Real Estate Finance & Investments + Excel templates CD-ROM

by BRUEGGEMAN

• ISBN13: 9780072977363
• ISBN10: 0072977361
• Edition: 12th
• Format: Hardcover
• Copyright: 2004-03-03
• Publisher: McGraw-Hill/Irwin

Table of Contents

PART ONE INTRODUCTION
An Introduction to Real Estate Investments: Legal Concepts	1	(12)
Property Rights and Estates	2	(4)
Definition of Estate	4	(1)
Classification of Estates	4	(1)
Examples of Freehold Estates	4	(1)
Estates Not Yet in Possession (Future Estates)	5	(1)
Leasehold Estates	5	(1)
Interests and Easements	6	(1)
Assurance of Title	7	(1)
The Meaning of Title	7	(1)
Deeds	7	(1)
Methods of Title Assurance	8	(2)
Abstract and Opinion Method	9	(1)
The Title Insurance Method	9	(1)
Recording Acts	10	(1)
Limitations on Property Rights	11	(2)
Financing: Notes and Mortgages	13	(25)
Notes	13	(1)
The Mortgage Instrument	14	(5)
Definition of a Mortgage	15	(1)
Relationship of Note to a Mortgage	15	(1)
Interests That Can Be Mortgaged	15	(1)
Minimum Mortgage Requirements	15	(2)
Important Mortgage Clauses	17	(2)
Assumption of Mortgage	19	(1)
Acquiring Title ``Subject to'' a Mortgage	19	(2)
Property Covered by a Mortgage	19	(1)
Junior Mortgages	20	(1)
Recording of Mortgages	20	(1)
Other Financing Sources	21	(1)
Seller Financing	21	(1)
Land Contracts	21	(1)
Default	22	(1)
What Constitutes Default	22	(1)
Alternatives to Foreclosure: Workouts	23	(4)
Restructuring the Mortgage Loan	23	(2)
Transfer of Mortgage to a New Owner	25	(1)
Voluntary Conveyance	26	(1)
Friendly Foreclosure	26	(1)
Prepackaged Bankruptcy	26	(1)
Foreclosure	27	(6)
Judicial Foreclosure	27	(1)
Redemption	27	(1)
Sales of Property	28	(3)
Effect of Foreclosure on Junior Lienors	31	(1)
Deficiency Judgment	31	(1)
Taxes in Default	32	(1)
Bankruptcy	33	(5)
Liquidation	33	(1)
Chapter 11	33	(1)
Chapter 13	33	(5)
The Interest Factor in Financing	38	(32)
Compound Interest	38	(1)
Compound or Future Value	39	(6)
Use of Compound Interest Tables	42	(3)
Use of Financial Calculators	45	(2)
Present Value	47	(4)
A Graphic Illustration of Present Value	47	(2)
Using Calculators for Finding Present Values	49	(2)
Compound or Future Value of an Annuity	51	(4)
Use of Compound Interest Factors for Annuities	53	(2)
Present Value of an Annuity	55	(4)
Use of the Present Value of an Annuity Factors	56	(3)
Accumulation of a Future Sum	59	(1)
Investments with Single Receipts	60	(1)
Determining Yields or Internal Rates of Return on Investments	60	(10)
Yields on Investment Annuities	63	(2)
Effective Annual Yields: Extensions	65	(1)
Solving for Annual Yields with Partial Periods: An Extension	66	(4)
PART TWO FINANCING RESIDENTIAL PROPERTIES
Fixed Rate Mortgage Loans	70	(40)
Determinants of Mortgage Interest Rates: A Brief Overview	70	(4)
The Real Rate of Interest: Underlying Considerations	71	(1)
Interest Rates and Inflation Expectations	71	(1)
Interest Rates and Risk	72	(1)
A Summary of Factors Important to Mortgage Pricing	73	(1)
Development of Mortgage Payment Patterns	74	(5)
Early Mortgage Lending Patterns	74	(1)
The Constant Amortization Mortgage Loan (CAM)	75	(1)
Fully Amortizing Constant Payment Mortgage Loans (CPM)	76	(3)
Constant Payment and Constant Amortization Loans: A Comparison	79	(12)
Determining Loan Balances	82	(1)
Loan Closing Costs and Effective Borrowing Costs: Fully Amortized Loans	83	(3)
Truth-in-Lending Requirements and the Annual Percentage Rate	86	(1)
Loan Fees and Early Repayment: Fully Amortized Loans	86	(5)
