Real Estate Midterm 2

How do brokers find clients?

-Cold calling - in person or by phone -Word of mouth -Referrals -Renewals -Relationships -Industry organizations -Any way possible. -Brokers get paid commission base -Leasing broker compensation is based upon rent per sq. foot * Square ft. rented * negotiated percentage. Brokers get paid only when the deal closes, first year or two the firm may provide a small salary. -In a sale, the broker typically is paid by the seller. -Generally a negotiated commission -If two brokers involved (for buyer and seller), commission is generally split. Variations may be negotiated in advance that reflect the current state of the market. Brokers can be on both buy and sell sides.

Due diligence - Physical:

-Complete plans and specification -verify building specs (i.e. ceiling heights, turning radius, mechanical, dock heights 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.

Due diligence - Financial and operations

-Current year operating budget -Historical year(s) 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 arrangements and parking income audit

Property manager skillset

-Customer Service -Understanding building owners goals -Communication -Responsiveness -Problem solving -Everyday is different -Organizational skills: time management, multi-tasking, prioritization. -Financial: Budgeting, accounting, and financial analysis -Contract and lease analysis -Building Maintenance and Repair -Business Management -Leadership

Engineering

-Due diligence -Property Inspections -Service Calls -Preventative Maintenance: property manager comes time to time to replace HVAC filter. -Safety Programs and Training

Accounting

-Ensure a financial integrity and on time reporting -Reconcile common area maintenance charges (Common Area Maintenance (CAM) expenses are fees paid by tenants to landlords to help cover costs associated with overhead and operating) -Ensure charges comply with lease terms. -Often centralized if property manager is part of a larger company. -Reporting always need to be customized -Increasing demand for real time metrics

Property Management

-Financial Services -Procurement -Engineering -Security and Emergency Response -Sustainability -Project management -Accounting -Tenant relations Personal notes: -Bring in tenants -Make sure tenants are paying rent+utilities -Interpersonal conflict -Contracting maintenance: plumbing HVAC -Inspection, keeping maintenance on building

Tenant relations

-First line of defense for tenant satisfaction -Frequent contract essential -Ongoing tenant satisfaction assessment Early knowledge of tenant plans: -Expansion -Contraction -Moving -Business difficulties

Denominator effect

-For institutional investors, asset allocation by type of asset as a percent of a 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 push to sell or buy to come into compliance - regardless of whether it makes sense for their asset class. ex: my apple options

Denominator effect

-For institutional investors, asset allocation by type of asset is a percent 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 buy to come into compliance -- Regardless of whether it makes sense for their asset class.

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. -Auditor must be approved by shareholders -All directors elected by shareholders -Increasing scrutiny and attention to shareholder rights.

Investment styles

-Opportunistic: Opportunistic is the riskiest of all real estate investment strategies. It is also synonymous with 'growth' in the stock market, like 'value-add,' but it is even riskier. Levered returns over 20% with leverage ranging from 0-70%. -Value-add: Value-add investors seek to generate heightened yields by harvesting untapped revenue potential or creating value through property upgrades. Levered returns in the mid to high teens with leverage ranging from 65-85% of value. -Core-plus: the ability to increase cash flows through light property improvements, management efficiencies or by increasing the quality of the tenants. Levered returns in the low teens with leverage ranging from 50-65% of value. -Core: conservative investors looking to generate stable income with very low risk. Levered returns in the high single digits with leverage ranging from 0-50% of value.

Debt capital

-Permanent financing made on stabilized/court assets. Typically the cheapest with the longest maturity -- 10+ years. -Construction/development loans used to finance new construction. Construction loans have more expensive debt with 3 to 5 year terms. -Transitional debt (bridge financing) very expensive that used to fund or transitional asset (e.g. office property being converted apartments) with short 2-3 year terms. Advantages: -Limits the amount of equity required. -Lower costs than equity. -Leverages equity returns Disadvantages: -May be difficult to get, if not preferred borrower -May have personal liability if recourse (Get non-recourse wherever possible - tougher these days) -Maturity/refinance risk -Leverage may turn negative (True of many properties these days, particularly retail and hotels)

Debt capital 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, (loan to value) is 0-60%

Invest capital

-Private equity -Hedge funds -Pension funds -Insurance companies -Endowments (give income or property to someone for the purpose of a will.) -Foreign/SWF -Friends and family

Financial Services

-Property budgeting -Capital planning -Operating expenses: property tax and insurance

Asset management

-Property position and brand the asset -Ensure proper tenant mix -Oversee leasing -Ensure a capital improvement program is in place -Oversee property manager -Ensure proper reserves are in place Financial focus: -Maximizing the return on investment. -Maximizing value of property. -Streamlining operations. -Repositioning property to reduce costs and increase income. -Mitigate risks: Operational, financial, and strategic -Ensure optimum tax strategy for investment.

