Introduction to Real Estate

1. Introduction to Real Estate History and Concepts

2. 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?

3. 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)

4. 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

5. 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?

6. 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.

7. Ceremonial Vessel • Bronze Inscription • Bronze model of bi-partite deed contract (from later dynasty)

8. Mortgages • Mirashu clan and contingent clan • 500 B.C. Nippur. 423 death of Atraxerxes • Sogdanius vs. Ochus - Darius II. • Mortgage Defaults financed revolution

9. Excavation of Nippur

10. 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.

11. 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

12. Title • Capital does not exist without title. • Capital without title is “dead.” • Process of transfer and development matters. • Separates first world from third world.

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

14. Title: Freeing up Capital • Mortgages free up capital in household savings. “Securitization.” • Real estate as fundamental asset.

15. 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.

20. 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.

21. Rights to Personal Enjoyment • People’s rights vs. personal rights • Elimination of private property • In its aftermath?

22. Real Estate as an Asset Features and valuation

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. Land • Primary and ancillary rights • Timing of Development & Construction

30. Development • Choice: Office, Industrial, Retail, Residential • Highest and best use • Financing • Debt/Equity choice • Syndication, partnership structure • Development loan • Bridge loan

31. Management Leasing • Tenants • Lease terms • “bundle” of leases • Turnover • Maintenance

32. Transaction • Valuation • Marketplace • Negotiation • Or demolition and reversion to land

33. Methods of Valuation • Comparables • Replacement Value • Discounted Future Cash Flows

34. Sources of Value • Land & Other rights • Building Leases • Options -- granted and owned • Strategic Advantage • Mortgage "Put"

35. 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.”

36. 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

39. 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

40. Performance Measures • Price Per Square Foot • Gross and Rentable • Cap Rate : NOI/Price • Going in • Going out

41. Performance Measures (cont) • Equity Dividend Rate • BTCF1/ Equity Investment • Debt Coverage Ratio • NOI/MTG PMT • NPV • Profitability: PV/Initial Investment • IRR • Modified IRR

42. Issues with Pro Forma • Single forecast • Discount rate choice • Assumptions about resale • Lacks dynamics and risk • Not tied to real economy