Professional Documents
Culture Documents
COURSE ASSISTANT
Noah Fasten
11 Gibbs Street
Brookline, MA 02446
617-734-5156 (Tel)
noah.fasten@verizon.net
COURSE OBJECTIVES
The course is designed to provide a practical understanding of real estate finance and
development fundamentals by:
Familiarizing students with the key components of the real estate development
process and the sequencing, relative importance, and interrelationships among
these elements; and
COURSE DESCRIPTION
This course is designed for students interested in understanding the "nuts and bolts"
fundamentals of real estate development, finance, and investment. Students will learn
how to identify, understand, and calculate the three basic financial rewards generated
through successful real estate investments: cash flow, tax benefits, and future benefits.
Students will also be exposed to the financial risks associated with real estate
development and investment. Based upon this understanding of basic risk and reward
components, students will proceed to construct simple After Tax Cash Flow income
statements incorporating a project's revenue stream, operating expenses, replacement
reserves, debt service requirements, amortization and depreciation schedules, and
federal income tax requirements. As the course progresses, students will prepare
discounted cash flow analyses for the projected asset holding period utilizing Net
Present Value and Internal Rate of Return methodologies.
Each of these
methodologies incorporate all three of the primary financial benefits of real estate
investment and the timing of all cash outflows and inflows so that the time value of
money is factored into the respective return measures.
On the capital funds side, students will prepare "Sources and Uses of Funds
Statements" based upon realistic real estate industry debt and equity financing
alternatives. In particular, students will define the level of debt and equity financing that
can be supported by a project's net operating income.
The classroom experience will be synthesized through a final exercise in which student
teams will use an analytical framework developed during the course to design, structure
and evaluate a potential real estate development by applying the general concepts
learned in the course to a specific real estate opportunity within the Boston market area.
TARGETED AUDIENCE
The course is designed to be useful for students with any of the following interests: real
estate finance, investment or development (private, institutional or public sector); real
estate brokerage; real estate financial analysis/consulting; property or asset
management; affordable and mixed-income housing; urban revitalization; and economic
development.
FORMAT
The course will be a mix of lectures, case discussions, classroom exercises, and
student team presentations. MGMT E-2030 is a highly interactive course. Active
classroom participation by all students in every class is encouraged and
expected throughout the course. All students, including students for whom
English is a foreign language, must be willing and able to actively participate in
class discussions. 20% of the final grade will be based upon the quality of a
students class participation.
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PREREQUISITES
There are no course prerequisites. No prior real estate finance or development
experience is required.
Students who are interested in learning how real estate value is created and who
possess a healthy curiosity about the varied components of the real estate financing
and development process should be good candidates for this course. Basic algebra
skills should be sufficient for any required quantitative course work.
READING AND CASE ASSIGNMENTS
Reading and case assignments are detailed in the attached syllabus. Reading and
case materials include:
1. Kolbe, Philip T., Gaylon E. Greer and Bennie D. Waller Jr., Investment Analysis for
Real Estate Decisions, 8th Edition (DF Institute, Inc. dba Dearborn Real Estate
Education, 2013).
(ISBN-10: 1-4277-4205-7) (ISBN-13: 978-1-4277-4205-6)
KGW (can be ordered on the Web at www.amazon.com or other sites of your
choice). HOWEVER, BE SURE THAT YOU ORDER THE 8TH EDITION.
2. Selected Harvard Business School cases and industry notes Coursepack
(available for purchase from Harvard Business School Publishing:
https://cb.hbsp.harvard.edu/cbmp/access/27965052
You will need to register at this site to purchase the Coursepack.
3. Assignments and handouts that will be posted on the iSite or emailed to the
official class list or distributed in class. Handouts.
The course iSite is http://isites.harvard.edu/k106068
The text (KGW) will also available at Grossman Library.
The Harvard Square Coop has in its business section several general-purpose real
estate textbooks/reference books that students may also find useful. Students with an
interest in a particular real estate topic are encouraged to ask the instructor for
references. The University's most comprehensive collections of real estate resource
materials are at Baker Library at Harvard Business School and at Gund Library at the
Graduate School of Design.
The Internet can be an invaluable resource for historic and current real estate
information. ULI-the Urban Land Institute (ULI), a nonprofit educational and research
association, has one of the more useful sites: "www.uli.org". Students should review
this ULI site and its links early in the course. ULI publishes a wide variety of materials
useful to both private and public sector participants in the real estate development
process. ULIs publications catalogue is available at its Web site.
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Please refer to the current Extension School catalogue for final examination
requirements. Note that the Extension School has very strict final examination
policies and that the instructor has no authority to modify these policies.
CLASS ATTENDANCE
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20%
30%
20%
30%
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SEPTEMBER 15
UNDERSTANDING HOW REAL ESTATE VALUE IS CREATED: NET OPERATING
INCOME (NOI), ADJUSTED NOI, WEIGHTED AVERAGE COST OF CAPITAL
(WACC), AND RETURN ON TOTAL ASSET COST (ROTAC)
Preparation
Somerville Commons Weighted Average Cost of Capital (WACC) assignment. Emailed
to class list and posted on course iSite.
