RED362 Final Exam

future value

FV = Co (1 + r)^n

exit cap rate

NOI in year after hold period / resale price

real estate asset market

a private market where the buying and selling of most real estate is direct ownership of whole properties -individual real properties are traded between parties that have usually matched via a broker

principal

the loan amount in a mortgage structure

the higher the discount rate

the lower the sum of the present values

equilibrium price

the price at which supply and demand meet

rent

the price of the right to posses and use space for a specific period of time

equilibrium quantity

the quantity that consumers demand and producers supply at the equilibrium price

localization economy

type of agglomeration economy -explains industry clusters of similar firms -eg same economic sector, standardized products

NPV = 0

you are breaking even (you are making jus as much as your other investment alternative, how much your penalizing future based on opportunity cost)

what drives the value of an income producing property?

cash flow

cash flow before taxes

cash flow generated periodically by the property excess of revenues over expenses including the payment of debt service but before the impact of federal income taxes

we all value time differently

each of us has different opportunity cost each of us discount future income flows at different rates each of us has a different level of risk attitude

interest-only mortgage

each period, only the interest on the principal is paid -incentives or drawbacks of interest only mortgage: -offer lower monthly loan payment -but one owes the full principal at the end of the mortgage period (known as balloon payment)

main aspects of pro forma

gross revenues -vacancy =effective gross (or rental) income -operating expenses -property taxes =(property) net operating income -capital costs (or repairs) =property cash flow -debt service (mortgage balance) =cash flow before taxes (investor cash flow)

market rent tricks

gross vs net commercial leases -free internet, free parking -tenant or leasehold improvements -customized alterations a building owner makes to rental space as part of lease agreement to configure the space for the needs of That particular tenant

equity build up

growth in an owner's equity over time as the principal of the mortgage is repaid

property expenses

how do we treat debt service or income taxes? expenses related to the property but not directly attributed to the operating the property -payments for the mortgage and personal or ownership income taxes are taxes on the income we gain from the rents on the property -these are not property taxes related to the property value -we should not consider them operating expenses

opportunity cost

how much return or profit would we have made if we invested in something else?

shortage

if the market price is below equilibrium: -there is a shortage of supply -producers raise prices -quantity demanded decreases and quantity supplied increases -the market continues to adjust until the equilibrium price is reached

a higher interest rate

increase of 25 basis points (0.25%) lowers the cash received from the property signficantly

demand side of space market

individuals, firms or institutions that want to use space either for consumption or production purposes -looks like classical demand in economic theory

Quigley 1998 (agglomeration and diversity)

industrial diversity may lead to more rapid economic growth -diversity may invite new firms to use new technologies -diversity fosters specialization so that a variety of inputs are available, leading to efficiency (again input sharing)

suburbanization

over time we have seen cities grow even more decentralized and density gradients flatten cities have become less mono centric which implies more dispersed land use patterns

what determines the price of a good?

some interaction of demand and supply

the dark side of agglomeration

"centrifugal forces" -negative externalities that come from large size/proximity: -congestion -pollution -crime (we can imagine agglomeration economies from crime) -high rents (especially for workers in industries that do not enjoy agglomeration or for workers starting out (ex school teachers)) -we should understand cities and their sizes as the net effect of agglomeration economies and congestion forces

economic factors that help explain the existence of cities

"centripetal forces" 1)internal economies of scale for firms and cities 2)reduction in transportation costs 3)agglomeration economies 4)energy conservation consumption amenities, minimize commuting, accessibility, clusters- learning, experimentation, jobs/trade, regulations, local government, shared infrastructure

outcome of 'revenue' component in proforma

'effective rent or net effective rent' -remaining cash the landlord receives after incurring in vacancies and any costs for tenant work to get the space ready for occupancy

suburbanization of people

US metro area as a whole, average of 20% of people live within 3 miles of CBD proportion living in central cities continues to decline (rate has slowed down in last decade) -not all groups have suburbanized at the same rate

going in cap rate

project NOI year one / purchase price

increase in supply

shift to the right, producers willing to sell more at any given price creates a surplus at the current price prices fall until the surplus is eliminated, giving a new equilibrium

