NYU Stern School of Business

Undergraduate College

FINC-UB.0039.001 (C15.0039): REAL ESTATE FINANCE

Spring 2013

Instructor Details

Leiber, Frank


by appointment, before class








Course Meetings

W, 6:20pm to 8:50pm

KMC 3-130

Schedule exceptions
    Class will not meet on: There will be no class on March 20 (Spring Break)


Course Description and Learning Goals

ThisReal Estate Primary Markets’ course is one of the four ‘essentials’ in the Real Estate Track, and its goal is to teach the analysis and decision criteria used by real estate investors. We focus on how investors value properties and acquire them by issuing a variety of debt and equity claims, and we do this in a rigorous capital structure framework integrating risk and expected return.


We emphasize leases as the main cash flow drivers of property value and analyze how lease contracts allocate risks between tenants and owner. We also accentuate how different types of funding tools (the mortgages, loans and other financial instruments issued in the acquisition process) are the means to allocate risks between the property and different investor classes in the primary capital markets.


These topics include choosing the optimal degree of leverage, the impact of risk on the hurdle rate and the expected return of debt and equity, the importance of cash flow projections, the valuation and structuring of a variety of mortgages, including technical aspects of debt financing such as negative amortization, the effective cost of debt due to upfront points, prepayment penalties etc. In addition to public investment vehicles, we will also discuss important ‘private market’ financing structures such as real estate partnerships, with their unique distribution rules of cash flows from operations and reversion.


This course also enables students to refine their understanding of analytical valuation techniques and risk measures, to deepen their mastery of discounted cash flow analysis by building property pro formas and by learning how to compute and evaluate deal proposals based on NPV and IRR. Students also learn the strengths and limitations of different valuation techniques and learn how and when to apply real options analysis, and sensitivity, scenario and simulation techniques to deal with risk, and they examine the key measures for credit risk and underwriting criteria in real estate financings.


Course Pre-Requisites

Course Pre-Requisites: An important prerequisite of this course is Foundations of Financial Markets’, FINC-UB 2, that develops the basic concepts and tools of modern finance, in particular risk and return, as well as a solid understanding how financial markets work and how different kinds of financial instruments are valued.


Ideally, theco-requisite ‘Corporate Finance’, FINC-UB 7, required for finance majors, has been successfully completed by the student prior to attending this class. I will do my best to guide students who take the Financial Management course concurrently with this class, which applies many important subjects from corporate finance to commercial real estate.


This course concentrates on commercial, income generating real estate, (‘investment properties’), although many of the financing concepts are applicable directly in a residential real estate context as well. Our focus is also distinct from studying ‘secondary markets’ where financial instruments funding real estate are traded individually, or bundled and sliced up again into new collateralized securities to satisfy specific investor needs (topics covered in Real Estate Capital Markets FINC-UB 38).


Course Outline

SCHEDULE (subject to revision)



Week #






Background Readings

(must be completed prior to class session)


Other Assignments

(students are responsible for additional homework that will be assigned during class)




January 30

Course Overview:

1)   Risk and Return in Real Estate Investments, and Introduction to Property Level Pro-Forma Analysis and Valuation

2)   Basic Legal Concepts in RE Finance

3)   RE Financing: Notes and Mortgages


Chapters 1, 2, 9


1)   Do Problems 1-11 Ch. 2 (Problems are due 24 hours prior to the following session)

2)   Form teams: maximum 4 students per team

3)   Start thinking about presentation: “Presentation and Investment Analysis of Income Producing Property”


February 6

1)   Review of TVM, IRR, NPV, annuities and compound interest conventions for RE


Chapter 3

1)   Do Problems 1-18 Ch. 3


February 13


1)   Fixed rate mortgages


Chapter 4

1)   Do Problems 1-22 Ch. 4


February 20

1)   Adjustable rate and variable payment mortgages


Chapter 5

1)   Do Problems 1-13 Ch. 5


February 27

1)   Additional Variations, Analysis and Applications of Mortgages

Chapter 6

1)   Do Problems 1-10 Ch. 6



March 6

1)   Leases, Rents and Developing Statements of Operating Cash Flow (NOI) for Valuation


