Professional Documents
Culture Documents
Real Estate
Finance and
Investments
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Real Estate
Finance and
Investments
Twelfth Edition
William B. Brueggeman,
Ph.D.
Corrigan Chair in Real Estate
Edwin L. Cox School of Business
Southern Methodist University
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
Bangkok Bogot Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
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www.mhhe.com
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Preface
Interest in real estate has increased dramatically in recent years as the various ways of in-
vesting in and financing real estate continue to evolve. There are a myriad of alternative
ways of making equity investments in real estate, ranging from purchasing properties like an
apartment building, either as an individual or in a partnership, to investing in publicly traded
companies called real estate investment trusts (REITs) that develop and own hundreds of
apartment properties throughout the nation. Investments can also be made in mortgages used
to finance real estate, ranging from making a mortgage loan (as a lender) or purchasing a
publicly traded mortgage-backed security (residential or commercial). This book prepares
readers to understand the risks and rewards associated with these various ways of investing
and financing both residential and commercial real estate. These concepts and techniques
are important for all careers related to real estate, such as investing, financing, appraising,
consulting, managing real estate portfolios, leasing, managing property, analyzing site loca-
tion, and managing corporate real estate. It is also applicable for those who just want to bet-
ter understand real estate for their own personal investment and financing decisions.
vi Preface
McGraw-Hill/Irwin has a new Internet resource called Real Estate Online. Real Estate
Online lets you stay current and expand your knowledge about the real estate field through
online discussion questions, articles, and exercises. Access to this and other student/instruc-
tors resources, including a new online quiz feature, is available at www.mhhe.com/bf12e.
Supplements
Several ancillary materials are available for instructor use. These include:
Instructors Manualdeveloped by Jeffrey Fisher and William Brueggeman.
Test Bankdeveloped by Jeffrey Fisher and William Brueggeman.
PowerPoint slidesdeveloped by Tom Epperson, Auburn University.
Acknowledgements
We would like to thank several people who contributed to the twelfth edition revision. We
thank the following reviewers for their valuable input:
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Preface vii
Brief Contents
Preface 000 12 Financial Leverage and Financing
Alternatives 000
PART ONE 13 Risk Analysis 000
Introduction 000 14 Disposition and Renovation of Income
1 An Introduction to Real Estate Investment: Properties 000
Legal Concepts 000 15 Financing Corporate Real Estate 000
2 Financing: Notes and Mortgages 000
3 The Interest Factor in Financing 000 PART FOUR
Financing Proposed Projects 000
PART TWO 16 Financing Project Development 000
Financing Residential Properties 000 17 Financing Land Development
4 Fixed Rate Mortgage Loans 000 Projects 000
5 Adjustable Rate and Variable Payment
Mortgages 000 PART FIVE
6 Residential Financial Analysis 000 Alternative Real Estate Investment
Vehicles 000
7 Single Family Housing: Pricing,
Investment, and Tax Considerations 000 18 Partnerships, Joint Ventures, and
Syndications 000
8 Underwriting and Financing Residential
Properties 000 19 The Secondary Mortgage Market: Pass-
Through Securities 000
PART THREE 20 The Secondary Mortgage Market: CMOs
Financing Income Properties (Debt and and Derivative Securities 000
Equity) 000 21 Real Estate Investment Trusts
9 Introduction to Income-Producing (REITs) 000
Properties: Leases and the Market for 22 Real Estate Investment Performance and
Space 000 Portfolio Considerations 000
10 Valuation of Income Properties: Appraisal
and the Market for Capital 000 INDEX 000
11 Investment Analysis and Taxation of
Income Properties 000
viii
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Table of Contents
PART ONE Friendly Foreclosure 00
Prepackaged Bankruptcy 00
INTRODUCTION 0
Foreclosure 00
Judicial Foreclosure 00
Chapter 1
Redemption 00
An Introduction to Real Estate Investments: Sales of Property 00
Legal Concepts 0 Effects of Foreclosure on Junior Lienors 00
Property Rights and Estates 0 Deficiency Judgment 00
Definition of Estate 0 Taxes in Default 00
Classification of Estates 0 Bankruptcy 00
Examples of Freehold Estates 0 Chapter 7 Liquidation 00
Estates Not Yet in Possession 0 Chapter 11 00
Leasehold Estates 0 Chapter 13 00
Interests and Easements 00
Assurance of Title 00 Chapter 3
The Meaning of Title 00 The Interest Factor in Financing 00
Deeds 00
Compound Interest 00
Methods of Title Assurance 00
Compound or Future Value 00
Abstract and Opinion Method 00
Use of Compound Interest Tables 00
The Title Insurance Method 00
Use of Financial Calculators 00
Recording Acts 00
Present Value 00
Limitations on Property Rights 00
A Graphic Illustration of Present Value 00
Using Calculators for Finding Present Values 00
Chapter 2
Compound or Future Value of an Annuity 00
Financing Notes and Mortgages 00 Use of Compound Interest Factors for Annuities 00
Notes 00 Present Value of an Annuity 00
