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1AbriefbiographyofProfessorLancasterisatthebackofthissyllabus.
B7331REALESTATEFINANCESUMMER2019
PROFESSOR:BRIANP.LANCASTER1Phone:860-898-0436E-mail:[email protected]:Pleasecontactmeandwecanarrangeameetingorcall.
TEACHINGASSISTANTSSarahRussellPhone:917-971-5902Email:[email protected]:byappointmentGregHardimanPhone:860-212-7233Email:[email protected]:byappointment
CommunicationsfromprofessorandteachingassistantsaboutthecoursewilltakeplacethroughCanvas.Studentsshouldmakesuretheyregularlycheckforannouncementsandmessagingnotifications.
SCHEDULEANDLOCATIONThursdays,6:00PM–9:00PMClassroom:Warren208COURSEDESCRIPTIONTheobjectiveofthecourseistoteachyouthefundamentalconcepts,analyticalmethods,toolsandmodelsusedformakingcommercialrealestatefinanceandinvestmentdecisions.Forexample,howinvestorsacquirerealestatepropertiesbyissuingavarietyofdebtandequityclaims.Thecoursewillfocusprimarilyonincomeproducingproperties(i.e.commercialrealestate).Thegeneralapproachwillbetoteachyoufirstthefundamentalprinciples,themath,thespreadsheet,thelogicofrealestatefinanceandthentoapplythistothe“reality”ofrealestatefinance–considerationsyouhavetotakeintoaccountatthesidewalklevel.Thecourseisdesignedtoensurethatyouhaveathoroughunderstandingofthe“science”(thetheoryandmodels)aswellasthe“art”(reality)ofrealestatefinanceandrealestateinvesting.Theapproachutilizesarigorous,unifiedfinance-basedframeworkinthelecturesandspreadsheetsthatintegratesriskandexpectedreturntoanswerrealestateinvestmentdecision-makingproblemsencounteredintherealworld,suchasdecidingbetweentheinvestmentreturnsoftwoproperties,whatisanappropriateriskadjustedborrowingrate,whenshouldvacantlandbedevelopedetc.Thistheoreticalapproachiscomplementedinthelecturesandcasestudieswiththe“art”ofrealestateinvesting-realsituationstohelpstudentsgainadeeperunderstandingoftheissuesbothbyapplyingtheseconceptsandseeingthelimitationsoftheseprincipalsandmodelswhenappliedtoreality.Forexample,whatarethebestassumptionstomake
inmodelingcashflowsforcaprates,vacanciesetc.Howsensitiveisouranalysistoourassumptions?Howdoweaccountforvacantlandadjacenttoashoppingmallwemayconsiderdeveloping?Howdothephysicalattributesofapropertyimpactitsvalue(floorplates,windows,views)etc?Bytheendofthecourseyoushouldhave:asolidunderstandingofhowtodirectlyinvestandvaluerealestateproperties;whenandhowtouseleverage,howtoinvestindirectlyinrealestatethroughvariousvehicles,suchasprivateequity,realestateinvestmenttrusts,CMBSandotherformssuchasmezzaninedebtandfinally…Howtomakemoney!REQUIREDCOURSEMATERIALSCourseHandouts:Powerpointsoflectures,readings,andcaseswillbeavailableonCANVASbeforeclasses.StudentsshouldmakesuretoreadlecturepowerpointslidesandreadingsforeachclassBEFOREeachclass.Theymaybringtheirlecturepowerpointslideswiththemtoclass,howeverpowerpointslideswillbeprovidedatthebeginningofeachclasssothatstudentsmaytakenotesonthem.Readingsthatareoptionalareindicated.Theyareprovidedifstudentswishadeeperlookintoaparticulartopic.Theyarealsohelpfuladditionalreferencedocumentstokeepshouldyoupursueacareerinrealestatefinance.Lectureswillberecordedandmadeavailableondemand.ReferenceBooks:• RealEstateFinanceandInvestments:RisksandOpportunitiesbyPeterLinneman(5thedition)—StronglysuggestedThisbookprovidesbackgroundmaterialandcontextformanyoftheconceptscoveredinclass.Itisalsousefulasareferencebookshouldyouwishtopursueacareerincommercialrealestate.