Chapter 9






1)   Do Problems 1-10 Ch. 9

2)    The following assignment is due by March 27:Write-up the case examples from Ch. 9 in EXCEL (for year 1):

a.     Webster Office Plaza

b.    Hellis Distribution Facility

c.     Shady Elm Community Shopping Center

d.    Waterfall Court Apartments




March 13


1)   Midterm Exam

2)   Valuation of income properties: focus on discounting cash flows and capitalizing NOI







Chapter 10


1)   Do Problems 1-16 Ch. 10




March 27


(No class on March 20

Midterm Recess)


1)   Investment Analysis and Impact of Taxation

2)   The Monument Office Building Example: IRR on Property, BT-IRR and AT-IRR on Equity

3)   Depreciation and Capital Gains: After-Tax Cash Flows from Operations an AT-CF from Disposition

Chapter 11










2)   Do Problems 1-6 Ch. 11





April 3


1)   Financial leverage, optimal capital structure and risk:

a.    Commercial Property Example: BT and AT Analysis of Positive vs. Negative Leverage

b.    Break-Even Interest Rate

c.    Leverage and Risk: a simple Scenario Analysis

2)   Loan Underwriting Criteria and Alternative Loan Structures for Apartment Project Example


Chapter 12

1)   Do Problems 1-10 Ch. 12




April 10


1)   Risk analysis and introduction to sensitivity and scenario analysis;

a.    the Westgate Shopping Center Example and Lease Rollover Risk

b.    The Worthington Distribution Center and the leverage-risk connection again

2)   Introduction to Simulation Analysis

3)   Extending the NPV criterion by valuing flexibility: introduction to real options


Chapter 13


1)   Do Problems 1-7 Ch. 13




April 17


1)   Investment Holding Period: IRR for Holding vs. Sale

2)   Marginal ATIRR to Equity and Optimal Holding Period

3)   Tax Deferral Strategies upon Disposition

4)   Refinancing and Renovation as Alternatives to Disposition

5)   Tax Credits for Rehabilitation and Low-Income Housing Investment






Chapter 14

1)   Do Problems 1-7 Ch. 14




April 24



1)   Structuring external sources of capital to deal with business risk

2)   Alternatives to commercial loans: raising funds through joint ventures, syndications, private equity funds, and partnerships; distribution rules of cash flows from operations and reversion


Chapter 18

1)   Do Problems 1-4 Ch. 18



May 1


1)   The cost of debt: CRE credit risk analysis in the cash flow and asset volatility perspectives

2)   Optimal Loan Structuring






May 8

1)   Financing Corporate Real Estate

2)   Lease-vs-Own Analysis

3)   Sale-Leaseback

4)   Real Estate in Corporate Restructuring

5)   When plans go awry: restructuring distressed loans and financing turnaround strategies


Chapter 15 and Handouts

1)   Do Problems 1-4 Ch. 15


Course Materials

Required Book:

(BF):   Brueggeman and Fisher: “Real Estate Finance and Investments”, 14th edition, 2011, ISBN-13  978-0-073-377-339


Recommended Books (optional):

(BD):   Berk and Demarzo: “Corporate Finance”, 2nd edition, 2011, Prentice Hall, ISBN-13:  978-0-136-08943-8

                (D):     Damodaran: “Applied Corporate Finance: A User’s Manual”, 3rd edition, 2011, ISBN: 978-0-470-38464-0 (pbk.)

 (B):     Benninga: “Financial Modeling”, 3rd edition, 2008, ISBN: 978-0-262-02628-4

               (H):     Holden: “Excel Modeling in Corporate Finance”, 4th edition, 2012, ISBN:  978-0-132-49784-8


The Berk-Demarzo textbook provides conceptual background to the tools and methods of corporate finance, which we apply to commercial real estate in this course. The Damodaran book, by NYU-STERN professor Aswath Damodaran, provides practical and succinct advice and applies corporate finance to real companies, rather than concentrating on theoretical debates, assumptions or models.


Spreadsheet modeling skills are an important part of the rigorous education in finance provided at Stern School of Business. Although you will not become an expert EXCEL programmer in this course, you will learn practical finance by answering questions in EXCEL. Being able to DO finance (rather than talking ABOUT finance) in a spreadsheet environment is ever more important as a competitive skill, and - instead of distributing spreadsheet templates - I encourage you on modeling in EXCEL. Both the Benninga and the Holden books are ideally suited to refreshing your EXCEL techniques in finance, to help you through practical problems such as we will study in this course and to guide you beyond.