Charging Fees to Achieve Yields, or Pricing CPMs	91	(1)
Other Loan Patterns	91	(3)
Partially Amortizing Constant Payment Loans	92	(1)
Zero Amortization or ``Interest Only'' Loans	92	(1)
Increasing Loan Balances, or Negative Amortization	93	(1)
Amortization Schedules and Callable Loans	93	(1)
Inflation and Mortgage Pricing Problems	94	(13)
Effects on Lenders and Borrowers	94	(3)
The Graduated Payment Mortgage (GPM)	97	(5)
Reverse Annuity Mortgages (RAMs)	102	(5)
Appendix Graduated Payment Mortgages---Extensions	107	(3)
Adjustable Rate and Variable Payment Mortgages	110	(30)
ARMs and Lender Considerations	111	(3)
The Price Level Adjusted Mortgage (PLAM)	114	(20)
PLAM: Payment Mechanics	115	(2)
ARMs: An Overview	117	(1)
ARMs Illustrated	118	(2)
Problems Lenders and Borrowers Face with ARMs	120	(1)
Risk Premiums, Interest Rate Risk, and Default Risk on ARMs	121	(2)
Expected Yield Relationships and Interest Rate Risk	123	(3)
ARM Payment Mechanics	126	(6)
Expected Yields on ARMs: A Comparison	132	(2)
Shared Appreciation Mortgages	134	(6)
Residential Financial Analysis	140	(32)
Incremental Borrowing Cost	140	(8)
Early Repayment	142	(1)
Origination Fees	143	(1)
Incremental Borrowing Cost versus a Second Mortgage	144	(1)
Relationship between the Incremental Cost and the Loan-to-Value Ratio	144	(3)
Differences in Maturities	147	(1)
Loan Refinancing	148	(4)
Early Repayment: Loan Refinancing	149	(1)
Effective Cost of Refinancing	150	(1)
Borrowing the Refinancing Costs	151	(1)
Early Loan Repayment: Lender Inducements	152	(1)
Market Value of a Loan	153	(2)
Effective Cost of Two or More Loans	155	(3)
Second Mortgages and Shorter Maturities	156	(2)
Effect of Below Market Financing on House Prices	158	(1)
Assuming a Lower Loan Balance	159	(1)
Cash Equivalency	159	(1)
Cash Equivalency: Smaller Loan Balance	160	(1)
Cash Equivalency: Concluding Comments	161	(1)
Wraparound Loans	162	(2)
Buydown Loans	164	(4)
Appendix After-Tax Effective Interest Rate	168	(4)
Single Family Housing: Pricing, Investment, and Tax Considerations	172	(27)
Overview	172	(14)
Growth in House Prices	172	(2)
Demographics	174	(3)
Income and Employment	177	(1)
Renting versus Owning	177	(9)
Supply Overview	186	(13)
The Influences of Neighborhoods/Municipalities	186	(1)
Capitalization Effects: Price Premiums	187	(1)
Pricing Property: Appraisals	188	(11)
Underwriting and Financing Residential Properties	199	(29)
Underwriting Default Risk	199	(1)
Classification of Mortgage Loans	200	(3)
Conventional Mortgage Loans	200	(1)
Insured Conventional Mortgage Loans	201	(1)
FHA Insured Mortgage Loans	202	(1)
VA Guaranteed Mortgage Loans	202	(1)
The Underwriting Process	203	(4)
Borrower Income	204	(1)
Verification of Borrower Assets	205	(1)
Assessment of Credit History	206	(1)
Estimated Housing Expense	206	(1)
Other Obligations	206	(1)
Compensating Factors	206	(1)
The Underwriting Process Illustrated	207	(7)
Underwriting Standards---Conventional and Insured Conventional Mortgages	207	(2)
Underwriting Standards---FHA Insured Mortgages	209	(3)
Underwriting Standards---VA Guaranteed Mortgages	212	(1)
Underwriting and Loan Amounts---A Summary	212	(2)
The Closing Process	214	(5)
Fees and Expenses	214	(1)
Prorations, Escrow Costs, and Payments to Third Parties	215	(2)
Statutory Costs	217	(1)
Requirements under the Real Estate Settlement and Procedures Act (RESPA)	217	(2)
Settlement Costs Illustrated	219	(9)
