Real Estate 101 Introduction to Basic Real Estate Terms and Concepts
Summary of Topics <ul><li>What is real estate “value”? </li></ul><ul><li>Property Types </li></ul><ul><li>Real Estate Term...
Summary of Topics (Cont’d) <ul><li>Development Outline </li></ul><ul><li>Major Players/Sources of Capital </li></ul><ul><l...
What is Real Estate Value? <ul><li>Present Value of Cash Flows </li></ul><ul><li>Capital Structure Decisions </li></ul><ul...
Property Types <ul><li>Office </li></ul><ul><li>Industrial </li></ul><ul><li>Retail </li></ul><ul><li>Multifamily </li></u...
Real Estate Terminology - Leasing <ul><li>In-Place vs. Market Rents  </li></ul><ul><li>Expense structures </li></ul><ul><u...
Leasing Terminology (Cont’d) <ul><li>Tenant Improvements (“TI allowance”) </li></ul><ul><li>Leasing Commissions </li></ul>...
“Per Unit” Terminology <ul><li>Real estate is measured, costed, and leased on a “per unit” basis </li></ul><ul><ul><li>Con...
Office Terminology <ul><li>Gross, rentable and usable area </li></ul><ul><li>Floor to ceiling heights </li></ul><ul><li>Fl...
Industrial Terminology <ul><li>Gross, rentable and useable area </li></ul><ul><li>“Clear Height” </li></ul><ul><li>Dock do...
Terminology - Retail <ul><li>Types of Shopping Centers </li></ul><ul><ul><li>Strip, neighborhood, grocery-anchored, power ...
Terminology - Multifamily <ul><li>Type: </li></ul><ul><ul><li>Garden, midrise, highrise </li></ul></ul><ul><ul><li>Condomi...
Hospitality  – Operating Business Using Real Estate <ul><li>ADR </li></ul><ul><li>REVPAR </li></ul><ul><li>Departmental Pr...
Basic Legal Concepts <ul><li>Ownership = Control over “bundle of rights” </li></ul><ul><li>Transfers of Ownership </li></u...
Basic Legal Concepts (Cont’d) <ul><li>Title </li></ul><ul><li>Purchase and Sale Agreements </li></ul><ul><ul><li>Escrow </...
Legal (Cont’d) <ul><li>Deeds of Trust </li></ul><ul><li>1 st  Lien –  Secured vs. Unsecured </li></ul><ul><li>Guarantees <...
Finance and Investment Terms: The Operating Statement <ul><li>Revenue </li></ul><ul><li>Actual vs Gross Potential </li></u...
Finance and Investment Terms – Debt Financing <ul><li>Loan to Value (LTV) </li></ul><ul><li>DCR  </li></ul><ul><li>Spread ...
Finance and Investment Terms:  Return Analysis – Three Critical Components <ul><li>Initial Investment Amount </li></ul><ul...
Finance and Investment Terms:  Return Analysis (Cont’d) <ul><li>Leveraged vs. Unleveraged Returns </li></ul><ul><li>Yields...
Finance and Investment Terms: IRR <ul><li>Use DCF analysis to calculate internal rate of return </li></ul><ul><ul><li>Retu...
Finance and Investment Terms: Assumptions <ul><li>General Economic Conditions  </li></ul><ul><li>Rental Rate Growth </li><...
Finance and Investment Terms: Deal Structure <ul><li>Use of Tax Efficient Forms of Ownership </li></ul><ul><ul><li>Partner...
Finance and Investment Terms: Analysis of Tax Benefits <ul><li>“ Interest Expense Deductibility </li></ul><ul><li>Deprecia...
Development Issues <ul><li>Supply and demand constraints </li></ul><ul><ul><li>Urban economic analysis </li></ul></ul><ul>...
Major Equity Players and Capital Sources <ul><li>Pension Funds </li></ul><ul><ul><li>Direct Investments </li></ul></ul><ul...
Major Player/Capital Sources: Equity:
Major Player/Capital Sources: Debt
Growth of MBS Market
Creation of MBS –  Fannie Mae MBS Creation
Mortgage Pass Through from Pooled –  Investment Characteristics <ul><li>Cash Flows </li></ul><ul><ul><li>Interest </li></u...
Mortgage Pass Through Securities –  Benefits created <ul><li>Default and payment timing risk (receiving both P&I timely) m...
