The Real Estate Game (Poorvu) - Book

CMBS

(Commercial Mortgage-Backed Security) A debt obligation that represents claims to the cash flows from pools of mortgage loans on commercial property. [package a group of mortgages and finance them as bonds].

Ways to Invest in Real Estate

1. Buy a Property Directly 2. Invest in Private Syndication (prospectus) 3. Invest in Multiproperty funds (mutual fund) 4. Invest in public securities (REITS)

Periods of Play

1. Concept to Commitment 2. Comitment to Closing 3. Development 4. Operation 5. Harvest

Real Estate Game

Diamond board game with 4 decks: properties, capital markets, players, external environment. Select a Card from any pile. Pick cards from piles until total match. Cards may be dealt to you at any time. Game is not over until you dispose of the property.

The Harvest

Harvesting is gaining access to some of the value that the landowner has added through his or her successful participation in the real estate game. It is not simple because: you don't know where you are in the cycle, not much thought is given to exit strategy; greed optimism that building will become more profitable; difficulty in finding next alternative...

NPV vs. IRR

NPV tells you how much profit you might earn above cost of capital and whether it is high enough to warrant risk. IRR shows what the actual rate of return on investment is taking into account all cash inflows and outflows and assumes all cash flows to be reinvested at same rate.

Operation

Operation involves growing or defending margins. 1. Lease (rent, term, default, obligations, insurance, damages, eminent domain, etc.) 2. Property management firm

Commitment to Closing

Phase in which buyer's exposure increases dramatically. 1. Purchase and Sale Agreement (+due diligence) 2. Negotiation with Financial Institutions 3. Negotiation with Equity Investors 4. Closing deal

Concept to Commitment

Phase of real estate game for the direct investor. The three key things you are trying to accomplish in this phase are: (1) get information; (2) manage money and (3) manage time (seek good oportunities only). Simultaneously you are evaluating operating risks involved (external circumstances), assembling a team, negotiating with financial institutions to set capital structure, negotiating with the seller and signing a LOI.

Development

Purchase and operate existing facility or build something from scratch? Even if not building, you need to know how likely it is that someone will throw up a competitive building. Development is the phase in which developers buy wholesale and sell retail. You must look at: 1. Timing and demand at completion (RE Cycle) 2. Assemble Land (secrecy) 3. Approval process (zoning/variance/taxes/infra) 4. Planning (dialogue w/community) 5. Think about Design (programming, schematic design, design development and construction documents) 6. Bidding and Construction 7. Marketing the Development

Real Estate Investment Trusts (REITs)

REITs are investment trusts that own and manage a pool of commercial properties and mortgages and other real estate asssets. To measure value investors look at Adjusted Funds From Operation (AFFO and FFO) and compare to REIT share prices. Also focused REITs tend to perform better.

Why sell?

Real Estate is cyclical business Need to free up capital for next deal Land and properties change in value better opportunities elsewhere external forces limit losses.

Syndication

Syndication is a group of people organized to carry out defined business purpose (purchase property and flip it). Syndications are often partnerships (LLP or LLC). They can be public or private.

Back of the Envelope

You buy the underlying assumptions. BOE is as good as the assumptiosn behind it. BOE let's you decide which projects to further investigate. 1. NOI 2. Cash Flow from Operations (CFO) 3. Financing Coss (FC) 4. Cash Flow Adter Financing (CFAF): CFO - FC 5. Return on Assets (ROA): CFO/Purchase Price 6. Return on Equity (ROE): CFAF/cash on cash