Federal Truth-in-Lending (FTL) Requirements	219	(2)
Truth-in-Lending Sample Disclosure	221	(1)
Establishing the APR under Federal Truth-in-Lending Requirements	221	(2)
ARMs and Truth-in-Lending Disclosure	223	(5)
PART THREE FINANCING INCOME PROPERTIES (DEBT AND EQUITY)
Introduction to Income-Producing Properties: Leases and the Market for Space	228	(27)
Property Types	228	(2)
Regional Economic Influences on Property Values	230	(4)
Analogy with the Law of Comparative Advantage	230	(2)
Economic Base Analysis---Location Quotients	232	(2)
Supply and Demand Analysis	234	(6)
Local Market Studies of Supply and Demand	237	(1)
Location and User-Tenants	238	(2)
The Business of Real Estate	240	(1)
The ``Market'' for Income-Producing Real Estate	241	(1)
Leases	242	(9)
General Lease Terms for Specific Property Types	242	(1)
Financial Contents of Leases	243	(4)
Effective Rent	247	(4)
Income Potential---Real Estate Assets	251	(4)
Vacancy	251	(4)
Valuation of Income Properties: Appraisal and the Market for Capital	255	(37)
Introduction	255	(1)
Valuation Fundamentals	255	(1)
Appraisal Process and Approaches to Valuation	256	(1)
Sales Comparison Approach	257	(2)
Income Approach	259	(10)
Capitalization Rate	261	(2)
Capitalization Rate---A Note of Caution	263	(1)
Discounted Present Value Techniques	263	(1)
Selection of a Discount Rate (r)	264	(2)
Using Approximations to Estimate Reversion Values	266	(3)
Land Values: Highest and Best Use Analysis	269	(2)
Volatility in Land Prices	270	(1)
``Highest and Best Use'' Analysis	270	(1)
Mortgage-Equity Capitalization	271	(2)
Reconciliation: Sales Comparison and Income Capitalization Approaches	273	(1)
Exploring the Relationships between Changing Market Conditions, Cap Rates, and Property Values	273	(4)
A Closing Note on Cap Rates and Market Conditions	277	(1)
A Word of Caution---Simultaneous Effects of Real Estate Market Forces and Interest Rates on Property Values	278	(1)
Valuation of a Leased Fee Estate	278	(1)
Cost Approach	279	(3)
Valuation Case Study---Oakwood Apartments	282	(10)
ARGUS Solution	286	(6)
Investment Analysis and Taxation of Income Properties	292	(28)
Motivation for Investing	292	(1)
Real Estate Market Characteristics and Investment Strategies	293	(2)
``The Real Estate Cycle''	293	(2)
Investment Strategies	295	(1)
Marketing Investments: Projecting Cash Flows	295	(1)
Office Building Example	295	(8)
Base Rent	298	(1)
CPI Adjustment	298	(1)
Expense Stops	299	(2)
Net Operating Income	301	(1)
Expected Outlays for Replacements and Capital Improvements	302	(1)
Estimated Sale Price	302	(1)
Introduction to Investment Analysis	303	(1)
Internal Rate of Return (IRR)	303	(1)
Present Value	304	(1)
ARGUS Solution	304	(1)
Introduction to Debt Financing	304	(4)
Measures of Investment Performance Using Ratios	306	(1)
Before-Tax Cash Flow from Sale	306	(2)
Summary of Investment Analysis Calculations	308	(1)
Taxation of Income-Producing Real Estate	308	(1)
Taxable Income from Operation of Real Estate	309	(2)
Depreciation Allowances	309	(1)
Loan Points	310	(1)
Tax Liability and After-Tax Cash Flow	311	(1)
Taxable Income from Disposal of Depreciable Real Property	311	(1)
After-Tax Investment Analysis	312	(3)
After-Tax Cash Flow from Operations	312	(1)
After-Tax Cash Flow from Sale	313	(1)
After-Tax IRR	314	(1)
Effective Tax Rate	314	(1)
A Note about Passive Losses	315	(5)
Special Expectations to PAL Rules	316	(4)
Financial Leverage and Financing Alternatives	320	(35)