Ginnie Mae (GNMA) <ul><li>Oldest; started making MBS in 1970 </li></ul><ul><li>Ginnie pools contain only government insure...
Fannie Mae (FNMA) : General <ul><li>Quasi-private </li></ul><ul><ul><li>Not a government department or entity </li></ul></...
Freddie Mac (FHLMC) : General <ul><li>Very similar to Fannie </li></ul><ul><li>Created to securitize conventional mortgage...
Fannie & Freddie loan limits –  Definition of Conforming Loans
Private MBS issues –  NOT  Ginnie, Fannie or Freddie <ul><li>Private MBS issues account for about 11% of total market </li...
MBS Pass-Through Wrap-up <ul><li>Concept  – MBS pass-through is an ownership share of an underlying mortgage pool where ea...
Problems with MBS Pass-Throughs  <ul><li>Unknown maturity </li></ul><ul><ul><ul><li>Difficult to hedge, difficult to inclu...
Source of MBS problems <ul><li>Primarily Prepayment  </li></ul><ul><li>Related issue is the fact that every pass-through s...
Financial Innovation in the MBS Market Lecture Map <ul><li>IOs and POs (basic strips) </li></ul><ul><ul><li>Break apart th...
OAS –  Calculating PV for a Path
What is a REIT? <ul><li>Owns, and in most cases operates, income-producing property (Equity REITs) </li></ul><ul><ul><li>O...
Where did REITs come from? <ul><li>Created in 1960 (act of Congress) as a way to make property investment available to ind...
How Many REITs are there? <ul><li>About 300,  ≈  2/3 of which are publicly traded </li></ul><ul><ul><li>149 on NYSE </li><...
Types of REITs <ul><li>Equity REITs  </li></ul><ul><ul><li>Own and operate income-producing real estate </li></ul></ul><ul...
Types of REITs – more detail (source: NAREIT)
REIT Structures –  UPREITs and Traditional REITs <ul><li>UPREIT (Umbrella Partnership REIT) </li></ul><ul><ul><li>First UP...
REITs and Taxes <ul><li>REITs do not have to pay federal taxes at the corporate level </li></ul><ul><ul><li>More specifica...
Career Opportunities <ul><li>Construction </li></ul><ul><li>Development </li></ul><ul><li>Property Management </li></ul><u...
Career Opportunities (Cont’d) <ul><li>Investment Management (institutional and family office) </li></ul><ul><li>Equity Fun...
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Real Estate 101 - UCLA

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Real Estate 101 - UCLA

  1. 1. Real Estate 101 Introduction to Basic Real Estate Terms and Concepts
  2. 2. Summary of Topics <ul><li>What is real estate “value”? </li></ul><ul><li>Property Types </li></ul><ul><li>Real Estate Terminology </li></ul><ul><li>Basic Legal Topics </li></ul><ul><li>Basic Finance, Investment Terms and Concepts </li></ul>
  3. 3. Summary of Topics (Cont’d) <ul><li>Development Outline </li></ul><ul><li>Major Players/Sources of Capital </li></ul><ul><li>Size of Domestic Real Estate Markets </li></ul><ul><li>Career Opportunities </li></ul>
  4. 4. What is Real Estate Value? <ul><li>Present Value of Cash Flows </li></ul><ul><li>Capital Structure Decisions </li></ul><ul><li>Definition of Market Value </li></ul><ul><li>Market Value vs. Price vs. Cost </li></ul>
  5. 5. Property Types <ul><li>Office </li></ul><ul><li>Industrial </li></ul><ul><li>Retail </li></ul><ul><li>Multifamily </li></ul><ul><li>Hospitality </li></ul><ul><li>Institutional </li></ul><ul><li>Mixed use </li></ul><ul><li>Single Family </li></ul>
  6. 6. Real Estate Terminology - Leasing <ul><li>In-Place vs. Market Rents </li></ul><ul><li>Expense structures </li></ul><ul><ul><li>Triple Net (NNN) </li></ul></ul><ul><ul><li>Expense Stops </li></ul></ul><ul><ul><li>Full Service </li></ul></ul><ul><li>Vacancy </li></ul><ul><li>Absorption </li></ul><ul><li>Sublease Space </li></ul><ul><li>“Phantom Space” </li></ul>