Public REITs

-Provide investors access to diverse portfolio of income producing properties -Invest across A broad array of property types, but individual rates are generally focus on one property type. -Distribute the bulk of their income to shareholders in the form of dividends.

Investment policy

-Provides the parameters for the construction of the portfolio. -Defined the type of real estate investments -- public or private markets. -Typically developed by staff and investment consultant and recommended to the governing board for approval. -Defined the risk control metrics such as allocation brands, maximum leverage, core/non-core percentages and geographic diversification. With public traded real estate, tracking error to benchmark is also used. -Space space return expectations - return measures. -Policy drives the strategy that drives tactics. -Periodically reviewed and updated.

Financing and closing: Project implementation

-Purchase closing (title, accounting switches over along with 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 -Third-party management -Stabilization -Exit

Scope

-REITS exist for nearly all property types -Properties located in every state. -More than 35 countries have some form of REITs traded on their exchanges.

Institutional investing

-REITs -Pension funds -Mutual funds -Hedge funds -Insurance companies -Commercial Banks -NYSE & Wall street **real estate has a good hedge against inflation Usually it's someone making investment choices on people's behalf. 60% equity 15% alternative 5% real estate 10% other 25% fixed income

Real estate private equity

-Real estate is also considered part of "alternative investments" for institutions -Joint ventures -- one-off or programmatic (business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task.) -Separate accounts -Commingled funds (mixed funds) open end (generally core) closed end (strategic) -Entity level investments

Public Non-Listed REITs

-Registered with SEC, not traded on major exchanges. -Read it through broker/dealer network -Typically externally advised and managed -Limited liquidity, generally higher transaction fees and ongoing to management fees. -Must be "sophisticated investor" to play -Definition tied to investors annual income, assets

Property managers

-Responsible for day-to-day operations -Closest to tenant and is 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.

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 a new asset. -capital improvement -"disposition" find the right conditions to sell

Due diligence - tenancy and leases:

-Review all leases and tenant correspondence -Examine tenant options, co-tenancy and % rent clauses -Audit historical account receivables -Conduct tenant interviews -Review insurance certificates from all tenants -Obtain and review estoppels from all tenants in March to rent roll and financial projections -Review all percentage rent, tenant sales information, and leasing status reports

Legal and Risk management

-Risk transfer -Contract Reviews -Property Liability Insurance

Negotiating with the seller: Successful traits with Either Style (win-win or win-lose)

-Self-confidence is critical, Shown through body language, voice, eye contact -Patience or lack there of 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 as negotiable (i.e. it's not just price, but also timing, construction etc.)

Institutional investment vehicles

-Separate account -Commingled fund -- multiple investors -open end -closed end Joint Venture: Two participants -institutional -management Club investment: multiple investors

Implementation: Separate Accounts

-Single client account, typical of larger investors, where the clients as a strategy via the manager mandate. -Based upon a strategic plan to target specific property types or investment strategy. -Client may give the investment decision making authority to the manager (a discretionary account) -Client retains the decision-making authority regarding acquisitions, Dispositions and financing (a non-discretionary account) -Lower manager fees than funds but higher than direct investing.

Preferred Equity Capital- characterisitcs

-Smaller checks are required of developer -Preferred equity capital is in a senior position to common equity; has a senior claim to cash flows. (they get paid first) -Preferred equity capital usually has a guaranteed return (a little bit like a bond, 12-16% return) -Like common equity and represents an unsecured interest (16-22% return). (there's no collateral tied to money) -Return requirements are lower than common equity, but higher than debt. Advantages: -May have perpetual timeframe -Usually has a guaranteed rate of return -Capture some of the equity risk premium Disadvantages: -Return is usually capped at the guaranteed return -Like common equity, equity partners are difficult to fine - challenging to raise third-party capital. -While not in the first loss position, capital is unsecured

Acquisitions

-Source deals in large variety of possible avenues: Often best deals are those not widely marketed. -Negotiate to point of optimum pain/benefit -Sequential process: Concept Commitment Closing -Negotiating tactics can be: win-win: best if looking to do repeat business with the other side and win-lose: Sometimes one party has to feel they won.

