C405 - Real Estate Finance

1. Lecture 1 Institutional & Macroeconomic Context Professors Tsur Somerville & Tom Davidoff Spring 2012 C405 - Real Estate Finance Reading: REFCC, Chapters 1-2

2. Course Objectives - Topics • Debt financing for real estate • Institutions • Legal • Math • Valuation • Types of real estate debt • Conventional • Reverse mortgages • Home equity lines of credit • Equity financing structures • Real estate debt derivatives

3. Course Objectives - Skills • What you’ll be able to do • Calculate and value mortgages • Structure financing programs for acquisition & development of real estate • Understand how housing finance policy works • Broader knowledge • Contracting under uncertainty • Financial systems • Derivative markets

4. What You’ll Have to Do • Assignments – 30% • #1 – Mortgage math and interest rates (individual) – 10% • #2 – Equity finance structure for development – 20% (group) • Mid term - Mortgage math and interest rates – 25% • Final Exam – Everything – 35% • Participation – 10% • Start with grade of 75 • Lower by 12 points for each guest lecture missed • Raise for outstanding quality NOT quantity • Lower if you don’t show regularly

5. Course Material / Supplies • . Real Estate Finance in a Canadian Context UBC Real Estate Division (2009). • This text is available from the Real Estate Division’s office on the 2nd floor. • Other reading material will either be posted or you will be provided with links. • Financial calculator • capable of amortization calculations and PV /FV • Example: Hewlett-Packard 10BII. • Your job to learn how to use it, not ours

6. About Prof. Somerville • Office Hours: • HA 278 • Thursdays 2:00-3:30ish • I will be strict about these, but • You can make appointments • Add time around assignments • Getting A Hold of Me • Email is good: tsur.somerville@sauder.ubc.ca • No instant turn around • My work hours are not yours – I go to bed before you do. • (604) 822-8343 • Outline (Slides) Will Be Posted on Vista/Flatbush • NO PROMISE BEFORE CLASS

7. About Prof. Davidoff • Office Hours: • HA 274 • Mondays 4:00-5:30 • Contact • thomas.davidoff@sauder.ubc.ca • (604) 822-8325

8. Web Site • Vista • Flatbush.sauder.ubc.ca • Why two? Ask Prof. Davidoff (Tom)

9. Class Rules – For Tsur • You guys • Eating – illegal, but I can be bribed w/ food • Talking – as long as I can’t hear • Showing up – up to you, but……. • Technology use – see next slide • Me – Dictator I get to do what I want • I talk too fast – please remind me to slow down • I’m loud – sit in the back • Bad handwriting – can’t help you there, but I provide notes • Probably will be boring - I get to teach mortgage math & law stuff

10. Technology Use in Class OK to Use

11. Class Rules – For Tom

12. Mortgage • Strictly – • Mortgage – security for a loan, where the security is an encumbrance or claim on real property • Overwhelming use is for real estate • Key is land • Popular use – the loan itself that is secured by property • Not correct • But we’ll talk this way

13. Mortgage – Key things • Foreclosure • Ability of lender to claim value of property if loan is violated • Judicial process • Value of mortgage compared to other debt • Depends on ease / ability of foreclosure • Value of real estate that secures the loan

14. What is Real Estate? • Fundamental – claim on rights tied to land • Use • Change • Transfer / sell • Rights may be full or partial • Limited by term: lease • Encumbrances on rights • Land = Location: Specific costs and benefits • Forms • Vacant land / air right • Land and structure • Structure

15. Real Estate: What’s Unique? • Fixed in space – role of location • Positive and negative “neighbourhood” externalities • Demand matters only in a location • Imperfect substitution across locations • Heterogeneous • Locations vary • Individual buildings vary in their characteristics • Risk can be property specific • Location • Tenants / lease structure • Lack of specific information makes ricing hard • Durable • Demand is sensitive to interest rates – DCF over a long time • History matters

16. Real Estate Classes • Non- Residential • Retail • Office • Industrial • Hotel • Residential • Investment – rental apartments • Owner-occupied • Recreation/resort/other

17. For Debt Financing • Owner – occupied real estate • No cash flow from property • Borrower is critical • Investment (commercial) real estate • Can the property “support” the loan • Borrower is less important • Strength of security depends on ownership claim

18. Ownership Forms • Fee Simple • Complete rights • Land & structure • Subject only to easements / encumbrances • Strata • Individual ownership of unit • Shared ownership of common areas, land, building envelope • Lease • Ground lease (lease land, own structure) • Structure lease (renting)

19. Lenders • Chartered Banks • Trust Companies • Lifecos – Life Insurance Companies • Pension Funds • Credit Unions • Finance Companies • Non-depository credit intermediaries • Securitized Debt • NHA MBS • SPVs

20. Lenders - Banks

21. Current “Players”

22. Institutions • Government • Department of Finance • Bank of Canada • OSFI – Office of Superindentent of Financial Institutions • Federal regulated deposit taking institutions • Pension funds • Life Cos • Provincial regulators – credit unions • CMHC – Canada Mortgage & Housing Corp