  7. 7. Leasing Terminology (Cont’d) <ul><li>Tenant Improvements (“TI allowance”) </li></ul><ul><li>Leasing Commissions </li></ul><ul><ul><li>Both in-house and external brokerage fees </li></ul></ul><ul><li>Concessions </li></ul><ul><ul><li>Free rent, excess TI over the “building standard allowance” moving expenses, etc. </li></ul></ul><ul><ul><li>Calculation of “effective rent” – straight line, PV equivalent of the rental stream over the term of the lease </li></ul></ul>
  8. 8. “Per Unit” Terminology <ul><li>Real estate is measured, costed, and leased on a “per unit” basis </li></ul><ul><ul><li>Construction cost per square foot </li></ul></ul><ul><ul><li>Land price per square foot of building area </li></ul></ul><ul><ul><li>Leases are quoted per unit as well </li></ul></ul><ul><li>Unit definition depends on the property type </li></ul><ul><ul><li>Retail, office, industrial – per square root </li></ul></ul><ul><ul><li>Multifamily – per apartment </li></ul></ul><ul><ul><li>Hospitality – per “key” (ie, per room) </li></ul></ul>
  9. 9. Office Terminology <ul><li>Gross, rentable and usable area </li></ul><ul><li>Floor to ceiling heights </li></ul><ul><li>Floor Area Ratio – “FAR” </li></ul><ul><li>“ Skin” – external curtain wall/façade materials </li></ul><ul><li>Property types: </li></ul><ul><ul><li>Low, mid and high rise; CBD vs. suburban </li></ul></ul><ul><ul><li>Build to suit </li></ul></ul><ul><li>Office leases – quoted annually, all structures depending upon market convention </li></ul><ul><li>Parking ratio zoned as spaces per 1,000 sq.ft. of space </li></ul>
  10. 10. Industrial Terminology <ul><li>Gross, rentable and useable area </li></ul><ul><li>“Clear Height” </li></ul><ul><li>Dock doors </li></ul><ul><li>Types: </li></ul><ul><ul><li>Warehouse/distribution, flex/R&D, hybrid </li></ul></ul><ul><li>Industrial leases quoted both monthly and annually, NNN </li></ul>
  11. 11. Terminology - Retail <ul><li>Types of Shopping Centers </li></ul><ul><ul><li>Strip, neighborhood, grocery-anchored, power centers, regional and super regional malls </li></ul></ul><ul><li>Common Area Maintenance Charges </li></ul><ul><li>1, 3, and 5 mile “trade areas” </li></ul><ul><li>Anchor Tenants </li></ul><ul><ul><li>Anchors are the “draw” for the center </li></ul></ul><ul><li>In-line Tenants </li></ul><ul><ul><li>In line tenants subsidize the anchors </li></ul></ul><ul><li>Leases quoted annually, hybrid with “CAM” charges </li></ul>
  12. 12. Terminology - Multifamily <ul><li>Type: </li></ul><ul><ul><li>Garden, midrise, highrise </li></ul></ul><ul><ul><li>Condominium, coop </li></ul></ul><ul><li>Base rent plus additional tenant charges </li></ul><ul><li>Repositioning </li></ul><ul><li>Unit Turnover </li></ul>
  13. 13. Hospitality – Operating Business Using Real Estate <ul><li>ADR </li></ul><ul><li>REVPAR </li></ul><ul><li>Departmental Profitability </li></ul><ul><li>Gross Operating Profit </li></ul><ul><li>Flagged vs. Independent </li></ul><ul><li>Type </li></ul><ul><ul><li>Limited service, full service, luxury, resort </li></ul></ul><ul><ul><li>Other subsets exist as well </li></ul></ul>
  14. 14. Basic Legal Concepts <ul><li>Ownership = Control over “bundle of rights” </li></ul><ul><li>Transfers of Ownership </li></ul><ul><li>Types of Legal Interests </li></ul><ul><ul><li>Possessory vs. Non-Possessory </li></ul></ul><ul><ul><li>Fee Simple </li></ul></ul><ul><ul><li>Leasehold </li></ul></ul><ul><ul><li>Easements </li></ul></ul>
  15. 15. Basic Legal Concepts (Cont’d) <ul><li>Title </li></ul><ul><li>Purchase and Sale Agreements </li></ul><ul><ul><li>Escrow </li></ul></ul><ul><ul><li>“Go Firm” </li></ul></ul><ul><ul><li>Closing </li></ul></ul><ul><ul><li>Types of deeds, importance of recording </li></ul></ul><ul><li>Mortgages </li></ul><ul><li>Promissory Notes </li></ul>