urbanization economy

type of agglomeration economy -explains clusters of overall economic activity -eg large cities -non standardized or complex products

characteristics of successful assumptions

unbiased, realistic, long-term

reasons to be cautious about land use regulations

unfettered land use and development can generate external costs and land use regulations can help address these externalities reasons to be cautious about land use regulations: 1) there will be losers -regulating property may lower land value -may significantly increase housing prices by restricting supply -need to think hard about how these actions protect health and public welfare -core justification for zoning should still be some sort of market failure -and always marginal social benefit should exceed marginal social cost 2) politics -reasons to believe land use regulations that actually emerge through out political process will not be socially efficient -people who gain from development can't vote (potential in-movers) are are few in numbers (owners of developable land) -outcomes will not represent public interest if land use regulations are enacted at level of local jurisdiction and not at broader metro region -localities will tend to pass restrictions that protect their parochial interests 3) motives -communities often justify zoning on the basis of externalities (sunlight, traffic, physical character of community) -but in fact may have other concerns in mind, like racial exclusion or exclusion of the poor

US cities densities

US cities have lowest densities -African European and Latin American cities have medium range densities -Asian cities have high densities

capitalization

a calculation where anticipated future income is converted into lump sum capital value

demand shift

a change in any other relevant variable causes the demand curve itself to shift (change in demand) eg income, prices of related goods, tases/preferences, expectation of prices

supply curve shift

a change in any other relevant variable causes to supply curve to shift (change in supply)

movement along the supply curve

a change in the price of the good causes movement along the supply curve (change in quantity supplied)

suburban airports

allowed for firms to suburbanize

amortization

amortization payments may or may not pay part of the principal over time -classic amortization pays a portion for interest and the remaining amount is applied towards the principal balance

downtown

an estimate of how long it will take to find a new tenant after the previous tenant leaves (1-12 months depending on market)

Tokyo vs NYC suburbanization

both cover about same land area -29 million people live in metro Tokyo compared with only 16 million in NYC -Tokyo has nearly 6000 residents per square mile while NY has only 2,900

why is the space market highly segmented

both supply and demand are location and type specific -barriers between markets (Offices in nyc vs offices in LA) -"submarkets" within metros (downtown vs suburbs) -property usage type (office, retail, industrial, multifamily residential, etc.)

break even rent per sf

break even gross revenues / rentable space in sf

built-up area and location

built-up area is highest at the city center (car accommodations use a lot of infrastructure)

supply-led growth

changes that make location more desirable to workers, given set wages -temperature/climate: January temperature explains city growth and air conditioning made warmer cities more attractive -what explains growth in developing countries? -investment in infrastructure -accessibility to ports/natural resources -urban primacy (vicinity to the government/political power) -industrial concentration appears to be stronger factor than overall diversity -in most discussion and policy debates around urban economic development, growth is typically defined as employment growth -however, employment growth is an imperfect measure of improvements in the standard of living and well being of the population

labor supply shifters

changes that make location more or less desirable to workers: -changes in environmental quality -new amenities -reductions in residential taxes -improvements to residential public services (Schools)

poly centric cities

cities with multiple centers eg. Los Angeles, Sao Paulo, Atlanta

distorted markets

economic argument to justify government intervention in addressing sprawl -markets may not have been free in the first place -government may have distorted land rent gradients -sprawl may be linked to pre-existing government intervention -local government fragmentation: decentralized control over land use policies -local government finance: tying fiscal support of local governments to property wealth gives people greater motive to move to different jurisdictions (may move to search for lower taxes, better services, and affluent communities) - local control of land use/zoning: through exclusionary zoning localities try to control growth (good for homeowners, protects homogeneity/property values) and push it to outlying areas -highway subsidies -other federal policies: low gas taxes, subsidies for homeownership (larger subsidies for larger homes with more land)

points

fee on the loan origination -can be paid up front or may be wrapped up into your loan repayment

supply side of asset market

investors (or developers or owner users) willing to sell property they own

demand side of asset market

investors willing to buy property

gross lease

landlord pays all operating expenses

market rent

potential gross revenue estimated from comparable or similar (adjacent) properties will depend on: -the amount of local alternatives (competition) -whether the market is growing, saturated, or stable -at time zero, we calculate market rents based on an educated guess on how much rents will increase each year -inflation is important because it should reflect the strength of the market as well as the overall economic conditions -key to understand market rent to know the potential value of vacant space in the following years

