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


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:

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
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
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
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
Judicial Foreclosure
Sales of Property
Effect of Foreclosure on Junior Lienors
Deficiency Judgment
Taxes in Default
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”
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
After-Tax Effective Interest Rate
Part Three: Residential Housing
Chapter 7: Single-Family Housing: Pricing, Investment, and Tax Considerations
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
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
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
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
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
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
Investing in Real Estate for Diversification
Real Estate Asset Pricing and Capital Budgeting Analysis: A Synthesis
Part Five: Financing Real Estate Development
Chapter 16: Financing Project Development
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
Sole Proprietorships
Limited Liability Companies
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”
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
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
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
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
Duration—An Additional Consideration in Yield Measurement
Chapter 21: Real Estate Investment Trusts (REITs)
Legal Requirements
Tax Treatment
Violation Penalties and Status Termination
Taxable REIT Subsidiaries
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
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

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