Real Estate Final

Commitment Phase

From Concept to Commitment Phase: - negotiating with the seller - moving from letter of commitment to purchase and sale agreement - feasibility testing based on project evaluation and market research - financial deposit, generally won't go hard until later the initial due diligence Develop a Project Strategy that Includes: - financial (operating) and capital (equity and debt) plan - project pricing of improvements and maintenance - preliminary designs and bids if redeveloping existing property - introduce project to stakeholder and public groups - leasing plans with turnover schedule - management plan for third party contracts Commitment Phase: Negotiating with the Seller - figure out the position of the seller - be relentlessly clear eyed - understand the trade offs between reducing risk and reducing price - how your alternative to this deal when you negotiate - be patient - leave your ego at home Letter of Commitment of Letter of Intent LOI includes: - major points of the deal - pricing, timing, broker involvement - financing conditions, tenant agreements, inspections timing and property access - neither party is legally bound until the formal purchase and sale agreement is executed The Purchase and Sale Agreement: - legal représentation of the parties involved - title of the property and any encumbrances - status of existing leases - condition of the property (as is) - terms of the deposit, how much, who holds it when it is non-refundable (goes hard) - time for performance, closing dates, etc... - adjustments such as broker fees, commissions, expenses during contract period - contingencies such as financing, removing of linens, tenant negotiations, etc...

Institutional Investing

asset allocation and policy set by governing board (input from staff, actuary, and consultants) - real estate part of alternative asset class (also called real estate; may be categorized alongside commodities and infrastructure) investment policy specifies (parameters for portfolio construction, allowable investments, return expectations, and risk control metrics) risk control metrics include allocation bands, geographic diversification, tracking error to benchmark, and maximum allowable leverage) Vintage year risk (put all your money in a particular and that year either goes really well or really bad) built in protections: allocation bands, diversification (must be true diversification including economic driers), tracing error, and constraints on leverage diversification is essential thought all factors including geographic, property type, economic drivers, style, and vintage year Denominator Effect

Asset Management vs Property Management

asset management is more strategic; work with portfolio manager/ investor to maximize returns from asset property management is tactical; implements strategy, handled operations

Leverage Worksheet

NOI = 1,650,000 Cap Rate = 6% investment = 27,500,000 if 10,000,000 for a down payment the percentage of the purchase price borrowed is: 27,500,000 - 10,000,000 = 17,500,000 17,500,000 / 27,500,000 = 63.64% if cap rates shift to 8%, what % of the value of the building will be levered? amount borrowed / (NOI/ cap rate) 1,650,000 / .08 = 20,625,000 17,500,000 / 20,625,000 = 84.85% levered if the debt service due is 5% interest only, what is the debt service coverage ratio? NOI / (amount borrowed x interest) -17,500,000 x .05 = 875,000 1,650,000 / 875,000 = 1.89

The Deal Process

1. finding opportunities 2. underwriting 3. evaluating the deal 4. the bid process 5. due diligence and the rest

Debt Capital

Characteristics: - permanent financing made on stabilized/ sore assets (typically the cheapest debt with the longest maturity 10+ years) - construction/ development loans used to finance new construction (more expensive debt with 3-5 year terms) - transitional debt (bridge financing) very expensive debt used to fund land or transitional asset (office property being converted apartments) with short 2-3 year terms Pros: - limits the amount of equity required - lower cost than equity - leverages equity returns Cons: - may be difficult to get, if not preferred borrower - personal liability due to recourse - maturity/ refinance risk - leverage may turn negative Providers: - permanent financing provided by insurance companies, agency (Fannie and Freddie), CMBS (public debt) - construction/ development loans typically provided by commercial banks - first mortgage loans: recourse or non recourse and LTV 0-60% - subordinate/ transitional debt is typically provided by non traditional alternative private lending sources (Shadow Banking): (second mortgage B Note, mezzanine, preferred equity quasi debt structure, ad LTV 50-90%)