The Mortgage Instrument 00 Use of the Present Value of an Annuity Factors 00
Definition of a Mortgage 00 Accumulation of a Future Sum 00
Relationship of a Note to a Mortgage 00 Investments with Single Receipts 00
Interests That Can Be Mortgaged 00 Determining Yields or Internal Rates of Return on
Minimum Mortgage Requirements 00 Investments 00
Important Mortgage Clauses 00 Yields on Investment Annuities 00
Assumption of Mortgage 00 Effective Annual Yields: Extensions 00
Acquiring Title Subject to a Mortgage 00 Solving for Annual Yields with Partial Periods: An
Property Covered by a Mortgage 00 Extension 00
Junior Mortgages 00
Recording of Mortgages 00 PART TWO
Other Financing Sources 00
FINANCING RESIDENTIAL
Seller Financing 00
Land Constraints 00 PROPERTIES 00
Default 00
What Constitutes Default 00
Chapter 4
Alternatives to Foreclosure: Workouts 00 Fixed Rate Mortgage Loans 00
Restructuring the Mortgage Loan 00 Determinants of Mortgage Interest Rates: A Brief
Transfer of Mortgage to a New Owner 00 Overview 00
Voluntary Conveyance 00
ix
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x Table of Contents
Table of Contents xi
Renovation as an Alternative to Disposition 000 Requirements to Close the Interim Loan 000
Renovation and Refinancing 000 The Permanent Loan Closing 000
Rehabilitation Investment Tax Credits 000 Project Development Illustrated 000
Low-Income Housing 000 Project Description and Project Costs 000
Market Data and Tenant Mix 000
Chapter 15 Pro Forma Construction Costs and Cash Flow
Financing Corporate Real Estate 000 Projections 000
Feasibility, Profitability, and RiskAdditional
Lease-versus-Own Analysis 000 Issues 000
Leasing versus OwningAn Example 000 Profitability before and after Taxes 000
Cash Flow from Leasing 000 Sensitivity Analysis, Risk, and Feasibility Analysis 000
Cash Flow from Owning 000
Cash Flow from Owning versus Leasing 000 Chapter 17
Return from Owning versus Leasing 000
Financing Land Development Projects 000
Importance of the Residual Value of Real Estate 000
The Investors Perspective 000 Characterization of the Land Development
A Note on Project Financing 000 Business 000
Factors Affecting Loan-versus-Lease Decisions 000 The Land Development ProcessAn Overview 000
The Role of Real Estate in Corporate Acquisition of LandUse of the Option Contract 000
Restructuring 000 Financing and Development 000
Sale-Leaseback 000 Lender Requirements in Financing Land
Refinancing 000 Development 000
Investing in Real Estate for Diversification 000 Detailed Cost Breakdowns 000
Appendix General Contracts and Subcontracts 000
Real Estate Asset Pricing and Capital Budgeting Residential Land Development Illustrated 000
Analysis: A Synthesis 000 Market Conditions and Site Plan 000
Estimating Development Cost and Interest Carry 000
Estimating Release Prices per Parcel Sold 000
PART FOUR Loan Request and Repayment Schedule 000
FINANCING PROPOSED Project Feasibility and Profitability 000
PROJECTS 000 Project IRR and Net Present Value 000
Entrepreneurial Profits 000
Chapter 16 Sensitivity Analysis 000
Financing Project Development 000
Introduction 000 PART FIVE
Overview: The Planning and Permitting Process 000 ALTERNATIVE REAL ESTATE
The Development of Income-Producing Property 000 INVESTMENT VEHICLES 000
Market Risk and Project Feasibility 000
Project Risks 000 Chapter 18
Project Development FinancingAn Overview 000 Partnerships, Joint Ventures, and
Lender Requirements in Financing Project
Syndications 000
Development 000
Loan Submission Information for Loan RequestsAn Introduction: What Is a Syndicate? 000
Overview 000 Use of the Limited Partnership in Private and Public
Standby Commitments 000 Syndicates 000
Contingencies in Lending Commitments 000 Private Syndication Problem Illustrated 000
The Construction or Interim Loan 000 Financial ConsiderationsPartnership Agreement 000
Methods of DisbursementConstruction Lending 000 Operating Projections 000
Interest Rates and Fees 000 Statement of Before-Tax Cash Flow (BTCF) 000
Additional Information for Interim Loan Calculation of Net Income or Loss 000
Submission 000 Calculation of Capital Gain from Sale 000
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Table of Contents xv
Lease Renewal Options and REIT Rent Growth 000 Data Sources for Other Investments 000
Occupancy Numbers: Leased Space or Occupied Cumulative Investment Return Patterns 000
Space? 000 Computing Holding Period Returns 000
Retail REITs and Sales per Square Foot 000 Computing Investment Returns 000
Additional Costs of Being a Public Company 000 Risk, Return, and Performance Measurement 000
The investment Appeal of Mortgage REITs 000 Risk-Adjusted Returns: Basic Elements 000
Financial Analysis of an Equity REIT Illustrated 000 Elements of Portfolio Theory 000
Calculating Portfolio Returns 000
Chapter 22 Portfolio Risk 000
Real Estate Investment Performance and Portfolio Weighting: Trading Off Risk and Return 000
Portfolio Considerations 000 Real Estate Returns, Other Investments, and the
Potential for Portfolio Diversification 000
Introduction 000 Portfolio Diversification: EREITs and Other
The Nature of Real Estate Investment Data 000 Investments 000
Sources of Data Used for Real Estate Performance Public versus Private Real Estate Investments 000
Measurement 000 Real Estate Performance and Inflation 000
REIT Data: Security Prices 000
Hybrid and Mortgage REITs 000
NCREIF Property Index: Property Values 000 INDEX 000