Introduction to Financial Leverage	320	(6)
Conditions for Positive Leverage---Before Tax	321	(4)
Conditions for Positive Leverage---After Tax	325	(1)
Break-Even Interest Rate	326	(2)
Risk and Leverage	328	(2)
Underwriting Loans on Income Properties	330	(2)
Market Study and Appraisal	330	(1)
Borrower Financials	330	(1)
The Loan-to-Value Ratio	331	(1)
The Debt Coverage Ratio	331	(1)
Other Loan Terms and Mortgage Covenants	332	(2)
Alternatives to Fixed Rate Loan Structures	334	(1)
Participation Loans	335	(5)
Lender Motivations	335	(1)
Investor Motivations	336	(1)
Participation Example	336	(4)
Sale-Leaseback of the Land	340	(2)
Effective Cost of the Sale-Leaseback	342	(1)
Interest-Only Loans	342	(1)
Accrual Loans	342	(4)
Structuring the Payment for a Target Debt Coverage Ratio	344	(2)
Convertible Mortgages	346	(2)
Lender's Yield on Convertible Mortgage	346	(2)
Comparison of Financing Alternatives	348	(2)
Monument Office Example---ARGUS Solution with a Loan	350	(5)
Risk Analysis	355	(31)
Introduction	355	(12)
Comparing Investment Returns	355	(1)
Types of Risk	356	(2)
Due Diligence in Real Estate Investment Risk Analysis	358	(1)
Sensitivity Analysis	358	(4)
Partitioning the IRR	362	(1)
Variations in Returns and Risk	363	(4)
Retail Case Study---Westgate Shopping Center	367	(3)
Westgate Shopping Center Scenario Analysis	368	(2)
Westgate Shopping Center---Argus Analysis	370	(1)
Lease Rollover Risk	370	(2)
Market Leasing Assumptions with Renewal Probabilities	372	(1)
Market Rent	373	(1)
Months Vacant	373	(1)
Leasing Commissions	373	(1)
Tenant Improvements	373	(1)
Industrial Case Study---Worthington Distribution Center	373	(3)
Solution with ARGUS	376	(1)
Risk and Leverage	376	(3)
A ``Real Options'' Approach to Investment Decisions	379	(7)
Traditional Approach to Land Valuation	380	(1)
Real Option Approach to Land Valuation	381	(1)
Real Options Extensions and Strategy	382	(4)
Disposition and Renovation of Income Properties	386	(20)
Disposition Decisions	386	(2)
A Decision Rule for Property Disposal	387	(1)
IRR for Holding versus Sale of Property	388	(3)
Returns to a New Investor	391	(4)
Marginal Rate of Return	391	(4)
Refinancing as an Alternative to Disposition	395	(2)
Incremental Cost of Refinancing	395	(1)
Refinancing at a Lower Interest Rate	396	(1)
Renovation as an Alternative to Disposition	397	(2)
Renovation and Refinancing	399	(1)
Rehabilitation Investment Tax Credits	400	(6)
Low-Income Housing	402	(4)
Financing Corporate Real Estate	406	(23)
Lease-versus-Own Analysis	407	(13)
Leasing versus Owning---An Example	407	(1)
Cash Flow from Leasing	408	(1)
Cash Flow from Owning	408	(2)
Cash Flow from Owning versus Leasing	410	(1)
Return from Owning versus Leasing	410	(1)
Importance of the Residual Value of Real Estate	411	(2)
The Investor's Perspective	413	(1)
A Note on Project Financing	414	(1)
Factors Affecting Loan-versus-Lease Decisions	415	(5)
The Role of Real Estate in Corporate Restructuring	420	(1)
Sale-Leaseback	421	(3)
Refinancing	424	(1)
Investing in Real Estate for Diversification	424	(3)
Appendix Real Estate Asset Pricing and Capital Budgeting Analysis: A Synthesis	427	(2)
PART FOUR FINANCING PROPOSED PROJECTS
Financing Project Development	429	(37)
Introduction	429	(1)
Overview: The Planning and Permitting Process	429	(3)
The Development of Income-Producing Property	432	(4)
Market Risks and Project Feasibility	434	(2)
Project Risks	436	(1)
