Principles of Commercial Real Estate Finance Module 1 Slides


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Principles of Commercial Real Estate Finance Module 1 Slides

  1. 1. Principles of Commercial Real Estate FinanceModule 1: Risks And Opportunities; What Is Real Estate?;Global Real EstateAssociated ReadingsLinneman Text:Ch. 1: Risks And OpportunitiesCh. 2: What Is Real Estate?Ch. 2 Supplement A: International Real Estate InvestingModel For Success Blog:How To Be A Great Real Estate Finance Student New York by Gehry, NYC Copyright © 2012 by Real Estate Financial Modeling, LLC. All rights reserved.
  2. 2. Professor Linneman’s Risks and Opportunities• What is generally the primary goal?* • TO EDIT MASTER TITLE STYLECLICK To acquire or create a source of cash flow, and to  reap value from that cash flow• What could possibly go wrong? • It depends…what’s your time horizon?* Excluding not‐for‐profit projects 2
  3. 3. Where Do The Primary Risks Lie?• Acquisition of an existing income‐producing asset • Operating CostsCLICK TO EDIT MASTER TITLE STYLE • Lease Terminations/Vacancy • Tenants go bankrupt (remember the .com’s and  Lehman?) • Market turns against you and you need to hold  longer than you wanted 3
  4. 4. Where Do The Primary Risks Lie?• Development of an income‐producing asset or units for sale  (e.g., housing subdivision or condominiums) • TO EDIT MASTER TITLE STYLECLICK Passage of Time! The world is today is not the world  tomorrow • Construction costs • Market turns against you • Pricing • Absorption (Leasing/Sales) • Tenant base disappears • Construction execution • Land Purchase Price and Closing Timing 4
  5. 5. What Are The Primary Ways To Realize Value?• Let Your Tenants Amortize the Property’s Debt• Streamline Operations to Lower Operating ExpensesCLICK TO EDIT MASTER TITLE STYLE• Ride the Rising Rent Tide• Renovate and Reposition the Property• Redevelop the Property to a New Use• Hold Until Asset Valuations Increase • “Compression” of Capitalization Rates 5
  6. 6. Types of Real Estate Residential CommercialDetached single family homes Office IndustrialTownhomes Central Business District (generally highrise and midrise) Heavy industrial (manufacturing) facilities Class A (e.g., The GM Building in NYC) Light assembly Class B (increasingly lesser in quality and location) Storage and distribution facilitiesCLICK TO EDIT MASTER TITLE STYLE Class C Suburban (generally midrise) Research and development facilities Class A Retail Class B Shopping centers Class C Super regional centers (e.g., Mall of America) Medical Office Regional center Community center Multifamily (apartments, condominiums and cooperatives) Neighborhood center Small properties Convenience center Suburban garden apartments Specialty center Urban midrise Big box (freestanding) store (e.g., Home Depot) Urban highrise Strip commercial Hotels and resorts Other Limited service Golf courses Land Full service (e.g., The Ritz Carlton or Marriott) Assisted living Health Care Extended stay Student housing Institutions 6
  7. 7. Gross vs. Net Measurement Building Footprint (building area at grade)CLICK TO EDIT MASTER TITLE STYLE 20,000 SF 7
  8. 8. Gross vs. Net Measurement Ground Floor Plan - Rentable SF Other Than Retail: 0 SF!CLICK TO EDIT MASTER TITLE STYLE Service Corridor Parking Ramp Fire Stairs Retail Service Corridor Trash Lavatories Public Plaza Loading Elevators Area Retail Lobby • What is not shown here that further reduces Rentable SF? 8
  9. 9. Gross vs. Net Measurement Typical Single Tenant Plan - Rentable SF at 90% EfficiencyCLICK TO EDIT MASTER TITLE STYLE Fire Stairs Tenant Tenant Tenant Office Lavatories Lobby/ Office Space Reception Space Elevators 9
  10. 10. Gross vs. Net Measurement Typical Multi-Tenant Plan - Rentable SF at 90% EfficiencyCLICK TO EDIT MASTER TITLE STYLE Fire Stairs Tenant 2 Lavatories Tenant 1 Tenant 1 Tenant 2 Office Lobby/ Lobby/ Office Reception Elevators Space Reception Space 10
  11. 11. Gross vs. Net Measurement Floor Type Floor Gross SF Efficiency Rentable SF OverallCLICK TO EDIT Count MASTER TITLE STYLE EfficiencyGround Floor 1 20,000 GSF 45% 9,000 RSFSingle Tenant Floors 3 60,000 GSF 90% 54,000 RSFMulti-Tenant Floors 1 20,000 GSF 90% 18,000 RSF 5 100,000 GSF 81,000 RSF 81% 11
  12. 12. Floor Area Ratio (FAR)• Better to think of it as Floor Area to Lot Size Ratio• Dictated by the zoning of the property; limits the amount of CLICK TO EDIT MASTER TITLE STYLE above‐grade Gross SF that can be consumed by the building• Calculated by multiplying the “FAR Ratio” by the Lot Size • 8.0 FAR * 10,000 SF = 80,000 “FAR” (Gross SF) allowed  above‐grade 12
  13. 13. Physical vs. Economic Occupancy• Physically occupied vs. receiving rent • Expansion space – not occupied but rent being CLICK TO EDIT MASTER TITLE STYLE paid • Vacated space – not occupied but rent being paid • “Free rent” – occupied but no rent being paid • Bankruptcy – occupied but no rent being paid 13
  14. 14. International Real Estate Investing• Up to 60% of investment‐quality real estate lies  outside of the U.S.CLICK TO EDIT MASTER TITLE STYLE• The world’s tenant base is globalizing• However: • Markets are not as liquid as the U.S. market • Information is scarce and unreliable • The rules can change rapidly due to the  government 14
  15. 15. International Real Estate Investing• Unknowns are magnifiedCLICK TO EDIT MASTER TITLE STYLE• Foreigners are no less intelligent than you or I• Local partners can hold the key, but this can backfire  on you if they renegotiate terms• Currency risk becomes a variable 15