  16. 16. Legal (Cont’d) <ul><li>Deeds of Trust </li></ul><ul><li>1 st Lien – Secured vs. Unsecured </li></ul><ul><li>Guarantees </li></ul><ul><li>Defaults – Monetary vs. Technical </li></ul><ul><li>Foreclosures </li></ul><ul><li>“Deed in Lieu” </li></ul><ul><li>Deficiency Judgment </li></ul>
  17. 17. Finance and Investment Terms: The Operating Statement <ul><li>Revenue </li></ul><ul><li>Actual vs Gross Potential </li></ul><ul><li>Vacancy Allowance </li></ul><ul><li>Gross Effective Income </li></ul><ul><li>Operating Expenses </li></ul><ul><li>Replacement Reserves </li></ul><ul><li>Net Operating Income </li></ul><ul><li>Debt Service </li></ul><ul><li>Capital Expenditures </li></ul><ul><li>TI, Commissions, and other Capex </li></ul><ul><li>Before Tax Net Cash Flow to Equity </li></ul>
  18. 18. Finance and Investment Terms – Debt Financing <ul><li>Loan to Value (LTV) </li></ul><ul><li>DCR </li></ul><ul><li>Spread </li></ul><ul><li>Interest Rate </li></ul><ul><li>Amortization vs. Maturity </li></ul><ul><li>Discount Points </li></ul><ul><li>Prepayment Points </li></ul><ul><li>Types of Debt </li></ul><ul><li>Private vs. Public Debt Markets – CMBS </li></ul><ul><li>Private vs. Public Equity Markets - REITs </li></ul>
  19. 19. Finance and Investment Terms: Return Analysis – Three Critical Components <ul><li>Initial Investment Amount </li></ul><ul><li>Cash Flow “pro forma” over the holding period </li></ul><ul><li>Exit or Terminal Value </li></ul>
  20. 20. Finance and Investment Terms: Return Analysis (Cont’d) <ul><li>Leveraged vs. Unleveraged Returns </li></ul><ul><li>Yields </li></ul><ul><ul><li>“ going-in” yield </li></ul></ul><ul><ul><li>“ free and clear “ yield </li></ul></ul><ul><ul><li>“ cash on cash” yield </li></ul></ul><ul><ul><li>in place vs. stabilized yield </li></ul></ul><ul><li>Capitalization Rates </li></ul><ul><ul><li>WACC </li></ul></ul><ul><ul><li>Real rate + risk, inflation, and recapture premiums </li></ul></ul><ul><li>Discount Rates </li></ul>
  21. 21. Finance and Investment Terms: IRR <ul><li>Use DCF analysis to calculate internal rate of return </li></ul><ul><ul><li>Return to investment over a holding period </li></ul></ul><ul><li>Also, use DCF to conduct sensitivity analysis </li></ul><ul><ul><li>Test level of risk in your pro forma assumptions </li></ul></ul><ul><li>Partitioning the IRR </li></ul><ul><ul><li>How much of your return comes from cash flow versus “residual” value? </li></ul></ul><ul><ul><li>Helps assess the risk in achieving the IRR – or, is your IRR requirement a good match with the level of risk in the property? </li></ul></ul>
  22. 22. Finance and Investment Terms: Assumptions <ul><li>General Economic Conditions </li></ul><ul><li>Rental Rate Growth </li></ul><ul><li>Occupancy </li></ul><ul><li>Exit Cap Rates </li></ul><ul><li>Loan Underwriting Parameters </li></ul><ul><ul><li>LTV and DCR ratio tests </li></ul></ul><ul><li>Year of Exit </li></ul>
  23. 23. Finance and Investment Terms: Deal Structure <ul><li>Use of Tax Efficient Forms of Ownership </li></ul><ul><ul><li>Partnerships </li></ul></ul><ul><ul><li>LLC’s </li></ul></ul><ul><ul><li>Syndications </li></ul></ul><ul><ul><li>REITS and UPREITS </li></ul></ul><ul><li>Preferred Returns </li></ul><ul><li>Promotes </li></ul>
  24. 24. Finance and Investment Terms: Analysis of Tax Benefits <ul><li>“ Interest Expense Deductibility </li></ul><ul><li>Depreciation </li></ul><ul><li>Loss Carryforwards </li></ul><ul><li>Must demonstrate “substantial economic effect” to use tax deductions </li></ul>
  25. 25. Development Issues <ul><li>Supply and demand constraints </li></ul><ul><ul><li>Urban economic analysis </li></ul></ul><ul><ul><li>Understanding when the market is ripe for new development </li></ul></ul><ul><ul><li>Understanding what the tenants want - and will pay for - is critical </li></ul></ul><ul><ul><li>Lag times for bringing property to completion </li></ul></ul><ul><li>Zoning and Entitlements </li></ul><ul><li>Financing Issues and capital market constraints </li></ul><ul><li>Renovation and Repositioning </li></ul>