Project Development Financing---An Overview	436	(2)
Lender Requirements in Financing Project Development	438	(9)
Loan Submission Information for Loan Requests---An Overview	438	(4)
Contingencies in Lending Commitments	442	(1)
The Construction or Interim Loan	443	(1)
Methods of Disbursement---Construction Lending	444	(1)
Interest Rates and Fees	444	(1)
Additional Information for Interim Loan Submission	445	(1)
Requirements to Close the Interim Loan	445	(1)
The Permanent Loan Closing	446	(1)
Project Development Illustrated	447	(9)
Project Description and Project Costs	447	(5)
Market Data and Tenant Mix	452	(1)
Pro Forma Construction Costs and Cash Flow Projections	453	(3)
Feasibility, Profitability, and Risk---Additional Issues	456	(10)
Profitability before and after Taxes	456	(3)
Sensitivity Analysis, Risk, and Feasibility Analysis	459	(7)
Financing Land Development Projects	466	(29)
Characterization of the Land Development Business	466	(2)
The Land Development Process---An Overview	468	(5)
Acquisition of Land---Use of the Option Contract	468	(2)
Financing and Development	470	(3)
Lender Requirements in Financing Land Development	473	(3)
Detailed Cost Breakdowns	475	(1)
General Contracts and Subcontracts	475	(1)
Residential Land Development Illustrated	476	(11)
Market Conditions and Site Plan	476	(3)
Estimating Development Cost and Interest Carry	479	(8)
Estimating Release Prices per Parcel Sold	487	(1)
Loan Request and Repayment Schedule	487	(1)
Project Feasibility and Profitability	487	(8)
Project IRR and Net Present Value	490	(1)
Entrepreneurial Profits	491	(1)
Sensitivity Analysis	491	(4)
PART FIVE ALTERNATIVE REAL ESTATE INVESTMENT VEHICLES
Partnerships, Joint Ventures, and Syndications	495	(21)
Introduction: What Is a Syndicate?	495	(1)
Use of the Limited Partnership in Private and Public Syndicates	496	(1)
Private Syndication Problem Illustrated	496	(4)
Financial Considerations---Partnership Agreement	497	(1)
Operating Projections	498	(1)
Statement of Before-Tax Cash Flow (BTCF)	499	(1)
Calculation of Net Income or Loss	500	(1)
Calculation of Capital Gain from Sale	500	(1)
Capital Accounts	500	(4)
Distribution of Cash from Sale of Asset	502	(1)
Calculation of After-Tax Cash Flow and ATIRR on Equity	502	(2)
Partnership Allocations and Substantial Economic Effect	504	(1)
Capital Accounts and Gain Charge-Backs	505	(2)
Use of the Limited Partnership in Private and Public Syndicates	507	(1)
Use of Corporate General Partners	508	(1)
Private versus Public Syndicates	508	(2)
Accredited Investors---Regulation D	509	(1)
Regulation of Syndicates	510	(2)
Investment Objectives and Policies	510	(1)
Promoters' and Managers' Compensation	511	(1)
Investor Suitability Standards	511	(1)
Federal and State Securities Authorities	512	(1)
Joint Ventures	512	(4)
The Secondary Mortgage Market: Pass-Through Securities	516	(27)
Introduction	516	(1)
Evolution of the Secondary Mortgage Market	516	(1)
Early Buyers of Mortgage Loans	517	(1)
A Secondary Market after 1954	517	(1)
FNMA's Changing Role	518	(1)
The Government National Mortgage Association	518	(2)
Mortgage-Backed Securities and the GNMA Payment Guarantee	519	(1)
The Federal Home Loan Mortgage Corporation	520	(1)
Operation of the Secondary Mortgage Market	520	(2)
Direct Sale Programs	520	(1)
The Development of Mortgage-Related Security Pools	521	(1)
Mortgage-Backed Bonds	522	(4)
Pricing Mortgage-Backed Bonds	523	(1)
Subsequent Prices	524	(2)