• CommercialRealEstateAnalysisandInvestmentsbyGeltnerandMiller,withClaytonandEichholtz,(SouthwesternPress,2ndedition)-Recommended.Thisbookisaveryusefulreferencethatprovidesamoredetailedcoverageandoffersmorequantitativeanalysis.
• Thesetwobooksarecomplementarytoeachotherandareavailableforpurchaseatthebookstoreoronline.Fourcopiesofeachbookareavailableatthelibrary.
CONNECTIONTOTHECORE• CorporateFinance:Timevalueofmoney,risk,CAPM,ModiglianiMillerTheorem,arbitragepricingandthelawofoneprice,efficientmarkets,frictions.
• ManagerialEconomics:Maximizationandthinkingonthemargin,analyzingcomplexdecision-makingunderuncertainty,understandingmarketcompetitionandequilibriumthinking.
• ManagerialStatistics:Statisticsdataanalysis,probabilityintro,conditionalprobability,modelinguncertainty.• GlobalEconomicEnvironmentI:Whatcausesinflation,whatdrivesemployment,whatarethecausesofbusinesscycle,whataretheeffectsofmonetarypolicy,whatistheroleoffinancialmarketsintheeconomy.
CLASSROOMNORMSANDEXPECTATIONSStudentsareexpectedtoadheretoCBSCoreCultureinthisclassbybeingPresent,Prepared,andParticipating.
Pleasebringandpostnameplatesineveryclass.Classparticipationcountsfor10%ofyourcoursegrade.Pleaseparticipate.Thecourseiscumulative,sobeinglostgetsquitecostlyveryquickly.TAswilltakeattendanceandnoteclass
participation.Excessiveunexcusedabsencesfromclasswillweighmoreheavilythan10%onyourgrade.Lackofparticipationcanreduceagradebyoneortwolevels.Constructivecommentsinclasswillincreasetheparticipationpoints.Pleaseturnoffcellphones,iPads,laptops,Blackberries,andotherelectronicdevicesetc.Absencesorlatearrivalswillbeconsideredasafactorinclassparticipation.Materialscoveredbyguestlecturersarerequired.WewelcomebackPeterLewisasoneofourguestspeakers.PeteristheCEOofWhartonEquityPartnersandwilldiscussthefutureopportunitiesandrisksinCommercialRealEstatebeingdrivenbychangesintechnologyandoursociety.Peterhasreceivedtopratingsinpreviousstudentevaluationsofthiscourse.WealsowelcomebackandcongratulateourlongtimeguestspeakerKenCaplanofBlackstone.GivenKen’snewseniorroleasco-headofGlobalRealEstateatBlackstone(thepositionformerlyheldbyJonGray),enrolledstudentsmayinvitenon-enrolledstudentstoattendthatclasswiththeprofessor’spermission.Studentsarerequiredtostudyanymaterialsguestspeakersprovideandcometoclasswiththoughtfulquestionsandparticipatefullyinclassdiscussions.Studentsshallnotuseanydeviceswhileguestspeakersarespeaking.Severalchangesincorporatinggreaterfocusoninternationalrealestateandprivateequityrealestatemaybemadetothissyllabus.
COURSEROADMAP/SCHEDULE2
Session Topic(s) RequiredPre-Readings AssignmentsDue(Type)1
05/16/19(Th)
CourseOverviewandRequirements Session1Lecturenotes(CANVAS)Linneman,Ch.2WhatisRealEstate?(CANVAS);Ch.3InternationalRealEstateInvesting(CANVAS)(Optionalreading)
205/16/19
(Th)
IntroductiontoProforma,RiskandLeasesHowtodoaprojectedcashflowanalysisofaproperty,limitations,NOI,CapEx,howtovaluedifferenttypesofleases.Choosingtherightdiscountrate.Tenantrisk,zoningrisk,operationalrisk,liquidityrisk,raterisk.
Session2LectureNotes(CANVAS)Linneman,Ch.4,Propertylevelproformaanalysis.(CANVAS)Linneman,Ch.6RealEstateDueDiligence.(CANVAS)HW#1(CANVAS)DueMay30
35/23/19(Th)
AnalysisofIncomeProducingProperties:ValuationandCapRatesDefinitionandmechanicsofcalculatingcaprates,thedeterminantsofcaprates,linkingdiscountedcashflowswithcaprates.
