Real Estate Finance & Investments 17th International Edition by William B. Brueggeman, ISBN-13: 978-1264892884

Description

Real Estate Finance & Investments 17th International Edition by William B. Brueggeman, ISBN-13: 978-1264892884

[PDF eBook eTextbook]

• The content of the International Edition is the same as other formats.
• Publisher: ‎ McGraw-Hill Education; 17th edition (January 1, 2021)
• Language: ‎ English
• ‎832 pages
• ISBN-10: ‎ 1264892888
• ISBN-13: ‎ 978-1264892884

Real Estate Finance & Investments prepares readers to understand the risks and rewards of financing and investing in residential and commercial real estate. Concepts and techniques included in the chapters and problem sets are used in many careers related to real estate. These include investing, development financing, appraising, consulting, managing real estate portfolios, leasing, managing property, analyzing site locations, corporate real estate, and managing real estate investment funds. This material is also relevant to individuals who want to understand real estate better when making their own personal investment and financing decisions.

As this current edition is being revised, there is a lot of uncertainty about the impact that COVID-19 will have on different sectors of the commercial real estate market. It is more important than ever to evaluate the risk and return for both lenders and investors. This text is designed to help both students and other readers understand these many factors so that they can perform the necessary analysis and make informed real estate finance and investment decisions.

Table of Contents:

Cover

Title

Copyright

Preface

Brief Contents

Table of Contents

Part One: Overview of Real Estate Finance and Investments

Chapter 1: Real Estate Investment: Basic Legal Concepts

Property Rights and Estates

Definition of Estate

Two General Classifications of Estates

Examples of Freehold Estates

Estates Not Yet in Possession (Future Estates)

Examples of Leasehold Estates

Interests, Encumbrances, and Easements

Assurance of Title

The Meaning of Title

Deeds

Methods of Title Assurance

Abstract and Opinion Method

The Title Insurance Method

Recording Acts

Limitations on Property Rights

Chapter 2: Real Estate Financing: Notes and Mortgages

Notes

The Mortgage Instrument

Definition of a Mortgage

Relationship of Note to Mortgage

Interests That Can Be Mortgaged

Minimum Mortgage Requirements

Important Mortgage Covenants

Assumption of Mortgage

Acquiring Title “Subject to” a Mortgage

Property Covered by a Mortgage

Junior Mortgages

Recording of Mortgages

Other Financing Sources

Seller Financing

Land Contracts

Default

What Constitutes Default?

Alternatives to Foreclosure: Workouts

Restructuring the Mortgage Loan

Transfer of Mortgage to a New Owner

Voluntary Conveyance

Friendly Foreclosure

Prepackaged Bankruptcy

Short Sale

Foreclosure

Judicial Foreclosure

Redemption

Sales of Property

Effect of Foreclosure on Junior Lienors

Deficiency Judgment

Taxes in Default

Bankruptcy

Chapter 7 Liquidation

Chapter 11

Chapter 13

Part Two: Mortgage Loans

Chapter 3: Mortgage Loan Foundations: The Time Value of Money

Compound Interest

Compound or Future Value

Calculating Compound Interest Factors

Using Financial Functions: Calculators and Spreadsheets

Present Value

A Graphic Illustration of Present Value

Expanding the Use of Calculators for Finding Present Values

Compound or Future Value of an Annuity

Use of Compound Interest Factors for Annuities

Present Value of an Annuity

Use of the Present Value of an Annuity Factors

Accumulation of a Future Sum

Determining Yields, or Internal Rates of Return, on Investments

Investments with Single Receipts

Yields on Investment Annuities

Equivalent Nominal Annual Rate (ENAR): Extensions

Solving for Annual Yields with Partial Periods: An Extension

Chapter 4: Fixed Interest Rate Mortgage Loans

Determinants of Mortgage Interest Rates: A Brief Overview

The Real Rate of Interest: Underlying Considerations

Interest Rates and Inflation Expectations

Interest Rates and Risk

A Summary of Factors Important in Mortgage Loan Pricing

Understanding Fixed Interest Rate Mortgage (FRM) Loan Terms

Calculating Payments and Loan Balances—Fixed Interest Rate Loans

The Importance of Accrued Interest and Loan Payments

Loan Amortization Patterns

Fully Amortizing, Constant Payment Mortgage (CPM) Loans

Partially Amortizing, Constant Payment Mortgage (CPM) Loans

Zero Amortizing, or Interest-Only—Constant Payment Mortgage (CPM) Loans

Negative Amortizing, Constant Payment Mortgage (CPM) Loans

Summary and Comparisons: Fixed Interest Rate, Constant Payment Mortgage (CPM) Loans with Various Amortization Patterns

