NYU Stern School of Business

Undergraduate College

C15.0039.001: REAL ESTATE FINANCE

Fall 2010

Instructor Details

Wally Boudry

wboudry@stern.nyu.edu

212-998-0309

Open Door

Tisch 4-24

 

Course Meetings

TR, 2:00pm to 3:15pm

Tisch T-LC25


Final Exam: will be take home.

 

 

Course Description and Learning Goals

This goal of this course is to teach students the science (and art) of property valuation. Aside from the technical aspects of property valuation, students should gain an understanding of the process of property valuation and the way in which real estate investors think. The course can be broken into seven topics.

 

Real Estate System– this is a structured way of thinking about real estate and how the different markets (space market, capital market and developers) are all interrelated. Understanding how the real estate system works is fundamental to property valuation.  

 

Real Estate Market Analysis- real estate market analysis is a structured way of thinking about a particular market and allows an investor to make macro-level judgments about the desirability of investing in that market.

 

Leases– rents are the cash flow driver in property valuation and the lease contract specifies the payment structure of rents. This topic is designed to introduce students to the different types of leases (gross v net leases etc.) and explain how these different types of leases can share risks and change property cash flows.

 

Mortgages– property investment is nearly always done on a leveraged basis and “always use other people’s money” is a common philosophy in real estate. The purpose of this topic is to examine the mechanics of mortgage contracts (debt service, amortization etc.) because these will be key inputs into property valuation. We will also examine residential mortgage contracts, since this will likely be one real estate decision all students will have to make at some stage.

 

Back of the Envelope– our first pass at property valuation will be what I would call “Back of the Envelope” pricing models. These models while being simplistic in nature work very effectively as a screen for determining whether you want to spend more time examining a property. In essence they are the starting point for property valuation and answer the question “Should I spend more time and money investigating this property?” 

 

Real Estate DCF– this topic is very similar to the DCF analysis you should have learned in Financial Management. We will build property pro formas and calculate NPVs and IRRs. At the end of this topic students should be familiar with all the valuation techniques they are likely to see in practice. They should also know the pitfalls of each method and be able to critically evaluate a real estate deal.

 

Real Estate Structures– there are numerous different structures an investment in real estate can take (RELP, CREF, REIT etc.) The purpose of this topic is to examine what the structures are and how participants’ incentives are aligned. All you hard work in selecting the best properties to invest in can be undone by a poorly set up investment structure.

 

I may include other topics as the course progresses.

 

Course Pre-Requisites

There are two words of warning. First, this course is a finance elective, so we will focus primarily on issues that apply and extend concepts which were learned in your core finance classes. In a lot of ways, real estate analysis is applied finance, and that is the perspective we will keep throughout the semester. Second, this course is devoted to commercial rather than residential real estate. Our focus will be on the valuation of commercial properties. Many of the principles we learn about commercial real estate can be applied to the single family market, but this is not the focus of the course.

 

Course Outline

Date

Class

Topic

9/7

1

Introduction

9/9

2

Real Estate System (Ch 1, 9 up to leases BF; Ch 1, Appendix A Poorvu) 

9/14

3

Real Estate System

9/16

4

Real Estate Market Analysis

9/21

5

Real Estate Market Analysis

9/23

6

Mortgages (Ch 2,3,4,5,8 BF)

9/28

7

Mortgages

9/30

8

Mortgages

10/5

9

Lease Mechanics (Ch 9 BF)

10/7

10

Lease Mechanics

10/12

11

Back of the Envelope (Ch 2,3,4 Poorvu)

10/14

12

Back of the Envelope

10/19

13

Back of the Envelope

10/21

14

Back Door Front Door

10/26

15

Overview

10/28

16

Mid Term

11/2

17

Mid Term Review

11/4

18

Back Door Front Door

11/9

19

Back Door Front Door

11/11

20

Discounted Cash Flow (Ch 10, 11 BF; Ch 7 Poorvu)

11/16

21

Discounted Cash Flow

11/18

22

Discounted Cash Flow

11/23

23

Discounted Cash Flow

11/30

24

Due Diligence

12/2

25

Real Estate Structures (Ch 18 BF)

12/7

26

Real Estate Structures

12/9

27

Case

12/14

28

Overview

 

Required Course Materials

Several of the topics covered in the course could exist as full semester classes in their own right. As such, I like to give references to textbooks that a student may find useful to gain more insight into individual topics. Students are not expected to buy these books or even read them if they are happy with the coverage provided in class.