  26. 26. Major Equity Players and Capital Sources <ul><li>Pension Funds </li></ul><ul><ul><li>Direct Investments </li></ul></ul><ul><ul><li>“ Core” Funds </li></ul></ul><ul><ul><li>Opportunity Funds </li></ul></ul><ul><ul><li>Separate Account Allocations </li></ul></ul><ul><ul><li>Advisors </li></ul></ul><ul><li>Equity REITS </li></ul><ul><li>Life Companies </li></ul><ul><li>Foreign Investors </li></ul><ul><li>Individuals, Syndications and Partnerships </li></ul>
  27. 27. Major Player/Capital Sources: Equity:
  28. 28. Major Player/Capital Sources: Debt
  29. 29. Growth of MBS Market
  30. 30. Creation of MBS – Fannie Mae MBS Creation
  31. 31. Mortgage Pass Through from Pooled – Investment Characteristics <ul><li>Cash Flows </li></ul><ul><ul><li>Interest </li></ul></ul><ul><ul><li>Principal </li></ul></ul><ul><ul><li>Unscheduled principal (PREPAYMENT) </li></ul></ul><ul><li>Risks </li></ul><ul><ul><li>Basic FI (bond) risk – time value, reinvestment </li></ul></ul><ul><ul><ul><li>Mitigate default and payment timing risk through pool insurance issued by Ginnie, Fannie, and Freddie </li></ul></ul></ul><ul><ul><li>Prepayment – easier to predict prepayment across a pool </li></ul></ul><ul><ul><ul><li>(think insurance: life, auto, flood, health, etc. – law of large numbers) </li></ul></ul></ul><ul><li>Additionally, pooled “creature” now divisible into MBS securities </li></ul>
  32. 32. Mortgage Pass Through Securities – Benefits created <ul><li>Default and payment timing risk (receiving both P&I timely) mitigated by pool insurance supplied by Ginnie, Fannie, Freddie </li></ul><ul><li>Prepayment risk still exists (total prepayment risk unchanged) but becomes easier to predict across the entire pool </li></ul><ul><li>Adds liquidity to the investment through creation of “small pieces” </li></ul><ul><ul><li>This is different from adding liquidity to primary mortgage market that we’ve been talking about </li></ul></ul>
  33. 33. Ginnie Mae (GNMA) <ul><li>Oldest; started making MBS in 1970 </li></ul><ul><li>Ginnie pools contain only government insured mortgages (primarily FHA and VA) </li></ul><ul><li>Ginnie pass-through securities are fully modified </li></ul><ul><ul><li>Fully modified means security holder will receive full and timely payment of P&I regardless of payment pattern on underlying mortgage </li></ul></ul><ul><li>2002 single family conforming limit up to $300,700 from $203,000 </li></ul><ul><ul><li>Increased to match Fannie and Freddie </li></ul></ul>
  34. 34. Fannie Mae (FNMA) : General <ul><li>Quasi-private </li></ul><ul><ul><li>Not a government department or entity </li></ul></ul><ul><ul><li>Guarantee does not carry “full faith and credit of U.S. Government” </li></ul></ul><ul><ul><li>Freddie has ability to request “emergency funding” from the U.S. Treasury </li></ul></ul><ul><li>Like Ginnie, Fannie guarantees timely payment of P&I fro all securities it issues </li></ul><ul><li>Unlike Ginnie, Fannie securitizes conventional mortgages (mortgages that do not have government insurance) and seasoned (older) FHA/VA mortgages </li></ul><ul><li>On the web at fanniemae.com </li></ul>
  35. 35. Freddie Mac (FHLMC) : General <ul><li>Very similar to Fannie </li></ul><ul><li>Created to securitize conventional mortgages and seasoned non-conventionals </li></ul><ul><li>Wide variety of pool types </li></ul><ul><ul><li>Bi-weekly mortgages </li></ul></ul><ul><ul><li>High LTV mortgages </li></ul></ul><ul><li>On the web at freddiemac.com </li></ul>
  36. 36. Fannie & Freddie loan limits – Definition of Conforming Loans