Determining Loan Balances

Finding Loan Balances—Other Amortization Patterns

Loan Closing Costs and Effective Borrowing Costs

Loan Fees and Early Repayment: Fully Amortizing Loans

Charging Fees to Achieve Yield, or When “Pricing” FRMs

Financing Loan Fees and Other Closing Costs

Other FRM Loan Patterns—Declining Payments and Constant Amortization Rates

Amortization Schedules and Callable Loans

“Reverse Mortgages”

Appendix

Inflation, Mortgage Pricing, and Payment Structuring

Chapter 5: Adjustable and Floating Rate Mortgage Loans

The Price Level Adjusted Mortgage (PLAM)

PLAM: Payment Mechanics

ARMs and Floating Rate Loans: An Overview

Variations: ARM and Floating Rate Loans

Risk Premiums, Interest Rate Risk, and Default Risk

Expected Yield Relationships and Interest Rate Risk

More Complex Features

ARM Payment Mechanics

Chapter 6: Mortgages: Additional Concepts, Analysis, and Applications

Incremental Borrowing Cost

Early Repayment

Origination Fees

Incremental Borrowing Cost versus a Second Mortgage

Relationship between the Incremental Cost and the Loan-to-Value Ratio

Differences in Maturities

Loan Refinancing

Early Repayment: Loan Refinancing

Effective Cost of Refinancing

Borrowing the Refinancing Costs

Other Considerations

Early Loan Repayment: Lender Inducements

Market Value of a Loan

Effective Cost of Two or More Loans

Second Mortgages and Shorter Maturities

Effect of Below-Market Financing on Property Prices

Assuming a Lower Loan Balance

Cash Equivalency

Cash Equivalency: Smaller Loan Balance

Cash Equivalency: Concluding Comments

Wraparound Loans

Buydown Loans

Appendix

After-Tax Effective Interest Rate

Part Three: Residential Housing

Chapter 7: Single-Family Housing: Pricing, Investment, and Tax Considerations

Overview

House Prices

Income and Employment

Renting versus Owning

Analyzing Expected House Prices

Economic Base Analysis—Location Quotients

Housing Supply: An Overview

Submarkets: Neighborhoods/Municipalities

Capitalization Effects: Price Premiums

Pricing Property in Specific Submarkets/Locations

Investing in “Distressed Properties”

Financial Framework for Analyzing Distressed Properties

Acquisition Phase

Holding Period Phase

Disposition Phase—Exit Strategies

Chapter 8: Underwriting and Financing Residential Properties

Underwriting Default Risk

Classification of Mortgage Loans

Conventional Mortgage Loans

Insured Conventional Mortgage Loans

FHA-Insured Mortgage Loans

VA-Guaranteed Mortgage Loans

The Underwriting Process

Borrower Income

Verification of Borrower Assets

Assessment of Credit History

Estimated Housing Expense

Other Obligations

Compensating Factors

The Underwriting Process Illustrated

Underwriting Standards—Conventional and Insured Conventional Mortgages

Underwriting Standards—FHA-Insured Mortgages

Underwriting Standards—VA-Guaranteed Mortgages

Underwriting and Loan Amounts—A Summary

The Closing Process

Fees and Expenses

Prorations, Escrow Costs, and Payments to Third Parties

Statutory Costs

Requirements under the Real Estate Settlement and Procedures Act (RESPA)

Settlement Costs Illustrated

Federal Truth-in-Lending (FTL) Requirements

Truth-in-Lending Sample Disclosure

Establishing the APR under Federal Truth-in-Lending Requirements

ARMs and Truth-in-Lending Disclosure

Part Four: Income-Producing Properties

Chapter 9: Income-Producing Properties: Leases, Rents, and the Market for Space

Property Types

Supply and Demand Analysis

Local Market Studies of Supply and Demand

Location and User-Tenants

The Business of Real Estate

The “Market” for Income-Producing Real Estate

Income Potential—Real Estate Assets

Vacancy

Underwriting Tenants

General Contents of Leases

Leases and Rental Income

Leases and Responsibility for Expenses (Recoveries)

