FINC 670 - Chapter 1

The U.S. represents about 6% of the earth's land service, or approximately 2.3 billion acres. Who actually owns the land? What is the distribution of this land among various uses (e.g. developed land, federal land?

-Developed land consisting of residential, industrial, commercial, and institutional land represents approximately 6% of the total land in the U.S. -Federal Lands and water areas occupy about 23% of the land; Crop Land and CRP Land represent about 21%; and pasture land comprises about 6% of the land. -Finally, the remaining land is divided between range land and forest, with each representing 21% of all U.S. land.

Real Estate construction is a volatile process determined by the interaction of the user, capital, and property markets. What signals do real estate producers (i.e. developers) use to manage this process? What factors affect the volatility of real estate production?

-When real estate prices exceed the cost of production, this signals producers to build, or add additional supply. As the supply of real estate increases, rental rates decline in the user market, which lowers property values ad signals the real estate market to slow the production of real estate. -Furthermore, shocks in the capital markets and the volatility of construction costs add to the volatility of real estate production. For example, higher interest rates adversely affect property values, all else equal, thereby reducing the attractiveness of new construction. Additionally, shortage of key building materials and organized labor disputes may contribute to the volatility of real estate production.

Which of the following is important to the location of commercial properties?

-access to consumers -visibility -Availability of communication infrastructure -NOT access to schools

Explain the role of government in real estate at the federal, state, and local levels. Which has the most significant impact on real estate markets?

-local government has the most significant influence on real estate markets. It affects the supply and cost of real estate through zoning and land use regulations fees on new land developments, and restrictive building codes. It also affects rental rates through the assessment of property taxes. Finally, local government affects the supply and quality of real estate through the provision of community infrastructure and through building codes.

Real estate markets differ from other asset classes in that they have all of the following characteristics:

-local market -high transaction costs -segment market

Which of the following assets are the most difficult to observe and value?

-location attributes

The actions of local, state, and federal governments affect real estate values through:

-user market -capital market -taxation policies

Identify 4 ways in which real estate markets differ from the market for publicly traded stock:

1. Real Estate is a heterogeneous product distinguished by its age, building design, and location. 2. Real estate is immobile, and therefore location and its accessibility are important. 3. Real estate is localized, segmented market due to local competition and heterogeneous nature of the product. 4. Real Estate Transactions have high transfer costs, and most deals are privately negotiated.

Real estate can be used in 3 fundamental ways. List these 3 alternatives or definitions:

1. Real estate is most commonly defined as land and any improvements and any improvements made to or on the land, including fixed structures and infrastructure components. 2. The term is also used to describe the "bundle of rights" associated with the ownership and the use of the physical characteristics of space and location. 3. Finally, real estate may be described as the business activities related to the development, construction, acquisition, operation, and disposition of real property assets.

What distinguishes real property from personal property?

A major determinant between real and personal property is whether or not the property is movable or affixed to the structure.

According to Exhibit 1-3, U.S. Households own 16.1 trillion in housing assets. Assume this amount does not include rental real estate. On average, what percent of the value of the U.S. housing stock is financed with home mortgage debt?

About 61% of the U.S. housing stock is financed with home mortgage debt.

Approximately what portion of U.S. households own their own home?

Approximately two thirds.

Describe the value of U.S. Real Estate by comprising it to the values of other real estate asset classes (e.g. stocks/bonds):

As of September 2005, real estate (including owner-occupied housing but excluding real estate held by non-government corporations) was the single largest asset class in the U.S., valued at approximately $11.1 Trillion. This is larger than the existing stock of both corporate and foreign bonds and the outstanding value of U.S. Treasury Securities.

The market in which required rates of return on available investment opportunities are determined are referred to as the:

Capital Market

How capital markets influence real estate:

Capital markets provide the financial resources necessary for the development and acquisition of real estate assets. Real estate companies compete for resources against other investment opportunities in the capital market based on investor required rates of return and risk considerations. Capital markets are segregated into 2 categories: equity interests and debt interests.

In what market are rental rates for commercial real estate assets determined? In what market are property values determined?

Commercial real estate rental rates are determined in local user (space) markets, while property values are determined largely in the local property market.

How government influences real estate:

Government influences the interaction between the user markets and capital markets through tax policy, regulations, and provisions of services and infrastructure, subsidies, and other means.

What is the single largest asset category, in terms of value, in the portfolio of the typical U.S. household?

Housing

Storm water drainage systems are best described as:

Improvements to the land

Of the following asset categories, which class has the greatest aggregate market value?

Non-government real estate

How much of the wealth of a typical U.S. household is tied up in housing? How does this compare to the role that assets and investments play in the portfolios of U.S. Households?

Real Estate is the single largest asset in the typical U.S. Households portfolio, representing approximately 30% of household wealth in September of 2005. In comparison, the total value of corporate stocks and mutual funds shares 16% of household assets. Pension Reserves, excluding stocks. represent 17% of household assets. Deposits and money market funds represents 9% of household assets.

Real estate assets and markets are unique when compared with other assets and markets. Discuss the primary ways that real estate markets are different from the markets for assets that trade in well developed public markets.

Real estate is unlike other asset classes because it is heterogeneous and immobile. Real estate assets have unique and distinctive characteristics, such as age, building design, and location. Real estate is also immobile; therefore, location is an important attribute. Because real estate assets are heterogeneous and immobile, real estate markets are localized. Potential users of real property and competing real estate are typically located in the same area or region. Additionally, real estate markets are highly segmented because of their heterogeneous nature. Therefore, potential users of a specific type of real property generally do not seek to substitute one property category for another. Finally, most real estate transactions are privately negotiated and have high transaction costs.

What is the role of state government in real estate?

State government generally has the least influence on real estate. State government affects real estate through the licensing of real estate professionals, establishment of statewide building codes, the creation of fair housing laws, and through numerous housing related subsidies for low and moderate income households. In addition, the state may protect some environmentally sensitive lands from development.

What is the difference between tangible and intangible assets? Does the ownership of "real estate" involve intangible assets, tangible assets or both?

Tangible assets physical assets such as land, automobiles, and buildings. Intangible assets are non physical, including patents, financial claims, or contractual agreements. Real estate is a tangible asset, but a bundle of intangible rights is also associated with the ownership and use of the property.

Identify and describe the interaction of the 3 economic sectors that affect real estate value.

The 3 economic sectors that influence real estate value are user markets, capital markets, and government. -In real estate user markets, households and firms compete for physical location and space. This competition determines who will obtain use of a specific property and how much will be paid for the use of this property.

Investible assets based on real estate are traded in each of the four capital market quadrants. List the four quadrants and at least one real estate asset that trades in each.

The 4 capital market quadrants include: -Private Equity -Private Debt -Public Equity -Public Debt The private equity market includes transactions of real property between individuals, firms, and institutions. Private debt includes the trading of home mortgages. Investors trade real estate companies, such as equity REITs in the public equity market. Mortgage backed securities are traded in public debt markets.

What is the role of federal government in real estate?

The federal government influences real estate through income tax policy, housing subsidy programs, federal financial reporting requirements, and disclosure laws.

A market where tenants negotiate rent and other terms with property owners or their managers is:

User Market