Session3Lecturenotes.(CANVAS)AnalysisofIncomeProducingProperties:ValuationandCaprates(CANVAS)EmergingTrendsinRealEstate2018(Optionalreading).(CANVAS)
405/23/19(Th)
IntroductiontoMortgageAnalysisandIntroductiontoCase1Part1Features,mechanicsandmathofcommercialrealestatemortgages(calculationofamortizationschedules,effectiveyieldsintheoryandusingafinancialcalculator,commercialmortgageprepayments.
Session4LectureNotes(CANVAS)GeltnerandMiller,Ch.16,p.387-397.(CANVAS)GeltnerandMiller,ch.17,pp.407-416(CANVAS)Case1:TheAssociatesTask,Part1:SunsetApartments(CANVAS)Case1,Part1SunsetApartmentsTemplate(CANVAS)Case1:Part2BylineandDuke(CANVAS)Case1,Part2BylineTemplate(CANVAS)Case1,Part2DukeTemplate(CANVAS)
505/30/19
(Th)
RealEstateCapitalStructureI:ImplicationsforRiskandReturnTheimpactofdebtandequityonreturns,howmuchdebttouse,LTV,expectedROE,expectedreturnonmortgagedebt.
Session5LectureNotes(CANVAS)GeltnerandMiller,Ch.16MortgageBasicsI:AnIntroductionandOverview(CANVAS)
2Thedatesonwhichvarioustopicsarediscussedinclassmaychangedependingonwhenspeakerscanattend.
605/30/19(Th)
RealEstateCapitalStructureII:LawofOnePriceCalculatingstateprices,pricingmortgageandequity,calculatinga“fair”mortgagerate,quantifyingthedefaultriskembeddedinmortgages,analyzingtherelationshipbetweenmortgageratesandloantovalueratios.
Session6LectureNotes(CANVAS)NotesonStatePrices(CANVAS)HW#2(CANVAS)DueJune13
HW#1Due(A:Group)
706/06/19(Th)
DiscussionofCase#1Part1andDynamicValuationAnalysisofwhetherornottoinvestinseveralcommercialrealestateproperties,calculatingriskandreturnonbothaleveredandunleveredbasis.Unleveredassetvaluation,calculatingdebtservice,IRRandNPVwithleverage,LTV,DSCR.
Session7LectureNotes(CANVAS)
Case#1Part1Due(A:Group)
806/06/2019
(Th)
RealEstateCapitalStructureIII:SubordinateDebtandMezzanineFinancingOverviewofdifferenttypesofCREsubordinatedebt(mezzanine,B-notes,preferredequity),pricing/valuingsubordinatedebt,calculatingthe“fair”mortgagerateonjuniordebt,legalaspectsofjuniordebt,risks,workouts,howtoacquirecommercialrealpropertiesatadiscountbymezzaninelending.
Session8lecturenotes(CANVAS)Lancaster,UnderstandingManagedCRECDOs,p.12-27(CANVAS)Thisreadingprovidesanin-depthanalysisofsubordinatedebt,mezzaninedebtandBnotes.Itisoptional.
906/13/19(Th)
DynamicValuationSpreadsheetSpreadsheetanalysisandmanipulationstodeterminemortgagerates,unleveredassetvaluation.
Session9lecturenotes(CANVAS)DynamicValuationExcelSpreadsheet(CANVAS)
1006/13/19
(Th)
RealEstateandTaxesQuantitativeandqualitativeanalysisanddeterminationofacommercialrealestatepropertyinvestment.Taxationonincomeandcapitalgains,NOIandbefore-taxandafter-taxcashflows,taxtreatmentsfordepreciationandinterestincome,taxshields.
Session10lecturenotes.(CANVAS)HW#3(CANVAS)DueJuly25
HW#2Due(A:Group)Case#1Part2Due(A:Group)
1106/20/19
(Th)
DefaultDecisionsoverTimeandDistressedDebtTheeconomicsofborrowerdefaultdecisions,applydynamicvaluationframework,makesenseofwhatisobservedintherealworld,differentiationbetweenbookandmarketvalues.