Comparing Leases: Effective Rent

Other Financial Considerations

Developing Statements of Operating Cash Flow

Case Example: Office Properties

Rent Premiums and Discounts for Office Space

Pro Forma Statement of Cash Flow—Office Properties

Case Example: Industrial and Warehouse Properties

Pro Forma Statement of Cash Flow—Industrial/Warehouse Properties

Case Example: Retail Properties

The Retail Leasing Environment

CAM Charges—Recoveries

Pro Forma Statement of Cash Flow—Retail Properties

Case Example: Apartment Properties

Chapter 10: Valuation of Income Properties: Appraisal and the Market for Capital

Introduction

Valuation Fundamentals

Appraisal Process and Approaches to Valuation

Sales Comparison Approach

Income Approach

Capitalization Rate

Capitalization Rates—A Note of Caution

Discounted Cash Flow Techniques

Land Values: Highest and Best Use Analysis

Volatility in Land Prices

“Highest and Best Use” Analysis—Vacant Site

“Highest and Best Use” Analysis—Improved Property

Mortgage-Equity Capitalization

Reconciliation: Sales Comparison and Income Capitalization Approaches

Exploring the Relationships between Changing Market Conditions, Cap Rates, and Property Values

A Closing Note on Cap Rates and Market Conditions

A Word of Caution—Simultaneous Effects of Real Market Forces and Interest Rates on Property Values

Leases: Valuation of a Leased Fee Estate

Cost Approach

Valuation Case Study—Oakwood Apartments

RealNex Solution

Appendix

RealNex Inputs and Output for Apartment Analysis

Chapter 11: Investment Analysis and Taxation of Income Properties

Motivations for Investing

Real Estate Market Characteristics and Investment Strategies

The Real Estate Cycle

Investment Strategies

Market Analysis

Supply of Space

Market Rents

Forecasting Supply, Demand, Market Rents, and Occupancy

Making Investments: Projecting Cash Flows

Office Building Example

Base Rent

Market Rent

Expense Stops

Net Operating Income

Expected Outlays for Replacements and Capital Improvements

Estimated Sale Price

Introduction to Investment Analysis

Internal Rate of Return (IRR)

Present Value

Introduction to Debt Financing

Measures of Investment Performance Using Ratios

Before-Tax Cash Flow from Sale

Summary of Investment Analysis Calculations

Taxation of Income-Producing Real Estate

Taxable Income from Operation of Real Estate

Depreciation Allowances

Loan Points

Tax Liability and After-Tax Cash Flow

Taxable Income from Disposal of Depreciable Real Property

After-Tax Investment Analysis

After-Tax Cash Flow from Operations

After-Tax Cash Flow from Sale

After-Tax IRR

Effective Tax Rate

A Note about Passive Losses

Special Exceptions to PAL Rules

Appendix A

Approaches to Metro Area Market Forecasting:

Appendix B

RealNex Office Example

Chapter 12: Financial Leverage and Financing Alternatives

Introduction to Financial Leverage

Conditions for Positive Leverage—Before Tax

Conditions for Positive Leverage—After Tax

Break-Even Interest Rate

Risk and Leverage

Underwriting Loans on Income Properties

Market Study and Appraisal

Borrower Financials

The Loan-to-Value Ratio

The Debt Coverage Ratio

Other Loan Terms and Mortgage Covenants

Alternatives to Fixed Rate Loan Structures

Participation Loans

Lender Motivations

Investor Motivations

Participation Example

Sale-Leaseback of the Land

Effective Cost of the Sale-Leaseback

Interest-Only Loans

Accrual Loans

Structuring the Payment for a Target Debt Coverage Ratio

Convertible Mortgages

Lender’s Yield on Convertible Mortgages

Comparison of Financing Alternatives

Other Financing Alternatives

Chapter 13: Risk Analysis

Introduction

Comparing Investment Returns

Types of Risk

Due Diligence in Real Estate Investment Risk Analysis

Sensitivity Analysis

Partitioning the IRR

Variation in Returns and Risk

Retail Case Study—Westgate Shopping Center

Westgate Shopping Center Scenario Analysis

Lease Rollover Risk

Market Leasing Assumptions with Renewal Probabilities

Market Rent

Months Vacant

Leasing Commissions

Tenant Improvements

Industrial Case Study—Worthington Distribution Center

Risk and Leverage

Monte Carlo Simulation

Example

Extensions of Monte Carlo Simulation

Participation Example

A “Real Options” Approach to Investment Decisions

Traditional Approach to Land Valuation

Real Option Approach to Land Valuation

Real Options Extensions and Strategy

Chapter 14: Disposition and Renovation of Income Properties

Disposition Decisions

A Decision Rule for Property Disposition

IRR for Holding versus Sale of the Property

Return to a New Investor

Marginal Rate of Return

Refinancing as an Alternative to Disposition

Incremental Cost of Refinancing

Leveraged Return from Refinancing and Holding an Additional Five Years

Refinancing at a Lower Interest Rate

Other Disposition Considerations—Portfolio Balancing

Tax-Deferral Strategies upon Disposition

Installment Sales

Tax-Deferred Exchanges

Renovation as an Alternative to Disposition

Renovation and Refinancing

Rehabilitation Investment Tax Credits

Low-Income Housing

Chapter 15: Financing Corporate Real Estate

Lease-versus-Own Analysis

Leasing versus Owning—An Example

Cash Flow from Leasing

Cash Flow from Owning

Cash Flow from Owning versus Leasing

Return from Owning versus Leasing

Importance of the Residual Value of Real Estate

The Investor’s Perspective

A Note on Project Financing

Factors Affecting Own-versus-Lease Decisions

Impact on Lessee Financial Reporting

Impact of Lease on Income Statement and Balance Sheet

The Role of Real Estate in Corporate Restructuring

Sale–Leaseback

Refinancing

Investing in Real Estate for Diversification

Appendix

Real Estate Asset Pricing and Capital Budgeting Analysis: A Synthesis

Part Five: Financing Real Estate Development

Chapter 16: Financing Project Development

Introduction

Overview: The Planning and Permitting Process

The Development of Income-Producing Property

Market Risks and Project Feasibility

Project Risks

Project Development Financing—An Overview

Lender Requirements in Financing Project Development

Interest Rates and Fees

Project Development Illustrated

Project Description and Project Costs

Market Data and Tenant Mix

Pro Forma Construction Costs and Cash Flow Projections

Feasibility, Profitability, and Risk—Additional Issues

Profitability Before and After Taxes

Sensitivity Analysis, Risk, and Feasibility Analysis

Chapter 17: Financing Land Development Projects

Characterization of the Land Development Business

The Land Development Process—An Overview

Acquisition of Land—Use of the Option Contract

Financing and Development

Lender Requirements in Financing Land Development

Detailed Cost Breakdowns

General Contracts and Subcontracts

Residential Land Development Illustrated

Market Conditions and Site Plan

Estimating Development Cost and Interest Carry

Estimating Release Prices per Parcel Sold

Loan Request and Repayment Schedule

Project Feasibility and Profitability

Project IRR and Net Present Value

Entrepreneurial Profits

Sensitivity Analysis

Part Six: Alternative Real Estate Financing and Investment Vehicles

Chapter 18: Structuring Real Estate Investments: Organizational Forms and Joint Ventures

Introduction

Sole Proprietorships

Partnerships

Limited Liability Companies

Corporations

Joint Ventures

Organizational Forms

Profit Sharing

Initial Capital Contributions

Sharing Cash Flow from Operations

Sharing of Cash Flow from Sale

Summary of Cash Flows Distributed in Each Operating Year

Cash Flow from Sale

IRR to Each Joint Venture Party

Variation on the Preferred IRR—“The Lookback IRR”