Preferred Equity Capital

Characteristics: - smaller checks required - equity capital is in a senior position to common equity; has a senior claim to cash flows - equity capital usually has a guaranteed return - like common equity it represents an unsecured interest - return requirements are lower than common equity, but higher than debt Pros; - may have perpetual time frame - usually has a guaranteed rate of return - captures some of the equity risk premium Cons: - return is usually capped at the guaranteed return - like common equity, equity partners are difficult to find: challenging to raise third party capital - while not in the first loss position, capital is unsecured

Common Equity Capital

Characteristics: - usually requires a large capital commitments - equity partners are usually utilized - equity capital is in the first loss position - implicit return requirements are high Advantages: - perpetual time frame - all profit upside flow to equity capital - captures the equity risk premium Drawbacks: - equity capital can be wrapped up into few projects - equity partners are difficult to find: challenging to raise third party capital - equity capital is in the first loss position

Brief Private Equity Primer

Investment Cycle realize investment and return capital to investors ---> raise capital --> source deals and originate investments --> add value/ renovate --> stabilize asset and maximize cash flow --> realize investment and return capital to investors

Due Diligence

Legal, Title, and Survey: deed, title reports, ALTA survey, reciprocal easements and restriction agreements, zoning, ground leases, and owner's association documents Physical: - complete plans and specification -verify building specs (ceiling heights, turning radius, mechanical, dock shifts, etc...), -verify leasable square footage and parking spaces -review construction documents and inspection reports, and warranties for systems - evaluate deferred maintenance, possible capital expenditures, or property upgrades -confirm code compliance - review soils and environmental reports or order new reports if necessary Tenancy and Leases: - review all leases and tenant correspondence - examine tenant options, co-tenancy, and % rent clauses -audit historical account receivable - conduct tenant interviews - review insurance certificates from all tenants - obtain and review estoppels from all tenants and match to rent roll and financial projections (singed documents by tenants certifying that a lease exists, there are no defaults ad rents are paid to a certain date, most leases require tenants to submit estoppels for transfer or financing of the property) - review all % rent, tenant sales information, and leasing status reports Financial and Operations: - current year operation budget - historical years operating statements - common area maintenance billings and receipts - prior years capital expenditures - real estate taxes, bonds special assessments - utility invoices and reimbursements - service contracts - permits and licenses required to run the property - parking agreements and paring income audit Market: - tour subject property and competing properties, visit at different times of the day - perform market study of competition and retail comparable - review competitive vacancy and market vacancy - perform (or order) demographic analysis (especially important for retail and residential) - obtain traffic counts - research potential competition, planned, or entitled projects - analyze building and land sale comparable y

Private Equity

Private Equity: - non institutional: first dig through your pockets, next your friends and family, expanded network, and then crowd funding - any ownership position that isn't noted on a public exchange - initially was used to denote direct investments in private companies (not usually real estate related) or buyouts of public companies - institutional investors considered it part of venture capital allocation, treated PE as an alternative investment Real Estate Private Equity: - real estate is also considered part of alternative instruments for institutions - joint ventures - one off or programmatic - separate accounts - commingled funds: open end (generally core) and closed end (strategic) - entity level investments

REIT Qualifications and Characteristics

REIT Qualifications: - atleast 75% of total assets must be in real estate - atlas 75% of gross income from rents must come form real property, mortgage interest, or sales of real estate - must pay at least 90% of table income in dividends each year (taxable income is not the same as cash received) - must be an entity that qualifies as a corporation - must be managed by Board of Directors or Trustees (public REITs must meet same tests for independent directors as other public companies) - operate under same rules as other public companies for regulatory and financial reporting purposes - must have a minimum of 100 shareholders (pass through qualification for pension funds, mutual funds, etc.) - must abide by 5/50 rule (no more than 50% of its shares may be held by five or fewer individuals) REITS have higher transparency: - national association of Real Estate investment trusts NAREIT tracks industry - Public REITs must feel all required quarterly, annual, and incidental reporting as other public companies - REIT research is a big industry- lots of scrutiny on individual companies Governance: - for public REITs governed by SEC and listing exchange (such as NYSE) - audit, compensation and nominating/ governance must be filled by independent directors only: (auditors must be approved by shareholders, all directors elected by shareholders, and increasing scrutiny and attention to shareholder rights)