Session11lecturenotes.(CANVAS)
1206/20/19(Th)
IntroductiontoCase2andRealEstateCapitalStructureIV:FinancingStrategiesbeyondPlainVanillaAnalysisofgroundleases,participatingmortgagesandtheirimpactonborrowingrates,thevalueofrecourseandpersonalguarantees.
Linneman,Ch.15Session13lecturenotes(CANVAS)Case21800LStreetCoverExplanation(CANVAS)Case21800LStreetCase(CANVAS)Case21800LStreetTemplate(CANVAS)
1306/27/19(Th)
LandDevelopment,Valuation,Risk,andReturnAnalysisanddecisioningastowhentodevelopland,howtovalueland,landasaphysicallyleveredasset,predictionsonreturnandvolatilityofland,whyislandvaluable.
Session14LectureNotes(CANVAS)
1406/27/19(Th)
CommercialMortgageBackedSecuritiesWhatarecommercialmortgagebackedsecurities,howtovalueandinvestinthem,risksandreturns,borrowingthroughconduitlendersversusbalancesheetlenders,prosandcons,influenceonrealestatevalues.
Session15LectureNotes(CANVAS)
15(Thursday07/11/19;6:00PMto7:30pm)MidtermExamonmaterialupthroughandincludinglecture10,RealEstateandTaxes
1607/11/19(Th)
Guestspeaker:PeterLewis,CEOWhartonEquityPartners
1707/18/19
(Th)
RealEstateInvestmentTrustsPart1WhatareequityREITs,whyinvestinREITs,whatarethetaxadvantagesofaREITstructure,valuingREITsandmeasuringtheirprofitability,FFOvsAFFO,mortgageREITs.
Session16LectureNotes(CANVAS)NAREITwebsite:www.REIT.com(GoodbackgroundmaterialonREITs,videoofREITs,goodfuturereferencesource.)
1807/18/19(Th)
RealEstateInvestmentTrustsPart2WhatareequityREITs,whyinvestinREITs,whatarethetaxadvantagesofaREITstructure,valuingREITsand
Session16LectureNotes(CANVAS)NAREITwebsite:www.REIT.com
measuringtheirprofitability,FFOvsAFFO,mortgageREITs.
(GoodbackgroundmaterialonREITs,videoofREITs,goodfuturereferencesource.)
1907/25/19(Th)
DiscussionofCase#2(1800L.Street)
1800LStreetPowerpoint(CANVAS)
Case#2Due(A:Group)
2007/25/19(Th)
RealEstatePrivateEquityFundsandIntroductiontoCase3Privateequitybusinessmodels,managerialandinvestmentsskillsofageneralpartner,fundinvestmentstrategies,considerationsforinvestinginprivateequityCRE,distributionwaterfalls,REITsversusprivateequityrealestatefunds
Session18LectureNotes(CANVAS)GraybarCaseCoverExplanationPage(CANVAS)GraybarCase(CANVAS)
HW#3Due(A:Group)
2108/01/19(Th)
DiscussionofCase#3(Graybar)
GraybarSyndicationsCasePowerpoint(CANVAS)
Case#3Due(A:Group)
2208/01/19(Th)
CourseReview Lecture22CourseReview(CANVAS)
23(Thursday08/08/19;6:00PM–-7:30PM)FinalExamonmaterialfromLecture11DefaultDecisionsoverTimethroughLecture20RealEstatePrivateEquityFunds
2408/08/19(Th)
Guestspeaker:KenCaplan,GlobalCo-headofRealEstate(Blackstone.)Discussingapotentialinvestmentinacommercialrealestateproperty,howmuchleveragetouse,risksofthepropertyetc.Thissessionwillapplymanyoftheconceptslearnedinthecasesaswellassessions6,7,8,9,and18toarealinvestmentsituation.