Open-end fund investing

-Structured as a partnership. -Manager is general partner and institution of us agreed to be limited partner. -Typically core strategy with lower leverage, lower expected returns. -Investors can enter or leave it anytime. -Fees typically 100 bps (1%) on net asset value -**Net asset value calculated as property value minus liabilities. Equity determined by regular the party appraisals. Difference in pricing from actual asset sale, which is market value. More liquid, can buy and sell at the same time.

Open-end commingled fund

-Structured as a partnership. -Manager is general partner and institution of us agreed to be limited partner. -Typically core strategy with lower leverage, lower expected returns. -Investors can enter or leave it anytime. -Fees typically 100 bps (1%) on net asset value -**Net asset value calculated as property value minus liabilities. Equity determined by regular the party appraisals. Difference in pricing from actual asset sale, which is market value. -Returns based on income, sales, and net asset value (NAV) appreciation/depreciation. -Tactic commonly used by institutional investors who are striving to achieve an allocation set by board/consultants -Exit may be subject to the queue

Deb t capital providers

-Subordinate/transitional that is typical provided by non-traditional/alternative private lending sources (shadow banking) -Second mortgage (B-notes) -Mezzanine -Preferred equity (quasi debt structure) -LTV 50-90%

Property Management

-The administration of residential or commercial real estate. -Includes collecting rents, tenant relations, property upkeep. -Tactical perspective -Works with asset manager to implement strategy and handle day-to-day operations. -works closely with tenant -Job requires a diverse set of skills - no two days are ever the same.

Loan term

-The amount of time you have to pay off the loan. Payments may be interest only, or principal and interest. At the end of the term, if the entire principal has not been repaired, the remainder is due in full.

Financing and closing: Working with debt

-The best opportunities often, and 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 in challenging markets. -Avoid personal guarantees, i.e. when possible borrow non-recourse, which means the lender can only go after the property. -Lenders may sell your loan in a third-party market or loan syndication so you may be dealing with more than one institution.

Leverage - Positive or negative: how it works

-The directive is to put together at the optimal capital stack using equity and debt. -That 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, three turn on equity can be much higher -- or lower. -Two examples -- Appreciation and income.

Domestic Public REIT market

-Total equity market capitalization of the FTSE Nareit All REITs Index including mREITs. -REIT activities resulted in the distribution of the $62 billion of dividend income in 2018. -REITs raised $109.4 billion in public market offering in 2019. -219 REITs are in the FTSE Nariet All REITs Index. -30 REITs are members of the S&P 500 -REITs raised $109.4 billion in public market offerings in 2019. -It is estimated that all REIT's earn approximately $3 trillion and gross assets. Public REITs account for $2 trillion.

Due diligence - Market

-Tour subject property and competing properties, visit at different times of the day. -Perform market study of competition and rental comparables -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 comparables

Broker duties

-Track activity in the market continually -Know what spaces are coming up for lease. -know who is looking for a space and what space would fit -Work with tenant to analyze and negotiate best deal out of all the options: understands timing, space needs, budget.

The Deal Process

1. Finding opportunities 2. Underwriting 3. Evaluating the deal 4. The bid process 5. Due diligence and the rest

Closed End Commingled Funds

-Also partnership with a manager as the general partner involved and investors as limited partner. -Defined life, typically 10 years with possible 2 to 3 one-year extensions. -Investment period generally first 3 to 4 years. -Fee structure typically 1.5-2% of committed capital (Me ratchet down to 1.5-2% of invested capital) and 20% of cash flow over 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 limited partner interests for those who want to get out early, generally, these interests trade at a discount. -Typically, higher risk profile and it will liquid investments lead to higher cost of capital (from 6% to 9%) -Typically higher leverage to maximize returns and diversified investments -Terms can be negotiated but in the end all investors must agree to same terms

Loan-to-Value Ratio (LTV)

-Amount of the loan divided by value of the asset. -So if you borrow 60 mill on 100 mill building, LTV (loan to value) is: 60/100=60%

Private equity

-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 consider it part of venture capital allocation, treated PE as an alternative investment.