contract rent

potential gross revenue rent that is stated in the least contract -it can include built in rent increases -usually annually or biannually -known as rent escalations or rent bumps varies by unit type -apartment or multifamily leases are often annual leases, renewed each year -commercial leases with office or retail tenants may be longer such as five years

net present value

present value minus the initial investment outflow -the higher the net present value (NPV) the better the investment alternative -NPV analysis = DCF analysis

distance from job opportunities

price of land decreases as you move further from the CBD (where the most jobs are)

mortgage structure

principal: loan amount interest: interest rate on property annual term: length of mortgage (number of years) amortization: process of paying off a debt over time through regular payments (monthly) points: fee on the loan origination (1% of loan amt)

urban growth boundary

regulation tool used to limit growth -metropolitan area wide resolution that prohibits growth outside a particular ring -Portland is a historical experiment -Boulder decided to limit services beyond a certain radius -ex: we set an urban growth boundary at 6 miles from city center effects of urban growth boundary: in the short run: -discontinuity in bid rent function at distance of boundary -initially no crucial issues except for complaints from landowners outside urban boundary -absence of effects due to the availability of land inside the urban boundary in the medium run: -landowners expect the urban boundary to be sequentially expanded -but it was not expanded so landowners realize they have an asset that suddenly is more valuable long run: all the land gets developed -as population grows, the price of land increases because it is in shorter supply -housing prices also increase -labor supply cannot increase much since there is little room for residential expansion and this leads to higher wages -ultimately, businesses leave since they can find cheaper labor and land elsewhere (bid rent for business land falls) winners: -landowners and generally homeowners within urban boundary -growth controls will generally lead to increase in housing prices -high cost housing metro areas also places with most stringent housing regulations losers: -potential in-movers -renters -landowners outside urban boundary

contract rent

rent as promised from leases

due diligence

taking caution, performing calculations, reviewing documents, walking property, etc. -doing hw before you actually make the purchase -takes place during a formal period agreed upon in initial contract

opportunity costs

the value of the next or second best alternative for our assets (our money our time) -what is the opportunity cost of attending college? monetary (explicit) cost of tuition and related expenses, implicit costs of the foregone income during those years

how do land use regulations affect the bid rent curve?

they prevent us from using land to its highest and best use

natural evolution theory

'pull theory' about the suburbanization of households -emphasizes changes in transportation technology and demand for new housing (mono centric location model explanations) 1) rising real incomes lead to greater housing consumption -however, income pulls in contradictory directions (greater housing consumption vs higher transportation costs) -maybe demand for land is more sensitive to increases in income than commuting costs 2) transportation innovations: -decrease in commuting costs -slope of residential bid rent function decreases -share of population in suburbs increases 3) other innovations: can be incorporated into location theory (fall in transport costs, less costly to suburbanize) -frozen food -television -air conditioning

what is a proforma?

-a document used to organize and forecast cash flow assumptions for a property -document used to organize and calculate investment return measurements for a property -an accounting style projection of the property's operating statement over time

shifts in demand

-a given demand curve shows how quantity demanded corresponds to price, holding constant all other factors -a change in one of these factors might shift the demand curve -demand shifts versus movement along the demand curve -a change in the price of the good causes movement along the demand curve (change in quantity demanded) -a change in any other relevant variable causes the demand curve itself to shift what might shift demand? a) income (richer we are, consume more); normal good goes up; inferior good goes down (ex cars go up, busses go down) b) prices of related goods: substitute +, complement - c) tasts/preferences d) expectation of prices

shifts in supply

-a given supply curve shows how quantity supplied corresponds to price, holding constant all other factors -a change in one of these other factors might shift the supply curve -supply shifts versus movement along the supply curve -a change in the price of the good causes movement along the supply curve (change in the quantity supplied) -a change in any other relevant variable causes the supply curve to shift (change in supply) shifts in supply: a. input prices (-) (labor, capital) b. prices of alternatives (-) (alternative goods) c. technology (+) d. expected future price (-)

what characteristics of a plot of land matter?