In addition, review more carefully the Somerville Commons case and the explanation of
the Somerville Commons calculations distributed at the prior class. Based upon your
post-offer reflections, would your maximum offer amount for Somerville Commons
change?
Reading
A.
KGW, pp. 3-22 (Real estate investment decision), pp. 93-107 (Reconstructing
the operating history) and pp.111-124 (Forecasting income and property
value)
B.
KGW, pp. 493-518 (Glossary: use as needed throughout the course). This text
also provides useful Internet references at the end of each chapter.
C.
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SEPTEMBER 22
DEBT FINANCING AND MORTGAGE FUNDAMENTALS, MORTGAGE
UNDERWRITING BASICS, FINANCIAL LEVERAGE, PERMANENT FINANCING,
CONSTRUCTION FINANCING, BEFORE TAX CASH FLOW (BTCF)
Preparation
A.
B.
Marchant, "Debt Service Exercise" (Exercise prepared for use in this course.)
Emailed to class list and posted on course iSite.
C.
D.
Reading
A.
KGW, pp. 131-144 (Financial leverage and investment analysis), pp. 149-160
(Credit instruments and borrowing arrangements), pp. 163-180 (Cost of
borrowed money), pp. 450-462 (Mathematics of compounding and
discounting) and pp. 472-478 (Compounding and discounting with financial
calculators)
B.
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SEPTEMBER 29
UNDERSTANDING THE BASIC FEDERAL INCOME TAX EFFECTS THAT CREATE
TAX BENEFITS, CALCULATING TAXABLE INCOME AND AFTER TAX CASH FLOW
(ATCF)
Note: You are not expected to become real estate tax experts. You are expected to
understand and be able to calculate depreciation schedules, amortization schedules,
taxable income, income taxes due or tax shelter benefits created, and ATCF.
Therefore, your reading should focus on the respective tax advantages of alternative
ownership entity vehicles, general tax policy, depreciation guidelines and methods,
respective tax rates, and capital gains tax treatment. Understanding how individuals,
limited partnerships, limited liability companies, corporations, real estate investment
trusts (REITs) and community development corporations structure investments to
maximize tax benefits by minimizing tax liabilities is particularly important.
Preparation
A.
Marchant, "After Tax Cash Flow (ATCF) Exercise" (Exercise prepared for use
in this course.) Emailed to class list and posted on course iSite.
B.
Reading
A.
Note: For more detailed and timely income tax-related information, students may want
to review the following IRS publications that are available at www.IRS.gov
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OCTOBER 6
FUTURE BENEFITS OF REAL PROPERTY
FORMATION OF STUDENT TEAMS FOR SOLDIERS FIELD EXERCISE
Preparation
A.
Marchant, "Net Cash from Sale Exercise" (Exercise prepared for use in
this course.). Emailed to class list and posted on course iSite. In addition, be
prepared to discuss what your Net Cash from Sale financial objectives would
be as an investor and how important this component of return would be to you
compared to Before Tax Cash Flow and Tax Benefit returns. Provide specific
metrics for your Net Cash from Sale financial objectives.
Reading
A.
B.
Note: Student teams for the Soldiers Field Site Exercise will be finalized at this
class for those students who have not already formed a team. There will be a total
of six teams. Initially, no team may have more than six members or more than
three international students. Students are encouraged to form their own teams
prior to October 6.
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OCTOBER 13
(NO CLASS/COLUMBUS DAY HOLIDAY)
Assignment in Lieu of Class Meeting
If you have not already done so, visit the Soldiers Field site prior to our next class in
preparation for the team assignment due December 9. Prepare an outline response to
Question 1 in "The Soldiers Field Site Development/Investment Analysis".
Reading
A.
B.
KGW, pp. 27-46 (Investment strategy and market efficiency), pp. 49-60 (Land
utilization and the rental value of real estate), pp. 67-90 (Market research tools
and techniques), pp. 375-386 (Subdivision proposal analysis), pp.389-404
(Development and rehabilitation), and pp. 407-431 (Industrial property, office
building, and shopping center analysis)
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B.
KGW, pp. 357-372 (Investment feasibility analysis), pp. 287-300 (Risk in real
estate investment), pp. 303-316 (Traditional risk-adjustment methods), pp.
319-343 (Contemporary risk measures) and pp. 345-353 (Risk management
in a portfolio context)
OCTOBER 27
FEASIBILITY STUDY EXERCISE, PART II / PROPOSED MULTI-FAMILY HOUSING
DEVELOPMENT IN RALEIGH, NORTH CAROLINA (NET CASH FROM SALE,
DISCOUNTED CASH FLOW ANALYSIS, INTERNAL RATE OF RETURN,
COMPUTER-ASSISTED REAL ESTATE ANALYSIS, SENSITIVITY ANALYSES)
Preparation
A.
The assignment for this class will be posted on the course iSite after the
preceding Feasibility Study Exercise, Part I class. Be sure to carefully review
the notes explaining how Net Present Value (NPV) and Internal Rate of Return
(IRR) measures of return are calculated before you complete the assignment
for this class. These notes are included at the end of the assignment.