REIT qualifications

-At least 75% of total assets must be in real estate -At least 75% of gross income from Rance must come from real property, mortgage interest, or sales of real estate. -Must pay at least 90% of taxable income in shareholder 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 finance 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 the shares may be held by five or fewer individuals.

Business Law

-Attorneys are important partners in real estate investments -Best relationships are true "counselors" -Can mediate between parties to provide perspective and mediate resolutions. -Work with client to achieve client's goals -Compensation fixed rate.

Example of loan terms/conditions

-Balloon payment due at the end of loan -Minimum debt service coverage ratio -Maximum loan to value -Recourse/non-recourse -Which asset securing the loan.

Financing and Closing phase

-Based on the positive conclusion of: Due diligence, feasibility testing, negotiation between buyer and seller. -Capital includes funding of equity and debt -Capital structure is finalized and implemented -Working with equal equity and debt at the same time adds complexity to transactions especially in a tight timeframe

Institutional investing

Diversification is essential -Economic drivers - Markets that are geographically dispersed may share the same race due to similar economic drivers. For example, Austin and San Jose are both driven by the tech industry. -Vintage year risk - the risk that a large portion of the properties are acquired during a period of high prices, making it difficult to sell them for a gain in the future.

Security and Emergency response

Ensure a safe environment: -Business continuity: continue to operate business if natural disaster destroys your business. -Security -Life Safety -Disaster recovery Restores asset and readies for occupancy after an emergency -Prompt response essential

Sustainability

Environmental LEED Certification and Recertification Sustainability efforts: -Data tracking -Measurement -Analysis -Recommended changes

Sources of capital

Equity: public and private Debt: Public and private

Phase 2: Commitment - Project under contract, feasibility testing, project strategy.

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 after 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 plan with turnover schedule -Management plan for third party contracts

Investment categories

Opportunistic: Levered returns over 20% with leverage ranging from 0-70% Value-add: Levered returns in the mid to high teens with leverage ranging from 65-85% of value Core-plus: Levered returns in the low teens with leverage ranging from 50-65% of value. Core: Levered returns in the high single digits with leverage ranging from 0-50% of value.

Real estate capital stack

Q: Developer wants to build/re-develop a project but needs capital, what does she do? A: Her options are to raise either equity or a combination of equity and debt: equity (common or preferred equity) Equity -Personal cash -Investor capital: private- Friends and family, high net worth, institutional, sovereign wealth. Public - REITs or REOCs Debt (First mortgage, B-note, or mezzazine) -Recourse or non-recourse (always choose non-recourse if possible) -Permanent, construction or transitional -Debt providers - Insurance companies, commercial banks, and private lending Mezzazine: relating to or denoting unsecured, higher-yielding loans that are subordinate to bank loans and secured loans but rank above equity. Debt gets paid first, (mortgage before mezzanine), than equity gets paid (preferred before common stock.

REVIEW

Review slides

Asset Management vs. Property Management

Asset management is strategic: -Work with portfolio manager/investor to maximize return from asset. Property manager is tactical: -Implement strategy, handles operations

Separate accounts

- Common arrangement between larger institutional investor and a manager -Based upon a strategic plan to target special property types or investment strategies -Investor retains bulk of control -Fees typically lower than in fund structure

Brokerage

-A commercial real estate broker is a licensed professional who helps clients buy, sell or lease properties that will be used for business purposes. They represent an act as mediators between buyers and sellers, or owners and tenants. - Compensation commission based.

Role of attorney

-A counselor in every sense -Focus is on $, not on emotion -Insurers all points are appropriately documented: Contracts must be in writing, ownership transferred through deed. Compensation is either hourly or a set fee

Loan Agreement

-A document that proves the money involved was alone, not a gift. This document stipulates the terms and conditions.

Why become a REIT?

-Access to capital: Stock issuance, initial public offering (IPO), secondary offerings, at the market (ATM). -Debt generally cheaper -Many REITs opt to be rated by S & P, Moody's or Fitch -Limits flexibility somewhat -Lowers interest rates on debt.