Participants: Real Estate Equity Capital Markets

Raise Capital: - investment banks - brokerage firms - independent advisory firms - placement agents Invest Capital: - private equity - hedge funds - pension funds - insurance cos. - endowments - foreign/ SWF - friends/ family consume capital: - operators -developers

Capital Stack within Commercial Real Estate

Real Estate Capital Stock: - equity (common and preferred) - debt (first mortgage, B note, mezzanine and preferred equity debt structure) Providers of Real Estate Debt: - commercial banks - insurance companies - private lending sources (PE/RE funds, pension funds, sovereign wealth)

Real Estate Property and Market Cycles

Real Estate Cycles: - real estate professionals formulate and refine their outlook about market supply and demand - the real estate market cycles form recovery to recession -the real estate typically moves through the cycle sequentially - there are times when there is a pause and reset where markets and sectors may move back within the cycles - if you are late in the cycle and long leases you are in a better position (chance to get through the cycle) --> if you are early and short leases that is also good; if you are late in the cycle and short leases thats bad the cycle of real estate emotions follows a similar pattern to the cycle of grief Phase I recovery: -your value is no longer falling (doesn't mean its picking up yet) - still coming out of or still have oversupply - negative rent growth however we are recovering (trying to work off excess supply) - wait a little to invest to make sure your not still in the recession phase Phase II expansion: -properties have come back in value (rents are starting to increase and vacancies are dropping) - rents grows greater than inflation Phase III Hyper supply -development has a long lead time industrial can be put up and shut down the quickest multifamily is the next retail is the next office has the longest lead time (wrong side of the cycle) building too much causes vacancy then falling rents - if you are at the top of the market invest in industrial or multifamily because it has short lease time - avoid office like plague -better to invest in debt because equity gets hit first if values decreases - difficult to tell if you are there because you are still rising just rising at a slower rate Phase IV Recession

REIT

Real Estate Investment Trust company that owns or finances income producing real estate modeled on mutual fund concept: large group of investors can access pooled investment Advantages: - allows individuals to participate in large real estate investments - pay regular income streams - diversification -long term capital appreciation - can pass tax advantages to shareholders - measure of success is FFO (funds from operations) rather than NOI Scope: - REITs exist for nearly all property types - properties are located in every state - more than 35 countries have some form of REITs traded on their exchanges

Investment Process

Three Phases Phase 1: concept - finding the deal - due diligence - project evaluation Phase 2: Commitment - project under contract -feasibility testing - project strategy Phase 3: Closing - financing -closing - implementation - this is where the actual acquisitions takes place (however successful acquisitions depend on phases 1 & 2) after finding the deal (market, size, product type): confidentiality agreements and soft deposit due diligence: provides the building blocks of good investment practice and detailed process of evaluating an asset

Why Become a REIT? and Performance

Why Become a REIT? - access to capital - stock issuance -initial public offering IPO - secondary offerings at the market ATM - debt is generally cheaper - many REITs opt to be rated by S&P, Moody's or Fish (limits flexibility somewhat and lowers rates) Perfromance: - NAREIT Index measures REIT performance - so does S&P Dow Jones REIT index - REITs are a good but imperfect proxy for private market performance (generally run ahead do private market by about 12-18 months and more volatile than private market valuations)

Real Estate Acquisitions

acquisitions in real estate include the acquisitions of land, buildings, shares of real estate equity investments, and portfolios of property the basic process of acquisition is similar for any acquisition but acquisitions of existing buildings are most common investing in real estate requires finding opportunities (work with the familiar and work with people you know and trust) responding to external forces (understanding where you are in the cycle and understanding the interest rate/ capital environment) Determining is the deal for me? how much $ do I have? what is my risk profile? is this market familiar or not? Real estate acquisitions: successful real estate investments depend on good acquisitions, its hard to build/ operate your way out of a bad buy, investments begin with understanding the value of an asset and its potential for growth, and the word before closing is just as important as the work after closing