Syndications

Use of the Limited Partnership in Private and Public Syndicates

Private Syndication Problem Illustrated

Financial Considerations—Partnership Agreement

Operating Projections

Statement of Before-Tax Cash Flow (BTCF) 603

Calculation of Net Income or Loss

Calculation of Capital Gain from Sale

Capital Accounts

Distribution of Cash from Sale of Asset

Calculation of After-Tax Cash Flow and ATIRR on Equity

Partnership Allocations and Substantial Economic Effect

Capital Accounts and Gain Charge-Backs

Use of the Limited Partnership in Private and Public Syndicates

Use of Corporate General Partners

Private versus Public Syndicates

Accredited Investors—Regulation D

Regulation of Syndicates

Investment Objectives and Policies

Promoters’ and Managers’ Compensation

Investor Suitability Standards

Federal and State Securities Authorities

Chapter 19: The Secondary Mortgage Market:Pass-Through Securities

Introduction

Evolution of the Secondary Mortgage Market

Early Buyers of Mortgage Loans

The Secondary Market

FNMA’s Changing Role

The Government National Mortgage Association

Mortgage-Backed Securities and the GNMA Payment Guarantee

The Federal Home Loan Mortgage Corporation

Operation of the Secondary Mortgage Market

Direct Sale Programs

The Development of Mortgage-Related Security Pools

Mortgage-Backed Bonds

Pricing Mortgage-Backed Bonds

Subsequent Prices

Mortgage Pass-Through Securities

Important Characteristics of Mortgage Pools

Mortgage Pass-Through Securities: A General Approach to Pricing

Mortgage Pass-Through Payment Mechanics Illustrated

Prepayment Patterns and Security Prices

Prepayment Assumptions

The Effects of Prepayment Illustrated

Security Prices and Expected Yields

Market Interest Rates and Price Behavior on Mortgage Pass-Throughs

A Note on MBBs and MPTs

Chapter 20: The Secondary Mortgage Market: CMOs, CDOs, CLOs, and Derivative Securities

Introduction

Mortgage Pay-Through Bonds (MPTBs)

Collateralized Mortgage Obligations

CMOs Illustrated

CMO Mechanics

CMOs: Pricing and Expected Maturities

CMO Price Behavior and Prepayment Rates

CMO Tranche Variations

Subprime Mortgage-Backed Securities

Derivatives Illustrated

Yield Enhancement

IO and PO Strips

Convexity

Residential Mortgage-Related Securities: A Summary

Residential Mortgage-Related Securities: Some Closing Observations

Commercial Mortgage-Backed Securities (CMBSs)

Rating Commercial Mortgage-Backed Securities

Collateralized Debt Obligations (CDOs)

Collateralized Loan Obligations (CLOs)

Mortgage-Related Securities and REMICs

REMICs: Other Considerations

Appendix

Duration—An Additional Consideration in Yield Measurement

Chapter 21: Real Estate Investment Trusts (REITs)

Introduction

Legal Requirements

Tax Treatment

Violation Penalties and Status Termination

Taxable REIT Subsidiaries

TYPES of REITs

Equity REITs

The Investment Appeal of Equity REITs

Public Nonlisted REITs

Importance of FFO (Funds from Operations)

REIT Expansion and Growth

Important Issues in Accounting and Financial Disclosure: Equity REITs

Tenant Improvements and Free Rents: Effects on FFO

Leasing Commissions and Related Costs

Use of Straight-Line Rents

FFO and Income from Managing Other Properties

Types of Mortgage Debt and Other Obligations

Existence of Ground Leases

Lease Renewal Options and REIT Rent Growth

Occupancy Numbers: Leased Space or Occupied Space?

Retail REITs and Sales per Square Foot

Additional Costs of Being a Public Company

The Investment Appeal of Mortgage REITs

Financial Analysis of an Equity REIT Illustrated

Valuing REITs as Investments

Valuation of Midwestern America Property Trust

Part Seven: Portfolio Analysis and Real Estate Funds

Chapter 22: Real Estate Investment Performance and Portfolio Considerations

Introduction

The Four Quadrants of Real Estate Investment

Sources of Data Used for Real Estate Performance Measurement

REIT Data: Security Prices

Hybrid and Mortgage REITs

NCREIF Property and Fund Indices

Data Sources for Other Investments

Computing Holding Period Return

Comparing Investment Returns

Risk-Adjusted Returns: Basic Elements

Elements of Portfolio Theory

Calculating Portfolio Returns

Portfolio Risk

Risk and Return for Portfolios with Different Weights

Importance of Correlation

Three Asset Class Portfolios

Multi-Asset Portfolios

Systematic versus Unsystematic Risk

Adding REITs to the Portfolio

Global Diversification

Use of Derivatives to Hedge Portfolio Risk

Beta and the Capital Asset Pricing Model (CAPM)

Chapter 23: Real Estate Funds: Structure, Performance, Benchmarking, Risk and Attribution Analysis

Investor Goals and Objectives

General Explanation of Possible Provisions in Fund Offerings

Reporting Fund Performance

Measuring and Reporting Investment Returns

Summary of Major Activity during Quarter:

Calculating Returns

Calculating Returns at the Property Level

Returns: Before and After Fees

Comparing Returns: Fund Level versus Property Level

Calculating Historical Returns

Time-Weighted Returns

Investor’s Return versus Fund Return

Choosing IRR versus TWR for Performance Measurement

Target Returns and Benchmarks

Investment Multiple

Attribution Analysis

Attribution Analysis Mathematics

Interpreting Sector Allocation

Evaluating Risk Differences

Jensen’s Alpha

Risk-Adjusted Attribution Analysis

INDEX

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