Real Estate Transactions - MBA Class
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Real Estate Transactions - MBA Class






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Real Estate Transactions - MBA Class Real Estate Transactions - MBA Class Presentation Transcript

  • The Institutional Side of Real Estate Transactions:Integrating Business Strategy and Legal Structure Professor Lynne Sagalyn B8158 Real Estate Transactions Columbia Business School
  • Transaction Strategy and Structure Market Drivers: Space & AssetLegal Structure Regulatory & Execution Frameworks Transaction Structure Tax Factors Financial Strategy Investment Strategy
  • • Interests in property • Forms of ownership Legal Structure & Execution • Terms and conditions of contracts • Governance • Distress and default • Local land-use regulations (police powers) Regulatory • Programmatic incentives linked to zoning Frameworks and tax codes • State and federal securities laws Other Constraints • Eminent domain (constitutional right, statutoryon Property Interests law procedures) • Taxation of real estate (constitutional right, statutory laws and procedures) • Escheat (reversionary right)
  • Course Structure Four Sections: • Asset Transactions • Financing Transactions • Development Transactions • Complex Transactions
  • Asset and Financing Transactions• Acquisitions and Dispositions• Space Leases
  • Asset and Financing Transactions• Land-Use Controls: Zoning and Value Creation
  • Asset and Financing Transactions• Mortgages and Securitization
  • Property OwnerEquity Interests Borrower SPE (nonrecourse) Mezzanine Debt Senior Loan Preferred Equity
  • Asset and Financing Transactions• Ground Leases
  • Exhibit 1: Graybar Leasehold Structure Title Landgray Associates Landgray Associates Fee Owner Fixed plus revaluation Fee Owner Ground Lease Metropolitan Life Metropolitan Life Insurance Company Insurance Company Fixed Sublease SL Green Graybar SL Green Graybar Fixed plus 33 1/1% Mesne Lease LLC Mesne Lease LLC participation Sub-Sublease (Operating Lease) New York Graybar New York Graybar Lease LP Lease LP FixedSub-Sub-Sublease(Operating Sublease) SLG Graybar SLG Graybar Sublease LLC Operating Sublease LLC
  • Exhibit 2: Process for Early Revaluaton and Renegotiation of Graybar Ground LeaseLandgray LandgrayMortgagee 1 Met Life 1b 2 SLG Mortgagee SLG 3 Option to Extend New Existing Lease (option to enter into (early renewal & new ground lease, extension to 2020) w/ renewals, maturity 2080) 4 Source: Case Author
  • Development and Other Complex Transactions• Development Financing• Mixed-Use Redevelopment• Private Equity and the JV Transaction• M&A Transactions• Surprise!
  • Forms of Ownership
  • Real Estate Ownership StructuresThere are four primary ownership structures Corporations (typically publicly held) – Non-Taxable REITs • Real estate asset-based companies qualifying for tax-free status – Taxable C-Corps • Typically used for operation-intensive businesses (e.g., hotels) Partnerships and LLCs (typically privately held) – General and Limited Partnerships/Limited Liability Companies • Tax pass-through entities • Most widely used form of real estate ownership – Open-end and Closed-end Commingled Funds / Separate Accounts • Collection of partnerships most typically used with institutional investors
  • What is a Partnership?• A legal entity that qualifies for tax pass-through status under the tax code• Created and governed by contractual partnership (or LLC) agreement• In General Partnerships all partners in the venture share management and liability• Limited Partnerships create different classes of partners in the venture – General Partners who manage the venture and have unlimited liability – Limited Partners who are passive partners with liability limited to their subscribed capital• Can be organized to engage in any activity
  • PartnershipsThere are few requirements for forming partnerships • An organization is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following: – A corporation or joint-stock company / association – An insurance company or bank – A tax-exempt organization – An organization that elects to be classified as a corporation – A Real Estate Investment Trust (REIT) – A trust under Internal Revenue Code