Supplementary Readings: Handouts, articles, additional exercises, review material and all other relevant communication will be posted on the Blackboard website for this course.


Assessment Components

Grading criteriaand assessment components:


Assignments and writing



Midterm exam



Attendance and quality of participation



In-class quizzes



Case Group Project



Final exam








NOTE: There is no make-up exam for exams or quizzes. All exams and quizzes are closed book. The final exam covers the entire semester.


Assignments and Case Study Group Projects

Written Assignments:  All students are expected to pursue and meet the highest standards of academic excellence by adhering to the norms of a serious intellectual community. If you are unclear about the rules and styles of citation, please read the section “Bibliography and Footnote Style Guide” and follow the resources listed at http://library.nyu.edu/research/bibliographies.


Each assignment must be handed in as a WORD document accompanied by an EXCEL file. As much as you are trained to solve analytical problems, you MUST learn to communicate well. Consequently you must create (and e-mail to me and the TA) a self-contained document, intelligible to a reader who has not seen the Problem / Question. Your work must be in the form of a professional memorandum and conform to professional formatting standards (pagination, logical presentation, correct English, including bibliographic references) with all supporting Spreadsheet models in a separate EXCEL file.  


The structure of a professional communication opens with an executive summary, followed by a succinct description of the project/assignment, then the body of your analysis with a clearly articulated commentary, accompanied by excerpts and graphs imported from the supporting analytical models, which you may have to create and which you must append to the assignment. Compelling narrative, neatness, organization, logic, clarity, grammar, punctuation, and spelling of each assignment are important elements to impress me, your colleagues, as well as your future bosses and clients…



Deadlines: Each assignment (the WORD write-up as well as any supporting EXCEL model and data) is due by e-mail 24 hours prior to class meetings, in my and the TA’s Inbox. The TA will determine whether a hardcopy of each assignment as well is due at the beginning of each class session (dates specified in the “SCHEDULE” below). All deadlines are HARD, i.e. late deliveries will automatically receive a grade of 0.



E-mail communication: You MUST use your NYU and/or STERN e-mail address. Any e-mail sent from a different address will be ignored. Also, every e-mail communication you send MUST contain a CLEAR indication of the content in the subject line, and every filename MUST contain the author’s name and a self-explanatory title. Please take these instructions seriously, because non-compliance will automatically disqualify your work.



Grading, Exercises and Examinations:  Throughout the semester, you can check your understanding of the material by doing the weekly exercises. This weekly assessment is complemented by a midterm exam and short, unannounced, in-class quizzes.


Guidelines for Case Group Project:

Business activities involve group effort. Consequently, learning how to work effectively in a group is a critical part of your business education.

Every member is expected to carry an equal share of the group’s workload. As such, it is in your interest to be involved in all aspects of the project. Even if you divide the work rather than work on each piece together, you are still responsible for each part. The group project will be graded as a whole:   its different components will not be graded separately. Your exams may contain questions that are based on aspects of your group projects.

It is recommended that each group establish ground rules early in the process to facilitate your joint work including a problem-solving process for handling conflicts. In the infrequent case where you believe that a group member is not carrying out his or her fair share of work, you are urged not to permit problems to develop to a point where they become serious. If you cannot resolve conflicts internally after your best efforts, they should be brought to my attention and I will work with you to find a resolution.

You will be asked to complete a peer evaluation form to evaluate the contribution of each of your group members (including your own contribution) at the conclusion of each project. If there is consensus that a group member did not contribute a fair share of work to the project, I will consider this feedback during grading.



Grading, Exercises and Examinations:  Throughout the semester, you can check your understanding of the material by doing the weekly exercises. This weekly assessment is complemented by a midterm exam and short, unannounced, in-class quizzes.



Grade Distribution: At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter.  In general, the grading distribution is based on the class curve rather than absolute number of points, and it adheres to the grading curve set by the Finance Department as follows:


A:                    (A, A-)                        25%

B:                    (B+, B, B-)                  50%

C:                    (C+, C, C-)                  20%

D and F:                                                5%


Professional Responsibilities For This Course

Course Structure:  This course gives you the opportunity to apply sophisticated  analytical tools in realistic real estate settings, and the course structure reflects the variety and depth of the subject material covered:


Preparation time involves review, background reading, and problem solving using EXCEL and WORD for the write-ups. You should study in teams (of no more than three individuals), to be formed by the second week of the course. You are allowed to hand-in 1 exercise per team, and each assignment will be graded on a team basis. It is up to teams to manage their own internal dynamics and to expel a ‘free-rider’. Each team member is also evaluated by his peers in a transparent and fair manner.