 

Brueggeman and Fisher “Real Estate Finance and Investments” 14th ed, McGraw-Hill.

(This is the main text for the course. You could get through the course without it.)

 

Poorvu “The Real Estate Game: The intelligent guide to decision-making and investment” The Free Press(You can read this book in a weekend. It gives a great overview of one man’s approach to real estate investment. It also does a great job of “Back of the Envelope” valuation.)

 

Gallinelli “What every real estate investor needs to know about cash flow … and 36 other key financial measures” (This is almost the cliff notes for the course. The whole book can be read in a few hours and is a great quick reference.)

 

Brett and Schmitz “Real estate market analysis: Methods and case studies” 2nd Edition. (This goes into far greater detail on market analysis than we will in class. A heavy read at times, but failry comprehensive.)

 

McMahan “The handbook of commercial real estate investing”(This book does a great job of explaining who does what in real estate and also covers a lot of practical issues to consider when valuing real estate. Definitely worth a read if you are planning on working in commercial real estate.)

 

Geltner, Miller, Clayton and Eichholtz “Commercial Real Estate Analysis and Investments” 2nd Ed. Thomson South-Western.(If you get really excited about a particular topic, then this text probably has a more in-depth discussion on it. It is in places a very technical book and can be quite difficult to read. You are under no obligation to read a single page of this book during the course. It is purely a reference.)

 

Linneman “Real Estate Finance and Investments: Risk and Opportunities” 2nd ed Linneman Associates.(This is an alternate text for most topics in the course. If you are having a hard time with BF, this text covers most of the same topics, but in a more conversational tone. You are under no obligation to read a single page of this book during the course. It is purely a reference.)

 

I strongly encourage class attendance and participation. I do not strictly follow any textbook so attending class is the best way to understand the course material. That said, I understand that many students are unable to make every class due to interviews, illness etc. In these cases it is strongly recommended that you read through the lecture notes and any set readings and come and see me if you have any questions.

 

Course material will be posted on Blackboard and I will bring copies of the notes to class. If I forget to post something, please remind me. Apart from the course material, students are encouraged to read the Wall Street Journal.

 

The instructor assumes that students will read all materials assigned for each class, and any additional recommended readings.

 

Assessment Components

Final Exam: 40%

Mid Term: 20%

Homework: 20%

Case: 10%

Participation: 10%

 

As always, participation is based on quality not quantity, but remember there needs to be some quantity to judge quality. Students are expected to adhere to the honor code. Students will be given many opportunities to discuss homework answers during class. So be prepared.

 

Group Projects

Guidelines for Group Projects

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

At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter.  In general, students in undergraduate core courses can expect a grading distribution where: 

Note that while the School uses these ranges  as a guide, the actual distribution for this course and your own grade will depend upon how well  you actually perform in this course.

 

Re-Grading

The process of assigning grades is intended to be one of unbiased evaluation. Students are encouraged to respect the integrity and authority of the professor’s grading system and are discouraged from pursuing arbitrary challenges to it.

If you believe an inadvertent error has been made in the grading of an individual assignment or in assessing an overall course grade, a request to have the grade re-evaluated may be submitted. You must submit such requests in writing to me within 7 days of receiving the grade, including a brief written statement of why you believe that an error in grading has been made.

 

Professional Responsibilities For This Course

Attendance

 

Participation

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:

 

Assignments

 

Classroom Norms

 

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 not work together on graded assignment unless the instructor gives express permission. 

 

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.

 

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