  • PartnershipGovernance • Established and governed by partnership agreement • Managed by General Partner, typically non-exclusive activity • Super-majority vote to remove general partner • No employees • Compensation determined by partnership agreement, often includes share of profits • Typically privately held
  • The Single-Asset Partnership: 1800 L Street Washington Partners 1800 L Street PMP (Borrower) (Collateral) (Lender) ML HCL S. Henderson Master Lease (Participants) C. Henderson (Additional Collateral) Skyline L.P. (Partners)
  • What is a REIT?• A trust or corporation that combines capital of many investors to acquire or provide financing for real estate properties• Legislative creation: Real Estate Investment Trust Act of 1960• Types of REITs: – Equity REITs own and operate income-producing real estate – Mortgage REITS lend money directly to real estate owners and their operators, or indirectly through acquisition of loans or mortgage backed securities – Hybrid REITs own properties and make loans to owners and operators• REIT mutual funds
  • Requirements for REIT StatusIf a REIT satisfies the following tax code requirements, it pays no corporate tax: – 90% Payout Rule: Must distribute at least 90% of taxable net income to shareholders – 75% Earnings Test: Must earn at least 75% of gross income from rents, mortgage interest or capital gains from the sale of real estate – 75% Assets Test: Must hold at least 75% of assets in real estate, claims against real estate, cash or government securities – 20% Assets Test: No more than 20% of assets may consist of stocks in taxable REIT subsidiaries – Five or Fifty Rule: Must have at least 100 shareholders with no five or fewer individuals owning more than 50% of the shares – Anti-churning Rule: Must refrain from short-term speculative buying or selling of real estate; no more than 30% of gross income from certain types of short-term holdings – May own stock in a taxable REIT subsidiary (TRS) up to 20% of REIT assets – Trustee Rule: Must be managed by a board of directors (trustees)
  • REIT Governance• Entity established and governed by charter and bylaws• Managed by real estate professionals employed by the company• Board of Directors (or Trustees) elected by the shareholders• Management compensation determined by Board, often tied to stock or asset performance• Typically publicly held• Board and management can contract day-to-day operations to an Advisor, creating an “Advised REIT”
  • Why is real estate owned in a publicly tradedformat, if the historical advantages of being privateare so great?
  • Public vs. Private Advantages of Being Public Advantages of Being Private • Ongoing access to capital • Limited pubic disclosure requirements (less transparency) • Enhanced balance-sheet flexibility • Insulation from volatility of public • Diversification of funding sources markets and valuation • Potentially lower cost of capital • Operational and structural simplicity • Access to new investors, especially • Large investors experience control small investors • Speed to market • Securities as acquisition currency • Flexibility in absence of regulation • Potential economies of scale • Pass-through of losses • Easier to build a long-term franchise
  • REIT RegimesRelative attractiveness as an ownership vehicle:• Historical regime: C&D REITs of the 1970s• Tax-oriented investment strategies of the 1980s• Modern REIT, post 1991
  • The UPREIT Structure
  • The DownREIT Structure
  • Typical Ownership Formats for Real Estate Assets Corporation REIT Limited Partnership (publicly traded (publicly traded Liability __________________ or privately or privately held) Corporation held) General LimitedAvoid DoubleTaxation No Yes Yes Yes YesAvoid managementresponsibility Yes Yes Yes No YesFlexibility inallocation No No Yes Yes Yesgains/lossesLimited liability Yes Yes Yes No YesAbility to passthrough tax losses No No Yes Yes YesEasy transfer ofinterests Yes Yes No No No
  • Real Estate Investor Types Developer Individual Family Investment FundReturn 18-20% (Total 12-18% (total 12-18% (total 9-15% + (TotalRequirements return driven) return and return) return and IRR ) IRR)Cash Flow versus Appreciation Varies Cash Flow VariesAppreciation dominatesHolding period Varies with 7-10 years Generational 3-10 years product and Indefinite equity sourceBusiness plan High Moderate Low Low toflexibility needs moderate