REIT advantages

-Allows individuals to participate in large real estate investments -Pay regular income streams -diversification because one company has multiple buildings -Long-term capital appreciation -It's company maintains REIT status, it is not subject to corporate income tax -Can pass tax advantages to shareholders -Metric used to measure success is Funds from Operations rather than Net Operating Income: So non-cash charges such as depreciation or not factored in

Closed End fund investing

-Also partnership with a manager as the general partner involved and investors as limited partner. -Defined life, typically 10 years with possible 2 to 3 one-year extensions. -Investment period generally first 3 to 4 years. -Fee structure typically 1.5-2% of committed capital (Me ratchet down to 1.5-2% of invested capital) and 20% of cash flow over negotiated hurdle. -Typically, higher risk profile and it will liquid investments lead to higher cost of capital (from 6% to 9%) -Typically higher leverage to maximize returns and diversified investments -Terms can be negotiated but in the end all investors must agree to same terms

Financing and closing: Terms of the partnership agreement include

Terms of the partnership agreement include: -Percentage contributions -Distribution of cash flow -Guarantees -Promoted interests (GP's incentive) -Fees to the GP (Leasing, management, financing etc....) -Length of the partnership -Puts and calls -Decisions about the asset sale or refinance -Decisions about the asset's sale or refinance -Allowable with that structure -Approval rights (leases, sales, third-party agreements etc....)

Debt service coverage ratio

NOI/Total Debt Service = DSCR So if NOI is 10,000 and Total debt service is 5,000, DSCR = 2.0 ** too much debt can overwhelm a real estate investment.

Commitment phase

Negotiating with seller: -Figure out the position of the seller -Be relentlessly clear eyed -Understand the trade offs between reducing risk and reducing price -Know your alternative to this deal when you negotiate -Be patient -Leave your ego at home

Real Estate Law terms

Deed: Written document which transfers annual ownership to another person. Title: The legal document of seeing you own something. Lease: A contract between an owner and a user of property. -The owner (lessor) receives financial compensation and in exchange, the tenant is given the right to operate his or her business on the property. Eminent Domain: The right of a government or is agent to expropriate private property for public use, with payment of compensation. You don't have a say, though you'll be throughly compromised. Environmental issues: -Can range from ground water and soil contamination to materials used in buildings. (i.e. asbestos, lead, mold) -Past uses an expected uses come in to play.

Development

Development is multi-faceted process that may include -Acquiring land and constructing buildings -Renovating/repurposing existing properties -Coordinating entire process Differs from construction, but may include construction or oversight of construction. -High risk but potentially high returns -How much one earns is directly tied to success of development.

Leverage

Different types of leverage Understand the jargon -LTV (loan to value) -Debt Service Coverage -Term of loan (length) vs. Terms of loan (negotiated conditions) Loan to value: Loan/Asset worth (mortgage is a loan) Debt service = interest rate x amount borrowed Debt Service Coverage ratio = NOI/Annual debt service

Institutional investing in Real Estate

Discussion topics: -Governance -Asset allocation -Investment Policy -Strategy/Investment Tactics -Implementation/Manager selection -Portfolio Monitoring

Negotiating with the seller

-Negotiation 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: Win-lose, Military style, Adversarial, power negotiation, competitive approach. There may be an in between: -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, Enjoys the game of negotiation as opposed to the results.

Private REITs

-Non-traded, structured for tax purposes -Generally sold only to institutional investors -Not registered with SEC -Share do not trade on national exchanges

Consume capital

-Operators -Developers

Strategy/Investment tactics

-Goes to construct a real estate portfolio that meets institutions long-term performance objectives and risk measures set out in the real estate policy. -Institutions typically build diversified portfolios that resemble market indices that serve as benchmarks: Property sectors, geography, lifecycle (core/non-core) -May tactically over or under white property types, geographic regions or core/noncore. -Diversification is essential: Geographically, Property type, economic drivers. i.e Boston and Austin both tech driven, both may suffer downturns simultaneously despite geographic diversification. -Style: Core, core plus, value added, opportunistic -Vintage year: one investment is starting. Investments made in 2008 look very different than those made in 2018. Cap rates/values vary with time. Returns on investment will vary as well. -Trend following versus contrarian investing: Following trends in buying what is in favor, Looking for value and investing or capital is scarce. Risks: Following the trend is very competitive and will most likely require having to "pay up" for assets. Contrarian investing must avoid value traps for assets are cheap for a good reason. Contrarian investing is difficult since investing is all pschology. -No two institutions have a real estate portfolio that are exactly alike.