Closed End Commingled Funds

also a partnership with a manager as the GP and investors as LPs defined life, typically 10 years with possible 2-3 one year extensions investment period generally first 3-4 years fee structure typically 2% of committed capital (may ratchet down to 2% of invested capital) and 20% of cash flow over a negotiated hurdle NAV is calculated and reported, but fees are based on cash flows there is no exit after commitment until liquidation: - severe penalties for failing to honor commitments - there is a secondary market in LP interests for those who want to get out early typically higher risk profile and illiquid investments leads to higher cost of capital 6%-9% typically higher leverage to maximize returns and diversify investments terms can be negotiated but in the end all investors must agree to same terms

Economic Cycles

being early is as bad as being wrong rental growth rates can be characterized in different parts of the market cycle Phase 1: Recovery --> negative rental growth and below inflation rental growth - declining vacancy, no new construction Phase 2: Expansion --> rents rise rapidly toward new construction levels and, cost feasible new construction rents , and high rent growth in tight market - declining vacancy and new construction --- demand/ supply equilibrium point ---- Phase 3: Hypersupply --> rent growth positive but declining - increasing vacancy and new construction Phase 4: Recession --> below inflation and negative rent growth - increasing vacancy and more completions then starts over at Phase 1 National Property Type Cycle Forecast - we shifted backwards (minus apartments); example things in Phase 3 2017 shifted back to Phase 2 which is very unusual and rarely happens -this causes confusion because now we don't know what phase we are in apartments moved back a phase but not as much since it is what we have built most recently missing middle class multifamily in apartments because it mostly luxury apartments being built right now a normal market multifamily ages and it ages into affordability but its not aging right now because nothing was being built since hotel leases are so small they can make quick adjustment to cycle; they are the canary in the coal mine; they will reflect the downturn first; since right now hotels are doing fine could signal we have a little more expansionary lefts the spread between cap rates and the 10yr us treasury is 1.6% points higher than during the peak of the last expansion; fixed income is at or below the peak of the last expansion - we want to look at how the spread is relative to the 10 yr because real estate is priced to the 10yr treasury - toward the end the spread gets tighter (when it gets abnormally tight that means its unsustainable) - cap rate needs to be higher than 10 yr - when its wide thats when you buy

Broker Duties

brokers track activity in the market continually, know what spaces are coming up for lease, know who is looking for space and what space would fit, work wit tenant to analyze (negotiate best deal out of all the options), and leasing brokers represent the tenant and agency broker represents the owner How do brokers find clients? - cold calling (in person or by phone) - word of mouth - referrals - renewals - relationships -industry organizations - any way possible How do brokers get paid? - commission based - based upon rent/ft x square feet rented x lease x negotiated % - only get paid if/ when deal closes (first year or two the firm may provide a small salary)

Real Estate Law

can be a traditional, boutique real estate, or environmental firm in house counsel employed by developer, lender, investor, REIT, or any of a variety of other companies essential for development help with entitlements (zoning, annexation, and incentives), due diligence (title, environmental, survey), an agreements (contracts, leases, deeds, and easements) contract must be in writing and real estate trades with a deed write deeds (written document which transfers actual ownership to another person) write titles (the legal document of saying you own something) write leases (contract between an owner and user of property; the owner [lessor] receives financial compensation and in exchange, the tenant [lessee] is given the right to operate his or her business on the property) eminent domain: the right of a government or its agent to expropriate private property for public use, with payment of compensation environmental issues: can range from groundwater and soil contamination to materials used in buildings, past uses and expected uses come into play, Phase I (look at prior use of land), Phase II (test if find any problems and get remediation if due) your attorney is an important partner in the process; a counselor in every sense (they want a win-win), focus is on $ not on emotion, ensures all points are appropriately documented (contracts must be in writing, ownership transferred through a deed, last thing you want to due is go through litigation [happens if there is ambiguity in contract])

