that lenders are actively competing and are willing to offer a lower initial rate of interest (teaser rate) in order to attract borrowers. One additional issue that borrowers must determine is whether they are getting a true discount or whether the lower rate of interest will be deferred interest which will be added to the loan balance.
Because it is inefficient for lenders to make loans with low loan-to-value ratios
Private mortgage insurance is a way of getting a loan thatisgreater than an 80 percent loan-to-value ratio. Companies like Mortgage Guarantee Insurance Corporation (www.mgic.com) offer such loans.
We cannot solve directly for the solution because there are two unknowns.
Suppose that the prepayment penalty of 2 percent must be paid on the existing loan, and the lender who is making the new loan available also requires an origination fee of $2,500 plus $25 for incidental closing costs if the new loan is made. Should the borrower refinance?
a well-known interest rate index (e.g., the prime rate).
added security provided by second liens
The wraparound rate of 10 percent is, in effect, a weighted average of the rate on the existing loan (8 percent) and the rate on a second mortgage (15.5 percent). The weighted average is (90,000 120,000 8%) (30,000 120,000 15.5%) 9.875 percent, or about 10 percent. This is often referred to as a “blended rate”
estimated that housing and related services account for as much as 15 percent of total U.S. output
(1) first-time home purchasers tend to be 28–32 years of age, (2) households tend to sell their first home and purchase a different home (upgrade) by age 40, and (3) potential purchases of vacation or second homes usually occur by age 48–52. Retirement homes are usually considered when households reach 60 years of age or older.
Tax Treatment of Second or Vacation Homes:
B. If the property is owned for personal use and rented for 14 days or less per year, no rents or expenses must be reported.
C. If the property is owned for both personal use and rented, all rental income must be reported and all expenses can be deducted. Personal use cannot exceed 14 days or 10% of the number of days for which it was rented (whichever is greater).
refinancing, in which case there may be no federal income taxes to pay because refinancing is not a “taxable event.” This example also clearly illustrates why investing in housing financed with mortgage loans has provided an extremely powerful financial incentive for households, particularly those interested in long-term wealth accumulation. Consider the research done by economists on the so-called “wealth effect.”
(1) natural advantages (e.g., seaport, minerals, low-cost energy, and beaches), (2) employee characteristics such as a highly trained, educated workforce (e.g., location of universities, workforce training in technical industries), and/or (3) proximity to many major consumer markets (e.g., transportation hub). Regional examples would include high-tech research and development (California, Seattle, Boston), oil and gas exploration (Houston), communication and computer assembly (Austin, San Diego), medical technology/clinics (Minnesota, Boston), and production of entertainment (Los Angeles).
www.census.gov:
• Housing construction permits
• Construction starts
• Housing units under construction
• Housing units completed
• Quarterly survey of housing vacancies
gauge the likelihood of any short-run price movement that may affect the estimate of value
Default risk may be fully assumed by the lender, shared by the lender and a third-party insurer, or fully assumed by a third-party insurer or guarantor.
FNMA and FHLMC (Fannie Mae and Freddie Mac). these two government-sponsored enterprises (GSEs) dominate the secondary residential mortgage market in the United States.
lenders may be willing to grant a loan request in excess of 80 percent of value with a condition that the borrower purchase mortgage insurance against default risk. Many firms provide this insurance for a premium, which is paid by the borrower
Lenders are not allowed to earn or pay the borrower interest on the initial deposit or monthly payments made into the escrow account.
the composite rate (the index plus the margin)
large warehouses choose a location in an area that will minimize delivery expenses
the vast majority of real estate used by business firms is leased and not owned.
One general exception to the above observations may occur if a single tenant-user requires its own facilities for its corporate headquarters or must have unique features such as high-tech labs, specialized computer installations, security, or other features that are unique. In these very special cases, ownership may be preferred to leasing.
Triple net, or net, net, net leases. As in the single and double net lease, in addition to paying operating expenses, taxes, and insurance, the tenant also agrees to pay certain recurring capital outlays for repairs, alterations, and modifications to the interior of the leased building space. (Triple net leases are commonly used by tenants occupying large amounts of space in warehouse/industrial properties or office buildings. In these cases, tenants may require the flexibility to modify, move fixtures, and reconfigure the interior space in order to operate their business efficiently.
rents specified in leases may be flat, stepped up, indexed, or based on some level of business performance.
Retail properties derive much of their value from the landlord’s ability to lease to a mix of tenants that attract shoppers. Key indicators of the success of a retail property include sales per square foot of rentable space and customer traffic counts. When developing retail properties, owners usually complete a trade area analysis. This study uses the population, age, and income of potential customers.
percentage rent lease. The rationale for this usually occurs when, in spite of high traffic counts and sales volumes, in-line tenants believe that the base rents being asked by the property owner are relatively high. In these cases, tenants may prefer to negotiate a lower base rent and agree to pay additional rents (referred to as overage rents) if their business in the retail property is successful. The additional rent is based on a percentage of the retail sales above some breakpoint sales level.
kick out clause, which specifies that the tenant must achieve a certain level of sales per square foot within a specific period of time (e.g., two years), otherwise either the property owner or the tenant may terminate the lease.