Mortgage Pass-Through Securities	526	(11)
Important Characteristics of Mortgage Pools	527	(4)
Mortgage Pass-Through Securities: A General Approach to Pricing	531	(2)
Mortgage Pass-Through Payment Mechanics Illustrated	533	(1)
Prepayment Patterns and Security Prices	534	(2)
Prepayment Assumptions	536	(1)
The Effects of Prepayment Illustrated	537	(6)
Security Prices and Expected Yields	539	(1)
Market Interest Rates and Price Behavior on Mortgage Pass-Throughs	539	(1)
A Note on MBBs and MPTs	540	(3)
The Secondary Mortgage Market: CMOs and Derivative Securities	543	(37)
Introduction	543	(1)
Mortgage Pay-Through Bonds (MPTBs)	543	(1)
Collateralized Mortgage Obligations	544	(14)
CMOs Illustrated	545	(2)
CMO Mechanics	547	(5)
CMOs: Pricing and Expected Maturities	552	(3)
CMO Price Behavior and Payment Rates	555	(1)
CMO Tranche Variations	556	(2)
Derivatives Illustrated	558	(6)
Yield Enhancement	561	(1)
IO and PO Strips	561	(3)
Convexity	564	(1)
Residential Mortgage-Related Securities: A Summary	564	(2)
Residential Mortgage-Related Securities: Some Closing Observations	566	(1)
Commercial Mortgage-Backed Securities (CMBSs)	566	(11)
Rating Commercial Mortgage-Backed Securities	570	(2)
Mortgage-Related Securities and REMICs	572	(1)
REMICs: Other Considerations	573	(4)
Appendix Duration---An Additional Consideration in Yield Measurement	577	(3)
Real Estate investment Trusts (REITs)	580	(23)
Introduction	580	(3)
Legal Requirements	580	(3)
Tax Treatment	583	(1)
Violation Penalties and Status Termination	583	(1)
Taxable REIT Subsidiaries	583	(1)
Types of Trusts	583	(8)
Equity Trusts	584	(1)
The Investment Appeal of Equity Trusts	585	(1)
Private REITs	586	(1)
Importance of FFO (Funds from Operations)	586	(2)
REIT Expansion and Growth	588	(3)
Important Issues in Accounting and Financial Disclosure: Equity REITs	591	(4)
Tenant Improvements and Free Rents: Effects on FFO	591	(1)
Leasing Commissions and Related Costs	592	(1)
Use of Straight-Line Rents	592	(1)
FFO and Income from Managing Other Properties	593	(1)
Types of Mortgage Debt and Other Obligations	593	(1)
Existence of Ground Leases	593	(1)
Lease Renewal Options and REIT Rent Growth	594	(1)
Occupancy Numbers: Leased Space or Occupied Space?	594	(1)
Retail REITs and Sales per Square Foot	595	(1)
Additional Costs of Being a Public Company	595	(1)
The Investment Appeal of Mortgage REITs	595	(8)
Financial Analysis of an Equity REIT Illustrated	597	(6)
Real Estate Investment Performance and Portfolio Considerations	603	(24)
Introduction	603	(1)
The Nature of Real Estate Investment Data	603	(1)
Sources of Data Used for Real Estate Performance Measurement	604	(2)
REIT Data: Security Prices	604	(1)
Hybrid and Mortgage REITs	604	(2)
NCREIF Property Index: Property Values	606	(1)
Data Sources for Other Investments	606	(1)
Cumulative Investment Return Patterns	606	(1)
Computing Holding Period Returns	607	(2)
Computing Investment Returns	609	(1)
Risk, Return, and Performance Measurement	609	(2)
Risk-Adjusted Returns: Basic Elements	610	(1)
Elements of Portfolio Theory	611	(4)
Calculating Portfolio Returns	613	(1)
Portfolio Risk	613	(3)
Portfolio Weighting: Trading Off Risk and Return	616
Real Estate Returns, Other Investments, and the Potential for Portfolio Diversification	615	(12)
Portfolio Diversification: EREITs and Other Investments	618	(2)
Public versus Private Real Estate Investments	620	(1)
Real Estate Performance and Inflation	621	(6)
Index	627