Fund Investing

commingled fund structure similar to private equity fund structure: - investor is a limited partner LP - manager is a general partner GP - manager's compensation is generally 1-2% on committed or invited assets, with a performance fee above a certain hurdle; (commonly referred to as 2 - 20 structure -> 2% asset management fee and 20% of the profits) investors's main job is choosing the manager wisely understand how fund's investment strategy would fit in to investor's overall portfolio investor then monitors performance through quarterly and annual reports, communication with manager, and possibly sitting on advisory board

Separate Accounts

common arrangement between larger institutional investor and a manager (pension fund, endowment, off-shore investor, high net worth HNW individuals) based upon a strategic plan to target specific property types or investment strategy investor retains bulk of control fees typically lower than in fund structure

Property Manager Skillset

customer service: understanding building owner's goals, communication, responsiveness, problem solving, and everyday is different organizational skills: time management, multi-tasking, and prioritization financial: budgeting, accounting, and financial analysis contract and lease analysis building maintenance and repair business management leadership

Leverage

different types of leverage terms of the loan are the conditions of the loan understand the jargon LTV- loan to value; if building is worth $10,000,000 and mortgage is $6,000,000 then LTV = 6,000,000 / 10,000,000 = 60% Annual Debt Service = interest rate x amount borrowed (depending on amortizations schedule, payment may include some principal repayment) with interest only loans, only the interest is paid currently, with a balloon payment at the end of the entire principal debt service coverage ratio DSCR = NOI/ annual debt service term of loan (length) vs terms of loan (negotiated conditions)

Public REITs listed

equity REITs: - provide investors access to a diverse portfolio of income producing properties - invest across a broad array of property types - generate income through collecting rent and sales of properties - distribute the bulk of their income to shareholders in the form of dividends mortgage REITs: - invest in mortgages or mortgage securities tied to commercial or residential properties - most acutely sensitive to interest rate fluctuations

NRP Developer Presentation

multifamily developer NRP is vertically integrated; largest affordable housing developer; have a local developer in all their cities (so each the markets has a local center which adds credibility and larger presence in community) Process and Functions of Capital Markets: initial screening and structuring, underwriting and due diligence, committee approval, capital raising, closing, and investor relations Approval Process: - functional experts: investment committee which includes property management, marketing, development, asset management, finance, legal, and construction - goes to unanimous executive approval: executive committee includes CFO, CEO, and governing board strong team structure and support the multifamily apartment business is a trillion dollar industry that has realized unprecedented growth that is forecasting to continue NRP has a business model that is very unique and allows us to develop in any economic cycle which allows our management arm to grow

Property Management Includes

financial services: property budgeting, capital planning, and operating expenses procurement: identify service providers, negotiate pricing, oversee vendors services/ products, and ensure best fit and pricing for client engineering: due diligence, property inspections, service calls, preventive maintenance, and safety programs and training security and emergency response: ensure a safe environment (business continuity, security, life safety, disaster recovery), restores asset and readiness for occupancy after an emergency (prompt response essential) sustainability: LEED certification and recertification, suitability efforts (data tracking, measurement, analysis, and recommended changes) project management: manage capital improvement projects, tenant buildout, supervise outside consultants for complex projects, local knowledge is essential (permitting, contracting, and service providers) accounting: ensure financial integrity and on time reporting, often centralized if property manager is part of a larger company, reporting always needs to be customized, and increasing demand for real time metrics legal and risk management: risk transfer, contract reviews, and property liability insurance tenant relations: first line of defense for tenant satisfaction, frequent contact essential, ongoing tenant satisfaction assessment, easy knowledge of tenant plants (expansion, contraction, moving, business difficulties)