METHODOFEVALUATION
ClassParticipation 10%
• Assignments:Therewillbehomeworkassignmentsandcases.Theyjointlyaccountfor45%ofyourgrade.Homeworkassignmentsandcaseswillbecompletedingroupsuptoamaximumof3students.Itisyourresponsibilitytoformthegroup.Assignmentsshouldbeturnedinbeforethebeginningofclassonthedayitisdue.Lateassignmentswillnotbeaccepted.
• Midterm:Themidtermexamcoversmaterialasindicatedabove.Itisonlyofferedinclass.Make-upsarenotgivenunlessyouhavewrittenauthorizationfromtheOfficeofStudentAffairs(OSA).
• FinalExam:Thefinalexamcoversmaterialasindicatedabove.Somematerialfromthefirsthalfoftheclassmayalsobeincluded.Itisonlyofferedinclass.Make-upsarenotgiven,unlessyouhavewrittenauthorizationfromtheOfficeofStudentAffairs(OSA).
• Case1actuallyconsistsof3cases:SunsetApartments,DukeOffice,BylineIndustrial.
Thereadingsdistributedoverthesemesteraretohelpyoubetterunderstandconceptsandmaterialscoveredinclass.Materialsonlyinthereadingsbutnotcoveredinclassarenotrequiredfortheexams.ASSIGNMENTSAllofyourassignmentsubmissionsaresubjecttotheCBSHonorCode.ViolationsoftheCBSHonorCodemayleadtofailingtheassignment,failingthecourse,suspension,and/ordismissal.InordertoavoidambiguitythatmayleadtounintentionalviolationsoftheHonorCode,assingmentdescriptiontypeshavebeenstandardizedandspecifiedbelow.Type Designation Grade Preparationof
submissionDiscussionofSubmission* Discussionof
Concepts**
A GroupWork Samegradeforallgroupmembers
Bythegroup Permittedtodiscuss(withingroup) Permitted
B1 Individualw/DiscussionsofConceptsandSubmission
Individualgrade Individualpreparation
Permittedtodiscuss;sharingsolutionsorsubmissionfilesisnot
allowed
Permitted
B2 Individualw/DiscussionsofConceptsOnly
Individualgrade Individualpreparation
Notpermittedtoshare/discusssolutionsorsubmission
Permitted
C Individual Individualgrade Individualpreparation
Notpermittedtoshare/discusssolutionsorsubmission
Notpermitted***
*Thedesignatedgroupcanbeeitheranassignedstudygrouporaself-selectedone.
ATTENDANCEPOLICYStudentsarerequiredtoattendeachclass.StudentsshouldreachouttotheOfficeofStudentAffairs(OSA)byusingCoreAbsenceFormonthiscourse’sCanvaspageregardingexcusedabsences(forreligiousobservances;personal,
Cases(5) 30%HomeworkExercises(3) 15%Midterm&FinalExam 45%
medical,andfamilyemergencies;militaryservice;courtappearancessuchasjuryduty).Unexcusedabsenceswillaffectyourcoursegrade.NOTE:ThefollowingisapplicableforCoreCoursesandinfluencestheprofessor’sjudgmentinthiscourse:
• Studentsthatmissmorethan33%oftheirclasses(unexcusedabsences)willatmostreceiveaPforthecoursegrade
• Studentsthatmissmorethan50%oftheirclasses(unexcusedabsences)willreceiveaFforthecoursegrade
NOTE:ThefollowingisapplicableforCoreCoursesandforanyelectiveswithOSA-administeredexams:• Studentsthatmisstheexamforanexcusedreasonbutareunabletotaketheexamwithinthestatedmake-up
periodwillreceiveazeroforthefinalexamgrade.• StudentsthatmisstheexamwithoutnotifyingOSA(unexcused),willreceiveanFfortheexam.