Reading
A.
B.
NOVEMBER 3
INVESTMENT ANALYSIS (REVERE STREET)
Reading
A.
B.
Preparation
Be prepared to discuss the following twelve questions:
1.
2.
3.
What debt and equity funds are available to purchase and rehabilitate the
property? (Sources of Funds)
4.
5.
6.
What Before Tax Cash Flow (BTCF) could the Revere Street property
generate? What would the Alexanders Cash-on-Cash Return be?
(Cash-on-Cash Return equals BTCF divided by Equity)
7.
What After Tax Cash Flow (ATCF) could be generated by Revere Street for
the Alexanders? Use the assumptions listed below.
8.
If the Alexanders expect to sell the property after owning it for five years after
the rehab work is completed, how should they estimate its future value?
Using the assumptions that follow, what do you think the sales price might be
after five years of operation? After deducting the costs of sale, any capital
gains tax due, and the outstanding mortgage balance, what would the
Alexanders Net Cash from Sale be?
9.
What is the Net Present Value (NPV) of this investment assuming a sale at
the end of year five and a discount rate of 12%? Explain your assumptions
and show your ATCF calculations for years 1-5 as well as your Net Cash from
Sale calculations assuming a sale at the end of year five. Do the NPV
calculation "by hand" and then check your answer by using your calculator
and/or computer software. Remember to use Year 6 NOI to project your
estimated Sales Price.
ASSIGNMENT CONTINUED ON NEXT PAGE
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10.
What is the Internal Rate of Return (IRR) for the Alexanders on this
investment, assuming a sale of the property at the end of year five? Do the
IRR calculation "by hand" and then check your answer by using your
calculator and/or computer software.
11.
12.
Is there any additional information you would want to have before making an
investment decision on this property?
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NOVEMBER 10
MEASURES OF REAL ESTATE VALUE AND RETURN
(ANGUS CARTWRIGHT IV / CLASS I)
Reading
A.
B.
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NOVEMBER 17
INVESTMENT RECOMMENDATIONS AND NEXT STEPS
(ANGUS CARTWRIGHT IV / CLASS II)
Reading
A.
B.
KGW, pp. 303-316 (Repeat) (Traditional risk-adjustment methods), pp. 319343 (Repeat) (Contemporary risk measures), and pp. 345-353 (Repeat) (Risk
management in a portfolio context)
NOVEMBER 24
PERMITTING, DESIGN AND DEVELOPMENT EXERCISE: SUBURBAN OFFICE
BUILDING
Reading and Preparation
A.
B.
KGW, pp. 407-434 (Repeat) (Industrial property, office building, and shopping
center analysis)
In addition, conduct a web search to find and review the Zoning Bylaws for office
building uses for any suburban Greater Boston community of your choice (or for your
hometown).
Be prepared to discuss the zoning requirements for the municipality that you
researched.
DECEMBER 1
COURSE REVIEW
Preparation
As assigned at conclusion of November 24th class. Written preparation of this
assignment and review/discussion with classmates is strongly encouraged.
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DECEMBER 8
DEVELOPMENT/INVESTMENT ANALYSIS: THE SOLDIERS FIELD SITE
Written Assignment Due
LATE ASSIGNMENTS WILL NOT BE ACCEPTED
ASSIGNMENT MUST BE SUBMITTED AT THE BEGINNING OF CLASS
Come to class prepared to present your team analysis and recommendations. Each
teams written report must include an Executive Summary and a concise discussion of
each of the six questions listed in the assignment. The report, exclusive of the
Executive Summary, must not exceed twelve, double-spaced pages. Relevant exhibits
(E.g., site plans, typical floor plans, building elevations, photographs, and/or market
data) are not included within this page limit.) Each team must also include a summary
of the primary work responsibilities of each team member. Each student must submit a
performance assessment for each team member using the Assessment Form that will
be distributed with this exercise.
PRESENTATION SCHEDULE
TEAM 1
TEAM 2
TEAM 3
TEAM 4
TEAM 5
TEAM 6
Balance of Class
Reading
A.
B.
KGW, pp. 49-60 (Land utilization and the rental value of real estate),
pp. 67-86 (Market research tools and techniques), pp. 375-386 (Subdivision
process analysis), pp. 389-406 (Development and rehabilitation process) and
pp. 409-431 (Industrial property, office building, and shopping center analysis).
These are all Repeat readings.
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DECEMBER 15
FINAL EXAM
Although the final exam will be designed to be completed by well-prepared students
within the normal class time, students desiring additional time may have until 10:15
p.m. to complete the exam, subject to the classroom being available after 9:40
p.m.
Please refer to the current Extension School catalogue for final examination
requirements. Note that the Extension School has very strict final examination
policies and that the instructor has no authority to modify these policies.
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DATE
9/1
TOPIC
No Class (Labor Day Holiday)
Introduction/Course Requirements
9/8
9/15
9/22
9/29
10/6
10/13
6
10/20
10/27
11/3
11/10
10
11/17
11
11/24
12
12/1
13
12/8
14
12/15
Final Exam