Development

-High risk, high reward -Earnings potential virtually unlimited -Maybe lengthy, years long process to pick your entitlements, financing, tenants -Good relationships with local authorities are essential. -Proper entitlements/zoning are essential. -As is financing -A good developer creatively looks at all options: Ground up, adaptive reuse, site densification, expansion of existing property. -A good relationship with debt providers or equity

Procurement

-Identify Service Providers -Negotiate Pricing with them -Oversee vendor services/products: make sure the process is good and what you're paying for -Ensure best fit and pricing for client

Fund investing

-Includes open-end (core) and close-end (strategic) funds -Staff's job is to select managers. -Limited partners have limited ability and limited control -Can be accomplished with a smaller staff -May also invest in other private market asset classes

Institutional investing: Governance

-Institutional investors have governing boards with authority over: Asset allocation, investment policies, investment strategy. -Staff's job is to implement.

Public REITs (listed): Mortgage REITs

-Invest in mortgages or mortgage securities tied to commercial or residential properties. -Most acutely sensitive to interest rate fluctuations.

Raising capital

-Investment banks -Brokerage firms -Independent advisory firms -Placement agents

Fund investing

-Investor'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.

What's a REIT?

-It's an acronym for Real Estate Investment Trust -Company that owns our finances income producing real estate. -Modeled on mutual funds concept: Large group investors can assess pooled real estate investments

Commitment phase: The purchase and sale agreement

-Legal representations 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 -Time for a performance, closing dates, etc... -Adjustments such as burger fees, commissions, expenses during contract period. -Contingencies such as financing, removal of liens, tenant negotiations etc...

Investment Focus (asset management)

-Long term financial forecast and cash flow analysis -Understand value of a property and what can be done to increase the value. -Negotiate on behalf of the owner. -Market an asset to increase revenue.

Commitment phase: The letter of commitment or Letter of Intent (LOI) includes:

-Major points of the deal. -Price, timing, broker involvement -Financing conditions, tenant arrangements, inspections timing and property access. -Neither party is legally bound until the formal purchase and sales agreement is executed.

Project Management

-Manage cabin improvement projects -Tenant buildout: adding walls -Supervise outside consultants for complex projects -Local knowledge is essential: Permitting, contracting, service providers.

Asset Management

-Maximize property value. -Maximize investment returns: Reducing expenditures when possible, Finding the most consistent and highest sources of revenue, Mitigating liability and risk, sell smart. -Acts like an owner. -Looks out for owners best interest. -Team with portfolio manager and owner to set strategy -Goal is always to maximize total return from a project. -Negotiate third-party contracts -Manage cash flow -Secure leverage or third-party investors -Include strategic perspective -Important player in acquisition and disposition process

Direct investing

-Most Investment functions are done in-house -Staff sets strategy, buy/sell decisions and execution -Requires a large investment staff. -Lowest third-party management fees.

Negotiating with the seller: Principled negotiation introduced by Fisher, Ury and Patton in their book getting to yes: 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 from the process -Ability to gather information from: external sources and research, through open discussions with other party. -Maximize speed of information exchange when trust and honesty are present. -Face is the risk of failure if other party is not negotiating with honesty. -Achieves "Pareto optimal" solutions (WIN-WIN) -Create and maintain straight respect between parties.

Performance

-NAREIT Index measure REIT performance -So does S&P - Dow Jones REIT Index -REITs are a good but imperfect proxy for private market performance -Generally run ahead of private market by about 12-18 months -More volatile than private market valuations

REITs have high transparency

-National Association of real estate investment trust (Nareit) tracks the industry. -Public REIT's must file all required quarterly, annual and incidental reporting as other public companies. -Edgar.gov lists all public filings for every public company -REIT research is a big industry -- lots of scrutiny on individual companies.

Implementation cont.d

-Typical institutional investor has a small internal staff and relies on external managers to source, acquire, manage and dispose of properties. (i.e. 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, manager performance and stability (returns and how consistent are returns are) 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, new supply. Portfolio fit: -Manager strategy must be consistent with the institutions policy and strategy -New Manager's strategy should be additive, not duplicative and complement the existing portfolio.(e.g. A 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. -Operational infrastructure: Appropriate information systems. Robust accounting. Audit and legal representation

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 in range around the target. The reason for an institutional investor to add real estate to a portfolio includes: portfolio diversification, income, inflation hedge. -Real estate allocations are typically between 5% and 12% of plan assets. -Allocations have ranges to accommodate valuation changes in the plan assets (Denominator effect).