A signage clause confers the right to display a name inside and/or outside of the building or in the mall ways.
exclusivity clause limits the ability of the property owner to lease space in the building to competitors
estoppel certificate
The question of whether or not it is a good investment will depend on the future growth in rents, income, and property values.
the Hypothetical Hills apartment complex
Land value is determined by its highest and best use
A common measure of this risk is the debt coverage ratio (DCR). Lenders typically want the first-year debt coverage ratio to be at least 1.2.
The Tax Act of 1993 introduced a second exception to the PAL rules that provides relief for real estate brokers, sales associates, and other real estate professionals who can demonstrate “material involvement in the real estate business.”13 These individuals are eligible to deduct unlimited real estate losses (1) if more than half of all personal services they perform during the year are for real property trades or businesses in which they materially participate, and (2) if they perform more than 750 hours of service per year in those real estate activities.
payroll employment and other data collected from the U.S. Department of Labor (http://www.dol.gov/).
20–34 years of age represent the largest percentage of renters
interest rate swaps may be used to achieve the equivalent of a fixed interest rate.
The lender will consider the borrower’s ability to pay should income from the property be insufficient to pay debt services. However, in many cases borrowers and lenders may agree that a nonrecourse clause will be included in the note. This clause releases the borrower from personal liability and makes the property the sole source of security for the loan. To obtain a nonrecourse provision, lenders will usually require an additional fee and/or a higher interest rate as compensation for this lesser amount of loan security.
equity participation loans, also referred to as participations or equity kickers.
One of the most straightforward ways of analyzing risk is to perform a sensitivity analysis,or awhat-if analysis. rental rate, vacancy rates, operating expenses, and the expected resale price. A sensitivity analysis starts with a base case. “most likely” case
real option on the land. The land can remain vacant (perhaps it is leased to a farmer so that it generates some income). Thus, the developer has an option either to construct or not to construct a building depending on economic conditions in the future. It is important to note that we are not talking about the developer getting an option from the seller of the land to purchase the land after some point in time.
In the 1970s, Starker ultimately prevailed in his challenge and, as a consequence, IRC Section 1031 was modified to allow for the nonsimultaneous exchange of properties in qualifying taxdeferred exchanges. This was an important change, as it gave much more flexibility to investors considering the use of exchanges.
As long as the investor can earn more than 2.80 percent on his money each year until the 2nd property is sold, the exchange is desirable
(1) When should a property be sold? (2) Should a property be renovated?
the ability of acquirers to take over asset-rich companies, write up the value of acquired real estate assets to market, and then depreciate their values over shorter lives (provided by the Economic Recovery Tax Act of 1981) clearly provided an artificial stimulus to takeover activity in the early 1980s. Such a stimulus was removed, however, with the Tax Reform Act of 1986.
carrying costs (interest on loans, taxes, etc.)
Cumulative distribution means that if total funds in any given year are insufficient to give the investor-partner his preferred yield, the liability to do so carries over to the next year. In these cases, in subsequent years, an investor would receive any funds that should have been paid in prior years before the developer/operator begins to receive any cash from current operations.
The concept of real estate syndication extends generally to any group of investors who have combined their financial resources with the expertise of a real estate professional for the common purpose of carrying out a real estate project.
The vast majority of U.S. government securities are issued for a stated maturity and are generally not callable. In other words, they are generally issued to run until maturity.
periodically “mark the mortgage collateral to the market”
REIT’s stated investment policy. In most cases, the fees are well in excess of 10 percent, leaving less than 90 cents on the dollar to be invested in properties.
FFO stands for funds from operations, which most analysts consider the REIT equivalent of earnings
valuation methods, we have:
Gordon dividend growth model
FFO multiple
Net asset value (NAV)
Historic returns are only used as one indication of what might be realistic to expect in the future.
February 19, 2024
very impreesive and well defined book i want to see how the investment approach in real estate sector
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Brownstone Marketing is highly regarded Real Estate Investment Firm in Islamabad , Pakistan. Our exceptional services and commitment to integrity make us one of the best companies for profitable real estate investment solutions. You can trust us to provide comprehensive service and timely delivery. Explore the best real estate investment opportunities available in Islamabad today with Brownstone Marketing.
January 3, 2020
Excellent book for real estate.
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August 20, 2025school
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April 29, 2014Using as text book to teach Real Estate Finance class at Universidad Americana english program in Managua Nicaragua excellent text book
December 10, 2015
Great textbook for explaining real estate finance
August 16, 2016
20160816 ◊ Dense. Well-written and chock-full of good info, but be aware that it assumes a pre-existing familiarity with advanced algebra to work through many of the formulae.
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May 20, 2011It's a dry text book. Read something else for fun.
Displaying 1 - 10 of 10 reviews