Denominator Effect

for institutional investors, asset allocation by type of asset is a % of total fund if one property type does very well or very poorly relative to the others, the total fund shrinks or grows this leads to other asset classes being out of compliance - they have either too much or too little the result may be that they are pushed to sell or to buy to come into compliance regardless of whether it makes sense for their asset class

Investment Categories

from low risk and low return - core - core plus - value add - opportunistic to high risk high return Opportunistic: leveraged returns over 20% with leverage ranging from 0-70% of value Value- Add: levered return in the mid to high teens with leveraging ranging from 65-85% of value Core-Plus: levered returns in the low teens with leverage ranging from 50-60% of value Core: levered returns in the high single digits with leverage ranging from 0-50% of value

Strategy/ Investment Tactics for Investing in Real Estate

goal is to construct a real estate portfolio that meets the institution's long term performance objectives and risk metrics set out in the real estate policy institutions typically build diversified portfolios that resemble market indices that serve as benchmarks: - property sectors - geography - life cycle (core/ non core) may be over or underweight property types, geographic regions or core/ non core trend following vs contrarian investing: - following trends and buying what is in favor - looking for value and investing where capital is scarce - risks: following the trend is very competitive and will most likely require having to pay up for assets and contrarian investing must avoid value traps where assets are cheap for a good reason no two institutions have a real estate portfolio that are exactly alike

Development

high risk, high reward earnings potential virtually unlimited may be length, years long process to procure entitlements, financing, tenants good relationships with local authorities essential connections are everything value isn't in the asset but in the tenants (leases) proper entitlements/ zoning essential as is financing a good developer creatively looks at all options (ground up, adaptive reuse, site densification, expansion of existing properties) densification is taking a piece of real estate that is underutilized and putting more on it (4 story to a 16 story) industrial can be built the fastest but office takes the longest

A developer wants to build/ redevelop a project, but needs capital; what does he do?

his options are to raise either equity or a combination of equity and debt: - Equity (Common or Preferred Equity): personal cash, investor capital, public REITs or REOCs - Debt (First Mortgage, B Note, or Mezzine): recourse or non recourse; permanent, construction, or transitional; debt provides - insurance companies, commercial banks, private lending

Governance in Institutional Investing in Real Estate

institutional investors have governing boards with authority over: - asset allocation - investment policies - investment strategy staff's job is to implement

JLL Brokerage Presentation

major thing for brokers is identifying opportunities time is money how can we best utilize our time and produce the most revenue Target Criteria: our strengths, revenue potential, amount of time and energy, likelihood of success, and timing Day in the Life: identify opportunities, make the pitch, create a marketing plan, find tenants (proactive vs reactive; must actively try to find new tenants), negotiating transactions, and investment scale

Portfolio Monitoring for Real Estate Investment

make sure the portfolio is achieving the strategic goals: - review business plans and actual performance - review financial reports and audits - yearly strategy planning - modify tactics as needed

Asset Management Characteristics

maximize property value maximize investment returns: reducing expenditures when possible, finding the most consistent and highest sources of revenue, mitigating liability and risk, and sell smart acts like an owner looks out for owner's best interests team with portfolio manager and owner to set strategy goal is always to maximize total return from a project negotiate 3rd party contracts, manage cash flow, secure leverage or 3rd part investors, and develop and distribute asset management reports to the investors (include strategic perspective) important player in acquisition and disposition process, properly position and brand the asset, ensure proper tenant mix, oversee leasing, ensure capital improvement program is in place, oversee property maker, ensure proper reserves are in place, and mitigate risks (operational, financial, and strategic) ensure optimum tax strategy for investment Investment Focus: long term financial forecasts and cash flow analysis, understand value of property and what can be done to increase the value, negotiate on behalf of the owner, and market an asset to increase revenue Financial Focus: maximizing the return on investment, maximizing value of property, streamlining operations, and repositioning property to reduce costs and increase income