-accessibility (eg good transportation infrastructure) -agglomeration (eg production benefits of nearby industries) -physical condition of nearby properties -some land is more desirable to firms -production costs are lower on some land

observed location of high-income households

-basic mono centric model: some economists have argued that US pattern suggests income elasticity of demand for land is dominant (demand for land is more sensitive to income changes than to commuting costs) -pattern is different in other developed countries -wealthy households tend to live close to center of town (esp in European countries) -not always true that demand for land is more sensitive to increases in income than to changes in commuting costs -something is unusual about US households, maybe factors outside of the simple model (race or local public services might be driving patterns)

losers from a multiplier effect

-because higher demand in one sector determines higher wages for all workers, all firms face higher wages -firms that cannot change the price of their goods/services (those in the tradable sector) are particularly disadvantaged (this effect can reduce the multiplier) -in areas where labor supply is flat (more elastic), the wage increase for workers is smaller (and the multiplier is larger)

bid rent curves with and without land use regulations

-beyond 5 km, the two land-rent curves are identical (in the short-run), reflecting both consumer and factor substitution -within 5 km of the CBD, the bid rent curve for the city with no potential for factor substitution will be lower and have less curvature -land use regulations may also push population further out in the longer run leading to greater sprawl -or if we allow for free mobility across cities, people could move to another city housing prices? housing prices are higher as a result of zoning restrictions (supply is constrained)

use zoning with changing bid rent curves without externalities

-bid rents shift over time but zoning does not -demand for land increases -zoning boundary is not long equal to the market boundary -land use regulations generate a DWL since land does not go to the highest bidder -beyond boundary, businesses value land as manufacturing more than households as residential -thus, we are not ensuring that users that value land most highly get to use it (then DWL) -if markets are competitive (no externalities), then zoning is either irrelevant of inefficient

what will determine the size of a metro area in the monocentric city model?

-both rents at the CBD (demand) and transport costs -as transport costs decline, city size will increase

reason why land rent function is convex/curved

-businesses that demand large amounts of land and that cannot engage in this kind of factor substitution locate on the outskirts of metropolitan areas where land prices are cheaper -we expect building heights and employment density to fall with distance to center

declining supply function (to the right of the kink point of course)

-can really only decline to the right of the kink point -happens when a location loses its 'centrality' -downtowns have lost their relative importance over the last decades (trends)

urbanized documentary

-cities are defined by a concentration of developed real estate -about exposure to a wide variety of global cities and how individuals are taking on elements of development within each

further issues with use zoning

-cities aren't likely to get zoning right as it is difficult to accomplish -use zoning doesn't limit pollution, it just moves it around -no incentive to reduce pollution -performance zoning may help -city sets performance standards for each zone (polluting firms locate in industrial zones and cleaner firms closer to residential areas) -rewards cleaner firms by giving them more location options -use zoning cam be used for exclusionary purposes (eg apartment buildings) -what externalities does apartments building generate? -are apartment buildings an example of use zoning or a type of fiscal zoning?

economic base of a city

-cities can be understood as collections of clusters of industries or sectors -'economic base' of cities is essential to understand real estate and land values in a city -two types of jobs: export jobs and local jobs

use zoning

-classic zoning, original zoning -first examples: Germany, France and Sweden late 19th century; US, SF 1885 NY 1916 why should we separate land uses? what is the underlying problem addressed? -use externalities (industrial nuisances) what are the specifics of the approach? -designating zones of allowable uses what are the expected market effects? -depends on weather externalities are present -if no externalities exist, zoning if efficient if and only if city gets it just right -zoning is irrelevant because market can lead us to the same place -will city get zoning boundary right? probably not -information costs for one single agent (central planner) compared to a multiplicity of them (market decisions) use zoning with changing bid rent curves: -bid rents shift over time but zoning does not -zoning boundary is no longer equal to market boundary when demand for certain land increases -land use regulations generate a "deadweight loss" (DWL) since land does not go to the highest bidder -beyond the boundary, businesses value more the land as a place for manufacturing than households as a residential location -thus, we are not ensuring that users who value land most highly get to use it (then we get a DWL) -therefore, if markets are competitive (no externalities) then zoning is either irrelevant of inefficient