  37. 37. Private MBS issues – NOT Ginnie, Fannie or Freddie <ul><li>Private MBS issues account for about 11% of total market </li></ul><ul><li>Private MBS market primarily for non-conforming loans, i.e., loans that Fannie, Freddie or Ginnie cannot accept </li></ul><ul><ul><li>Jumbos (greater than $300,700 (2002)) </li></ul></ul><ul><ul><li>No-docs or limited doc </li></ul></ul>
  38. 38. MBS Pass-Through Wrap-up <ul><li>Concept – MBS pass-through is an ownership share of an underlying mortgage pool where each security receives a pro-rata share of both the P&I paid by the underlying mortgages </li></ul><ul><ul><li>Are there any questions on this? </li></ul></ul><ul><li>Particulars – modeling the cash flow is essentially modeling N mortgages with the prepayment option explicitly included in the cash flows </li></ul><ul><ul><li>Are there any questions on the MBS cash flow spreadsheet everyone now has? </li></ul></ul>
  39. 39. Problems with MBS Pass-Throughs <ul><li>Unknown maturity </li></ul><ul><ul><ul><li>Difficult to hedge, difficult to include in a traditional FI portfolio </li></ul></ul></ul><ul><li>Negative Convexity </li></ul><ul><ul><li>Convexity (as you know) is the curvature in the price/yield relationship for a FI instrument </li></ul></ul><ul><ul><ul><li>Convexity means that a drop in rates leads to a more than linear increase in price, and an increase in rates leads to a less than linear decrease in price : convexity is a good thing </li></ul></ul></ul><ul><ul><ul><li>Negative convexity is not a good thing for a FI instrument </li></ul></ul></ul><ul><ul><ul><ul><li>Rate declines lead to PP and reinvestment problems, market knows this and value suffers on rate declines </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Rate increases don’t lead to PP, but they then hurt the FI component (fixed future cash flows) </li></ul></ul></ul></ul><ul><li>Both problems stem mainly from prepayment </li></ul>
  40. 40. Source of MBS problems <ul><li>Primarily Prepayment </li></ul><ul><li>Related issue is the fact that every pass-through share gets both principal and interest </li></ul><ul><ul><li>Early prepayment </li></ul></ul><ul><ul><ul><li>good thing in terms of getting money back sooner (good in terms of principal), </li></ul></ul></ul><ul><ul><ul><li>bad in that interest flow stops (bad in terms of interest) </li></ul></ul></ul><ul><ul><li>Late prepayment </li></ul></ul><ul><ul><ul><li>bad because you wait longer for money to return (bad in terms of principal) </li></ul></ul></ul><ul><ul><ul><li>good in that interest flow continues longer (good in terms of interest) </li></ul></ul></ul>
  41. 41. Financial Innovation in the MBS Market Lecture Map <ul><li>IOs and POs (basic strips) </li></ul><ul><ul><li>Break apart the payment stream into interest and principal – increase predictability of price reaction to rate changes </li></ul></ul><ul><li>CMOs </li></ul><ul><ul><li>Increase maturity certainty (tranche creation) </li></ul></ul><ul><ul><li>Parcel out or concentrate prepayment risk and interest rate risk </li></ul></ul><ul><ul><ul><li>Freddie Mac Multiclass Certificates, Series 2468 </li></ul></ul></ul>
  42. 42. OAS – Calculating PV for a Path
  43. 43. What is a REIT? <ul><li>Owns, and in most cases operates, income-producing property (Equity REITs) </li></ul><ul><ul><li>Office </li></ul></ul><ul><ul><li>Apartment </li></ul></ul><ul><ul><li>Retail (shopping centers) </li></ul></ul><ul><ul><li>Hotels </li></ul></ul><ul><ul><li>Warehouses (storage) </li></ul></ul><ul><li>Some REITs also finance real estate (Mortgage REITs) </li></ul><ul><li>REIT shares trade on major exchanges </li></ul><ul><ul><li>Debt (bonds) are also publicly traded </li></ul></ul>