Takingexamsoffschedulecreatessignificantlogisticalchallengesinfindingroomsandproctorsandmostimportantly,hasthepotentialtojeopardizetheintegrityoftheexam.Therefore,requestsforreschedulingofexamsshouldonlybemadewithinthefirstthreeweeksofthesemesterandonlyforseriousconflicts.Reschedulingofexamsforweddings,earlytravelhomearenotacceptable.Lastminutereschedulingofexamsmayonlybedoneforveryseriouscause.Ifforamedicalreasonstudentsmustprovidealegible,signeddoctor’snoteinEnglish,explainingwhythestudentcan’tsitfortheexam.INCLUSION,ACCOMMODATIONS,ANDSUPPORTFORSTUDENTSAtColumbiaBusinessSchool,webelievethatdiversitystrengthensanycommunityorbusinessmodelandbringsitgreatersuccess.ColumbiaBusinessSchooliscommittedtoprovidingallstudentswiththeequalopportunitytothriveintheclassroombyprovidingalearning,living,andworkingenvironmentfreefromdiscrimination,harassment,andbiasonthebasisofgender,sexualorientation,race,ethnicity,socioeconomicstatus,orability.
ColumbiaBusinessSchoolwillmakereasonableaccommodationsforpersonswithdocumenteddisabilities.StudentsareencouragedtocontacttheColumbiaUniversity’sOfficeofDisabilityServicesforinformationaboutregistration.StudentsseekingaccommodationintheclassroommayobtaininformationontheservicesofferedbyColumbiaUniversity’sOfficeofDisabilityServicesonlineatwww.health.columbia.edu/docs/services/ods/index.htmlorbycontacting(212)854-2388.
ColumbiaBusinessSchooliscommittedtomaintainingasafeenvironmentforstudents,staffandfaculty.Becauseofthiscommitmentandbecauseoffederalandstateregulations,wemustadviseyouthatifyoutellanyofyourinstructorsaboutsexualharassmentorgender-basedmisconductinvolvingamemberofthecampuscommunity,yourinstructorisrequiredtoreportthisinformationtoaTitleIXCoordinator.Theywilltreatthisinformationasprivate,butwillneedtofollowupwithyouandpossiblylookintothematter.CounselingandPsychologicalServices,theOfficeoftheUniversityChaplain,andtheOmbudsOfficeforGender-BasedMisconductareconfidentialresourcesavailableforstudents,staffandfaculty.“Gender-basedmisconduct”includessexualassault,stalking,sexualharassment,datingviolence,domesticviolence,sexualexploitation,andgender-basedharassment.Formoreinformation,seehttp://sexualrespect.columbia.edu/gender-based-misconduct-policy-students.PROFESSOR´SBIOGRAPHY
ProfessorLancasterhasovertwentyfiveyearsofprofessionalexperienceinrealestatefinanceandcapitalmarketsincludingPresident,TheMinotGroup,votedoneofForbes“America’sBestManagementConsultingFirms”(2017,2018,2019}(realestatefinanceandcapitalmarketsconsultingtohedgefunds,privateequity,REITs,banksandinsurancecompanies);Co-headFinancialAnalyticsandStructuredTransactions,RBS;ChiefInvestmentOfficer,RealEstateDivision,Wachovia/WellsFargo;HeadofCommercialRealEstateResearch,WachoviaCapitalMarkets;HeadofStructuredProductsResearch,WachoviaCapitalMarkets;ManagingDirectorPrincipalBearStearns(commercialandresidentialrealestatesecurities);SeniorCapitalMarketsEconomistFederalReserveBankofNYandBankofEngland.Healsoinvestsinrealestatedevelopmentprojects,realestateprivateequityinAsia,mezzanineandbridgefunds,distressedrealestate,CMBSandsecuritizationdealsanddevelopscondominiums.HispassionforrealestatestartedwithhisworkontheredevelopmentofBoston’swaterfrontasasophomoreatMIT.HeisafulltimeprofessorintheMBAprogramattheColumbiaBusinessSchoolandwasformerlyanadjunctprofessorattheColumbiaBusinessSchoolandtheSternSchoolofBusiness,NewYorkUniversity.HeholdsaBScinEconomicsfromtheMassachusettsInstituteofTechnology,anMBAinFinance,SternSchoolofBusiness,NewYorkUniversity,andaMasterofInternationalAffairsandPublicPolicy,ColumbiaUniversity.HeisaformerboardmemberoftheCommercialRealEstateFinanceAssociation,aformerExecutiveCommitteememberoftheMortgageBankersAssociationandEditorinChiefofCommercialRealEstateFinancejournal.HeperiodicallylecturesatDukeUniversityandtheWhartonSchoolofBusiness,UniversityofPennsylvania.