market

-collection of buyers and sellers whose interactions determine the price of a product of set of products -(industry is the supply side of a market, industry does not equal market) -boundaries may be defined by geography and by the range of products included -two general categories: 1) product markets (goods and services) 2) resource markets (factors of production)

other methods of calculating cap rates

-debt coverage ratio method -yield capitalization method -loaded capitalization rate

negative leverage

-decreases annual return on equity invested (decrease cash on cash return) -when cost of debt is greater than free and clear return -debt constant > free and clear return

demand

-demand curve measures how many units of a good consumers are willing to buy at each price -this price-quantity relationship can be described by the follow equation: Qd = D (P) -"demand" for a product is the relationship between quantity and price -demand curve slopes downward, demonstrating that consumers are willing to buy more at lower prices ("law of demand") -vertical axis measures price paid per unit in dollars -horizontal axis measures quantity demanded in number of units per time period

how to asses what and where to build in LA?

-determine the needs of the community -local knowledge, do lots of research -market evolution -financial analysis -zoning, environmental issues, utility access -regulatory process

fiscal zoning market effects or consequences

-developers less able to benefit from factor substitution -value of land probably decrease -value of houses probably increase -neighborhood becomes homogenous -winners: existing single-family homes -losers: potential residents, renter, neighboring communities -who votes for fiscal zoning ordinances?existing homeowners who will benefit, reason to fear that zoning will not result in socially optimal outcome -should be careful about social/racial motives to be exclusionary

transportation costs

-economic factor to help explain the existence of cities -big reason for current location of cities 1)closeness to transportation routes (historically water) 2)defense reasons (easy to build fortress or port) 3) access to common resources -these physical factors brought firms to locate around them -market size was a key factor a lot when transportation costs were high -substantial decline in transportation costs has moved production away from cities (especially manufacturing) -many cities found near historical portage sites persist today; the same pattern is found in Russia where portage sites are known as voloks

internal economies of scale

-economic factor to help explain the existence of cities -some firms benefit from internal economies of scale 1) fixed costs of production can be important; makes more efficient to produce many units of output in one location than small amounts across space (eg cars, electricity, airports) -cities may also benefit from internal economies of scale in these firms (reasons why cities may grow around one factory)

what is a city

-economic unit that reflects a spatial concentration of economic activity -in most cases not political but economic -in US metro area is collection of counties around central core -large concentration of activity in a small area, often proxied by population density -mean density in US city 90 people per sq mile; very low relative to asian countries; us cities much less dense overall

review on regulation

-economists are very suspicious about the need to regulate even in the presence of market failures -many forms of regulation are used as blunt instruments (static, irreversible, hard to change) -quite unlikely that we set the level of regulation appropriately so that we get to the socially efficient output level -we prefer regulation through prices rather than strict regulations -we can use market mechanisms (auctions) to guarantee that those who value production the most will produce (ex pollution permits) -regulations can be evaded; individuals respond to incentives so long as they find a profitable activity they will incur in it -ex traffic/pollution control in Mexico -city banned driving by a certain number of cars on everyday, depending on last digit of license plate; people bought two cars and made problem worse!

empirical evidence about household suburbanization

-empirical studies provide mixed support for all three theories -natural evolution explanations matter a lot -flight from blight important too- metro areas experience more rapid suburbanization if city has relatively: -old housing stock -high taxes -large black population -high crime, low expenditures on education -number of governments matter too; why? -proxy for exclusionary zoning -income-stratified communities preferable since wealthy can avoid local redistributive taxes -more choice in bundle public services

sales comparison or market approach

-estimate of value derived by comparing a property with recently sold properties with similar characteristics -they must be similar, and have been sold within the last year in an open, competitive market under typical market conditions -most important factors are size and location

poor residents in central cities in the US

-factors outside of the model (race and local public services) are likely to be driving different patters in the US too -Race: greater desire to segregate -with higher levels of social mobility in the US, segregated locations can be a marker of social status -racial segregation: concentration of minorities in cities is more pronounced in the US -local government: government structure/suburban zoning: -US has more extensive system of local governments that deliver key services funded out of local tax dollars -US also rants vast last use zoning to limit redevelopment to large plots of land that the poor cannot afford