Negotiating with the Seller

negotiating is a process in which two or more parties resolve a dispute or come to a mutual agreement (there are different styles of negotiation) negotiation methods can be summarized as falling into or between two general styles known by various names: Win win, principled negotiation the ally approach, mutual gains, cooperative approach, win-lose, military style, adversarial, intimidation, power negotiation, and competitive approach negotiation may be a choice or a blend of the two styles deepening on: - win win: we trust each other, multiple issues are involved, future deals may occur, cooperative by nature - win lose: we don't trust each other, single issues are involved, little chance of future deals, and enjoys the game of negotiation as opposed to the results negotiation with the seller: - principled negotiation (win win) introduced by Fisher, Ury and Patton (negotiating agreement without giving in) - most efficient in terms of time and effort required to reach agreement - factors contributing to its efficiency: separation of ego form the process, ability to gather information from external sources and research and through open discussions with the other party, maximize speed of information exchange when trust and honestly are present, faces the risk of failure if other party is not negotiating with honesty, achieves pareto optimal solutions, and creates and maintains great respect between parties Roles of Principal vs Agent: - an agent (usually broker or attorney) has a fiduciary obligation to the principle with specific duties including loyalty, disclosure of information, avoidance of conflicts of interest, confidentiality, and diligence to act in the best interests of the principal - agent must be clear about terms of employment - principal must set up incentives to maximize what is best for principal and agent - make sure interests are aligned - commissions with bonuses, flat fees with bonuses often include both pricing and timing Successful Traits with Either Style (Win Win or Win Lose): - self confidence is critical, shown body language, voice, eye contact - patience or lack thereof provides a signal - listening is a critical skill - information and knowledge are power (so prepare for your negotiations) - know your true interests - know your options at all times - consider everything is negotiable (its not just price, it could be timing etc...)

Private REITs

non traded, structured for tax purposes generally sold only to institutional investors not registered with SEC shares do not trade on national exchanges

Phase 3: Closing

phase 3 is based on a positive conclusion of due diligence, feasibility testing, and negotiation between buyer and seller capital structure is finalized and implemented, capital includes funding of equity and debt working with equity and debt at the same time adds complexity to transactions especially in a tight timeframe Financing and Closing: - working wth equity: large commercial acquisitions often include a partnership of various equity investors and usually structured as a limited partnership (buyer is the GP overseeing operations, financing and disposition with an incentivized return based on performance; equity participants are LP and usually have a preferred return before the GP's return) - terms of the partnership agreement include: % contributions, distribution of cash flow, guarantees, promoted interests (GP incentive), fees to the GP, length of partnership, puts and calls, decisions about the asset's sale or refinance, allowable debt structure, and approval rights (leases, sales, party agreements) - working with debt: the best opportunities often come when financing is the hardest to get, negotiating loan agreements can be expensive and time consuming, banking relationships are important (try to have more than one or at least a good mortgage broker), flexibility from your lender is critical in later stages of the transaction and in challenging markets, avoid personal guarantees (when possible borrow non recourse, which means the lender can only go after the property), and lenders may sell your loan in a 3rd party market or loan syndication so you may be dealing with more than one institution Project implementation: - purchase closing (title, accounting switches over along with all utilities, leases, and third party contracts) - equity partners funded, now requires reporting - lenders funded, now requires reporting - completion of improvements or construction - executing leasing plans - 3rd party management - stabilization -exit

Investment Policy in Investing in Real Estate

provides the parameters for the construction of the portfolio defines the type of real estate investment: public or private markets typically developed by staff and the investment consultant and recommended to the governing board for approval defines the risk control metrics such as allocation bands, maximum leverage, core/ non core % and geographic diversification: - with public traded real estate, tracking error to benchmark is also used specifies return expectations- relative measures policy drives the strategy that drives tactics periodically reviews and updated

Public Non Listed REITs PNLRs

registered with SEC, not traded on major exchanges typically externally advised and managed limited liquidity, generally higher transaction fees must be sophisticated investor to play