Classroom time consists primarily of discussions of concepts and, based on the reading assignments for each class, students will have frequent opportunities to verbally uent on the reading assignments for each classhniques3 and evaluate NPV and IRR. present their analysis.



Attendance:  Students are expected to attend each class and be on time. Constructive, knowledgeable, courteous and active class participation is expected and rewarded. Classes will start on time, attendance will be taken at the start of each session, and if you are late or have missed a session, please inquire with members of your study team, outside of class-time, about what you missed. It is very disturbing to your colleagues if you come in late, and chronic late-coming will not be accepted.


Absences may be excused only in the case of documented serious illness, family emergency, religious observance, or civic obligation. Recruiting activities, partying and other NYU-related events are not acceptable reasons for class absence. You must notify instructor and teaching assistant as soon as possible if it appears likely that you will miss class for an extended period of time due to illness or another reason.




In-class contribution is a significant part of your grade and an important part of our shared learning experience. Your active participation helps me to evaluate your overall performance.
You can excel in this area if you come to class on time and contribute to the course by:



Electronic devices: Cell phones must be switched off during class sessions, as they are highly distractive and negatively impact class discussion. I will ask the IT department to record our sessions for students who wish to review the material discussed.



Nameplates: Your nameplate must be displayed during every session to facilitate a pleasant interactive atmosphere, and so I can remember whom to credit for exceptionally high quality contributions. You have no nameplate, by Week 2, print your own in large font and landscape and simply fold it to create a ‘paper tent’.




Tidy Classroom: At the end of each session, please clean your desk and put any refuse in the classroom bins. As much as you expect to find a clean desk at the start of each session, it is important to exercise the same consideration towards your student colleagues in the following class as well as to Stern staff.


Stern Policies

General Behavior
The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior.  Students who fail to do so may be asked to leave the classroom. 


Collaboration on Graded Assignments
Students may work together on graded assignment. 


Course Evaluations
Course evaluations are important to us and to students who come after you.  Please complete them thoughtfully.


Academic Integrity

Integrity is critical to the learning process and to all that we do here at NYU Stern. As members of our community, all students agree to abide by the NYU Stern Student Code of Conduct, which includes a commitment to:

The entire Stern Student Code of Conduct applies to all students enrolled in Stern courses and can be found here:

Undergraduate College: http://www.stern.nyu.edu/uc/codeofconduct
Graduate Programs: http://w4.stern.nyu.edu/studentactivities/involved.cfm?doc_id=102505

To help ensure the integrity of our learning community, prose assignments you submit to Blackboard will be submitted to Turnitin.  Turnitin will compare your submission to a database of prior submissions to Turnitin, current and archived Web pages, periodicals, journals, and publications.  Additionally, your document will become part of the Turnitin database.


Recording of Classes

Your class may be recorded for educational purposes


Students with Disabilities

If you have a qualified disability and will require academic accommodation of any kind during this course, you must notify me at the beginning of the course and provide a letter from the Moses Center for Students with Disabilities (CSD, 998-4980, www.nyu.edu/csd) verifying your registration and outlining the accommodations they recommend.  If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation.


Communication skills

Communication skills: It is increasingly important that financial practitioners know how to communicate their analysis. In order to hone professional writing and speaking skills, this course requires students


All NYU students can readily ask for help with writing skills from ‘The Writing Center’ at NYU's Expository Writing Program in the College of Arts and Science. For further details, please visit http://www.nyu.edu/cas/ewp/html/writing_center.html



This course is an opportunity to enhance your analytical capabilities in Real Estate Finance and beyond, to polish your written and verbal presentation and professional communication skills, and to enjoy all this in a polite atmosphere. In this class, you are rewarded for asking intelligent questions – and you will not lose your client (or your job) if you make a mistake…


My goal is to provide you with the chance to demonstrate your ‘mastery and/or proficiency of core and ancillary material comprising the course’, by submitting work ‘in a condition that could be used confidently in a professional setting with virtually no modification’ -  quoted from NYU’s “Qualitative Standards for Grades” to earn an “A”.


Welcome again and good luck!


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