  44. 44. Where did REITs come from? <ul><li>Created in 1960 (act of Congress) as a way to make property investment available to individual investors </li></ul><ul><ul><li>Offer expert management and familiar corporate governance structures (BOD) </li></ul></ul><ul><ul><ul><li>REIT trivia – original REIT act was an amendment to an Act regarding excise taxes on cigars </li></ul></ul></ul><ul><li>REITs make equity interest in commercial property: </li></ul><ul><ul><ul><li>Divisible into shares that can be purchased by small investors </li></ul></ul></ul><ul><ul><ul><li>LIQUID – the shares trade on major exchanges </li></ul></ul></ul>
  45. 45. How Many REITs are there? <ul><li>About 300, ≈ 2/3 of which are publicly traded </li></ul><ul><ul><li>149 on NYSE </li></ul></ul><ul><ul><li>27 on American </li></ul></ul><ul><ul><li>12 on NASDAQ </li></ul></ul><ul><li>Total REIT assets ≈ $300 billion </li></ul>
  46. 46. Types of REITs <ul><li>Equity REITs </li></ul><ul><ul><li>Own and operate income-producing real estate </li></ul></ul><ul><ul><li>Perform leasing, development, and construction activities </li></ul></ul><ul><ul><ul><li>151 publicly traded equity REITs </li></ul></ul></ul><ul><li>Mortgage REITs </li></ul><ul><ul><li>Hold mortgages on real property </li></ul></ul><ul><ul><ul><li>Make mortgages (lend money), usually on existing property </li></ul></ul></ul><ul><ul><ul><li>Buy mortgages </li></ul></ul></ul><ul><ul><ul><li>22 publicly traded mortgage REITs </li></ul></ul></ul><ul><li>Hybrid REITs </li></ul><ul><ul><li>Both own properties and make loans </li></ul></ul><ul><ul><ul><li>9 publicly traded Hybrid REITs </li></ul></ul></ul>
  47. 47. Types of REITs – more detail (source: NAREIT)
  48. 48. REIT Structures – UPREITs and Traditional REITs <ul><li>UPREIT (Umbrella Partnership REIT) </li></ul><ul><ul><li>First UPREIT was Taubman Realty IPO in 1992 </li></ul></ul><ul><ul><li>UPREIT structure created to shield owners contributing real estate assets to the REIT from capital gains taxes on contributed property </li></ul></ul><ul><ul><ul><li>Transfer is then partnership shares for partnership shares, and this is not a taxable event for the owners </li></ul></ul></ul><ul><ul><li>UPREIT owns a controlling interest in a limited partnership that owns the real estate, as opposed to a traditional REIT structure in which the REIT owns the real estate </li></ul></ul><ul><ul><li>The Umbrella Partnership “shares” – known as operating partnership units, or OP units – are convertible into REIT shares and enjoy voting rights and dividends just like REIT shares </li></ul></ul><ul><ul><ul><li>Convertibility allowed after one year, and triggers taxes </li></ul></ul></ul>
  49. 49. REITs and Taxes <ul><li>REITs do not have to pay federal taxes at the corporate level </li></ul><ul><ul><li>More specifically, REITs are allowed to deduct dividends paid to shareholders from taxable income, and thus have the ability to shield 100% of taxable income through distributions to shareholders </li></ul></ul><ul><ul><ul><li>No other firm in the economy can deduct dividends </li></ul></ul></ul><ul><ul><li>REIT shareholders still have to pay taxes on dividends and capital gains </li></ul></ul><ul><ul><li>Most states honor the REIT status and don’t require REITs to pay state taxes </li></ul></ul>
  50. 50. Career Opportunities <ul><li>Construction </li></ul><ul><li>Development </li></ul><ul><li>Property Management </li></ul><ul><li>Leasing Brokerage/Tenant Rep </li></ul><ul><li>Asset Management </li></ul><ul><li>Consulting </li></ul><ul><li>City Planning/Economic Community Dev. </li></ul>
  51. 51. Career Opportunities (Cont’d) <ul><li>Investment Management (institutional and family office) </li></ul><ul><li>Equity Funds </li></ul><ul><li>Commercial Banking </li></ul><ul><li>Mortgage Brokerage and Placement </li></ul><ul><li>Institutional Brokerage </li></ul><ul><li>Investment Banking </li></ul>

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