Asset Managers

responsible for optimizing asset return that may include branding, repositioning asset, re-leasing space to new tenants it does not include acquisition, financing, underwriting of new asset brand of the owner hire and fire the property manager its critical to have the asset and propriety managers work together during the acquisition process strategic

Institutional Investment Vehicles

separate account commingled fund- multiple investors (open end or closed end) joint venture (two participants; institutional and management) club investment (multiple investors)

Acquisitions

source deals in large variety of possible avenues negotiate to point of optimum pain/ benefit sequential process: concept, commitment, closing

Open End Commingled Fund

structured as a partnership: manager is general partner and institutional investors agree to limited partner typically core strategy with lower leverage, lower expected returns investors can enter or leave at any time fees typically 100bps (1%) on Net Asset Value: - NAV calculated as equity minus liabilities - equity determined by regulators third party appraisals - differs from pricing from actual asset sale returns based upon income, sales, and Net Asset Value appreciation/ depreciations tactic commonly used by institutional investors who are striving to achieve an allocation set by board/ consultants exist may be subject to a queue

Property Managers

tactical thinkers responsible for the day to day operations closest to tenant and first to know of tenant issues or opportunities responsible for procurement and contracting for maintenance and supplies ensure tenant is in compliance with contract must be able to think creatively and deal with unexpected

Leverage: Positive or Negative

the objective is to put together the optimal capital stack using equity and dent debt is a great tool when used judicially it can overload an asset if too much and turns negative without leverage, the investment performance of the equity matches that of the property with leverage, the return on equity can be much higher or lower two examples: appreciation and income

Implementation and Manager Selection for Investing in Real Estate

three common operating models: 1. direct investing: most investment functions are done in house, staff sets strategy, buy/sell decisions and execution; requires a large investment staff; and lowest 3rd party management fees 2. fund investing: includes open end and closed end functions; staff's job is to select managers; limited partners have limited liability and limited control; can be accomplished with a smaller staff; and may also invest in other private market asset classes 3. separate accounts: single client account where the client sets the strategy via the manager mandate; client gives the investment decisions making authority to the manager (discretionary account); client retains the decision main authority regarding acquisitions, dispositions and financings (non discretionary account); and lower manager fees than funds but higher than direct investing a typical institutional investor has a small internal staff and relies an external managers to source, acquire, manage, and dispose of properties (fund and separate account operating model) staff's job is to select, underwrite and monitor the external managers manager selection based on: market opportunity, portfolio fit, and manager performance and stability market opportunity should be expanding - look at the capital market supply and demand dynamics - look at the property fundamentals for that strategy: occupancy and rental rate trends, interest rates, and new supply portfolio fit: - manager's strategy must be consistent with the institution's policy and strategy - new manager's strategy should be additive, not duplicative and complement the existing portfolio (new property type, new geographic exposure and/ or management skill) manager performance and stability: - performance track record - analysis of the strategy and implementation - stability, compensation and development of the professional staff - operation infrastructure: appropriate informations systems, robust accounting, and audit and legal representation

Daimler Law Presentation

traditional law firm there as such things as drop dead clauses (you do not have it built or if something does not happen by a certain date specified in the clause then they do not have to go through with the contract) If you know there is market willing to pay higher prices go for it. For instance when they did the office/ residential space on Columbus Commons they freed up the 12th floor (highest floor) that was originally amenities and moved it to a lower floor because people were willing to pay significantly higher prices to be in that penthouse space.

Asset Allocation

typically set by the governing board with input from the CIO, investment consultant and the actuary periodically reviewed and revised real estate is part of Real Assets along with commodities, timber agriculture and infrastructure and is part of the alternative allocation each asset class is provided with an allocation target and range around the target the reason for institutional investor to add relative estate to a portfolio includes: - portfolio diversification - income - inflation hedge real estate allocation are typically between 5% - 12% of plan assets allocations have ranges to accommodate valuation changes in the plan assets (denominator effect)

Cap Rate

want to trade to increase return (increased cap rate) Investment = NOI / cap rate Cap Rate = NOI / purchase price