Why does it matter?

-US REITs Contributed the equivalent of an estimated 2.4 million full-time jobs to the economy in 2018, generating $148.2 billion of labor income. -mREITs help finance 2.8 million homes in the U.S. -An estimated 87 million Americans own REIT's through their retirement savings and other investment funds. -REIT is invested $59.4 billion in new construction and routine capital expenditures to maintain existing property in 2018. -It is estimated that all our EIT's approximately $3 trillion in gross assets. Publicly traded equity REIT's account for $2 trillion. -REIT is on more than 520,000 properties across the US.

Common Equity Capital - Characteristics

-Usually requires a large capital commitment. -Equity partners are usually involved. -Equity capital is in the first loss position, thus it's the most risky. -Implicit return requirements are high. -Equity partners will want some form of control. advantages: -Perpetual timeframe (it's not finite) -All profits upside flow to equity capital. -Captures the equity risk premium. disadvantages: -Equity capital can be wrapped up into new projects. - Equity partners are difficult to find -- challenging to raise third-party capital. -Equity capital is in the first loss position.

Woodie's warehouse 1989

-Woodward and Lothrop warehouse -1989 -Asset valuation -$5,000,000 Partner defaulted Tenant in bankruptcy - handed the keys back Environmental issues Severe detrimental effect on neighborhood Manager used strategy: -Reposition the neighborhood to reposition the asset -Worked with neighborhood association, added a metro stop, talk to tenants, contender for area, increased visibility/credibility. Looks beautiful today and neighborhood completely turned around.

Size of REIT market

-Yearly/earnings 2019, there were 219 REITs tracked by NAREIT. -Equity market cap of 1.4 trillion dollars -3 trillion in gross assets

Why own REITs"?

-the FTSE Nareit All Equity REITs Index has outperformed the S&P 500 15 out of last 25 years -10.9% total return of 25 year annualized total return of the FTSE Nareit All equity REITs index. -optimal REIT portfolio allocation may be between 5% to 15% -The FTSE Nareit All REITs Index has a dividend yield of 4.0% more than double that of the S&P 500 1.9% -80% of registered investment advisor's recommend REITs to their clients. -REITs own and operate properties across diverse probably sectors including retail, residential, infrastructure, healthcare, office, industrial, data centers, self-storage, lodging, timberlands, and others

Real Estate Acquisitions

Acquisitions in real estate include acquisitions of: -Land -Buildings -Shares of real estate equity investments -Portfolios of property The basic process is similar for any acquisition by acquisitions of existing buildings are most common. Investing in real estate requires finding opportunities -work with the familiar -work with people you know and trust Responding to external forces -Understanding where you are in cycle -Understanding the interest/capital environment Determining is this the deal for me? -How much $ do I have? -What is my risk profile? -IS this market familiar or not? Successful real estate investments depend on good acquisitions It's 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 the work before closing is just as important as the work after closing

Phase 1: Concept - finding the deal, due diligence, project evaluation

After finding the deal (market, size, product type): -Confidentially agreements -Soft deposit Due diligence -Provides the building blocks of good investment practice -Detailed process of evaluating an asset.

Loan Terms (or Terms and Conditions)

Agreed-upon characteristics of the land, which can include: -Interest rate -Minimum monthly payment -Pre-payment penalties.

investment categories, institutional investment vehicles, fund investing,

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Negotiating with the seller: Roles of Principal vs. Agent

An agent (usually a broker or attorney) has a fiduciary obligation to the principal with specific duties including: -loyalty -disclosure of information -avoidance of conflicts of interest -confidentiality -Diligence to act in the best interest of the principal -Agent must be clear about terms of employment -Principal set up incentives to maximize what is best for principal and agent -Make sure interests are aligned -Commission with bonuses, flat fees with bonuses often include both pricing and timing.

Acquisitions/dispositions

Coordinates all aspects of transaction -Finding new properties to buy -Finding buyers for existing assets -Negotiating all aspects of deal -Finding the money- investors, loans, etc. -Coordinating successful close Purely transaction based Compensation varies depending on relationship. OPERS

Brief private equity primer

Chronological Order: -Raise capital -Source deals and originate investments -Add value/renovate -Stabilize asset and maximize cash flow -Realize investment and return cabinets investors

Fund investing

Commingled fund structure similar to private equity fund structure: -Investor is a limited partner (LP) -Manager is general partner (GP) -Manager's Compensation is generally 1-2% on committed or invested assets, with a performance fee above a certain hurdle: commonly referred to as 2 and 20 structure (2% asset management fee and 20% of the profits)

Real Estate Law

If you specialize in Real Estate Law you can work in... -A traditional law firm -Boutique real estate/environmental firm -In-house counsel employed by: -Developer -lender -Investor -REIT -Any other variety of other companies Real estate is... -essential for development. -Entitlements-zoning, annexation, incentives (looks over all documents, reviewing, and drafting.) -Due-diligence-title, environmental, survey. -Agreements-contracts, leases, deeds, easements -Contract must be in writing, all contracts MUST be in writing so that why you absolutely need a RE attorney.

Other vehicles

Joint venture: Generally two participants. -Institutional brings the money -Management brings the expertise Club Investment: -Essentially a joint venture with multiple investors. -Still requires management to bring expertise.

Due diligence

Legal, title and survey: -Deed: a legal document that is signed and delivered, especially one regarding the ownership of property or legal rights. -Title reports: a document that outlines the legal status of a property and related information on its ownership -ALTA (title) survey: It incorporates elements of the boundary survey, mortgage survey, and topographic survey. -Reciprocal easements and restrictions agreements -Zoning -Ground leases -Owner's association documents

Portfolio Monitoring

Make sure the portfolio is achieving strategic goals: -Review business plans and actual performance. -Review financial reports and audits. -Yearly strategy planning. -Modify tactics as needed.

Via Verde

Mixed-income/Mixed-use residential development offering innovative, high-quality design and affordable rental and ownership housing located in brownfield site of South Bronx, New York. -Achieved LEED certification, high-tech rain screen, solar panels, and healthy living. Developers: Jonathan Rose, and Phipps house Architects: Two firms, Dattner architects, Grimshaw architects. Worked closely with City of New York: -Housing preservation and development -Environmental development. NYC already owned it, it was vacant for a while. Goals: -Wanted safe and affordable housing for south bronx community -Sustainable, healthy, and affordable housing. Financing: LIHTC investors, commercial banks that bought tax credits (for favorable exam), JP morgan

Private equity

Non-institutional: -First dig through your pockets (pay what you can) -Next call friends and family (to borrow/receive gifts) -Expanded network -Crowdfunding: funding project by raising capital with multiple people.

The investment process

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. -Three phases in the investment process -The actual acquisition takes place in phase 3 -Successful acquisitions depend on phases 1 & 2

Economic Cycle

Phase 1: Recovery- Declining vacancy, No new construction. Phase 2: Expansion- Declining vacancy, New construction Phase 3: Hypersupply- Increasing vacancy, New construction Phase 4: Recession- Declining vacancy, more complications

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, and friends/family Consume capital: Operators and developers

Capital Stack Discussion Topics

Real Estate Capital Stack -Equity (Common and Preferred) -Debt (First mortgage, B-note. Mezzanine (more like debt) and Preferred Equity-debt structure.) Providers of real estate debt -commercial banks -insurance companies -Private lending sources (PE/RE funds, pension funds, sovereign wealth.) How leverage works in real estate.

Implementation

Three common operating models: -Direct investing -Fund investing -Separate Accounts

Careers in Real Estate

Wisdom: you need both hunters and skinners in. a successful company. It's important to know which is which.

Financing and closing: working with equity

Working with equity: -Large commercial acquisitions often include a partnership of various equity investors Usually structured as limited partnership: -Buyer is the general partner over seeing operations, financing and disposition with incentivize return based on performance. -Equity participants are limited partners (may be institutional investors, pension funds, private equity funds or wealthy individuals) and usually have a preferred return before the GP's return.

asset management

a systematic process of deploying, operating, maintaining, upgrading, and disposing of assets cost-effectively. The term is most commonly used in the financial world to describe people and companies that manage investments on behalf of others. -May work directly for investor, or for a third - party investment management firm. -Compensation is generally a fixed rate, with incentive kicker tied to performance. -Strategic perspective - how to optimize return from the asset.