indirect effect

-firm expands operation and hires new people -local production requires inputs as part of production -some of these inputs will be locally produced increasing sales of these firms -the original increase in a city's income is larger than the original increase in the export income

induced effect

-firm expands operation and hires new people -these workers will earn an income, and spend part of it on local goods such as groceries, haircuts, and movie theater tickets -the firms producing these local goods hire more people to produce them -these new workers spend part of their income on local goods -thus, increase in total employment exceeds the initial increase in export employment

six stages of development

1) feasibility and acquisition (market analysis, site acquisition, regulatory approvals) 2) design 3) financing (convincing investors and mortgage banks to invest in the deal) 4) construction 5) marketing and leasing 6) operation and management

winners from a multiplier effect

-firms and workers in the non-tradable sectors (due to the increase spending in these sectors) -firms and workers in similar areas or industries because of agglomeration/localization economies -in areas where labor supply is steep (more inelastic), the wage increase for workers in larger (and the multiplier is smaller)

factor substitution for residential land

-firms can change their input proportions and lower pre-rent production costs -as land closer to the CBD becomes more expensive (due to a productive advantage), they economize on land -they build taller buildings on less land -the ability to substitute faros in production makes them pay even higher prices for a given amount of land can households make similar adjustments to land consumption? -consumer substitution (households consume fewer square feet) -factor substitution (housing developers will use less land per unit of housing)

agglomeration and TFP (total factor productivity)

-firms total factor productivity (TFP) is higher in big cities than in small cities -using the same amount of inputs, firms in big cities can produce more output -there is direct evidence on the presence of agglomeration economies -however, it is quite hard to find rich data on firms' location, output and use of inputs -we thus rely on indirect evidence on the positive association between wages and city size -available estimates are convincing -worker-level data allow researchers to follow workers as they move across cities of different sizes

measuring sprawl 2014 Ewing and Hamidi

-four factors combined into a single index score (equal weights, average index = 100) 1) development density (six components) 2) land use mix 3) activity centering 4) street accessibility researchers found that as metro areas became less sprawling, several quality of life factors improved along with them people in more compact, connected metro areas: 1) have greater economic mobility 2) spend less of their household income on the combined cost of housing and transportation 3) have more transportation options 4) have long, healthier safer lives these are correlations not causal effects

comparing investments

-given the same time periods and payments or flows over time, we pick the investment option with the highest interest rate -given the same time periods but different flows over time, we notice that early large payments matter a lot as they keep accumulating large interest gains over time -we always prefer higher payments and higher interest rates for our investments, but if we have to pick between both we may face a tradeoff

Portland Experiment

-growth control boundary -boundary ended up expanding in 1998 and 1999 -restrictions should come together with increases in density -Feschel ex assumes density stays constant within the boundary, but if density increases this can limit wage and land price increases -Portland is maybe first example that uses MSA wide body to order the suburbs to rezone land to accommodate high-density development -in some cases states have rejected projects that localities want, but rarely had interfered in zoning decisions of localities -smart growth is a less strict variant on growth boundary -steers infrastructure and development to areas targeted for high-density growth

segregation in location of businesses

-high transport cost users has a steeper bid rent function -since high transport cost user is willing to pay more to be located near downtown, it wins land in the CBD -low displacement cost user bids more for outlying land -final outcome exhibits segregated location of businesses -high displacement cost businesses located in CBD -lower displacement cost businesses outside

difference between US and other countries w suburbanization

-higher transport costs (gas taxes) in other countries -lower incomes in other countries -land is more expensive relative to incomes in other countries -less availability of land in other countries -government regulations can vary -cities tend to be more mono centric because governments tend to steer businesses to locate only in central areas -in some cities, government control of land markets has actually led to positively sloping gradients (Johannesburg, Brasilia, Moscow) -even when comparing developed countries, suburbanization in the US is exceptional -US has suburbanized more rapidly, poor live in central cities and wealthy in suburbs

how to estimate operating costs

-historical operating statements or current budget information from the property -if you are purchasing the property the broker or seller can provide you this information -comparable from other properties -inflate future years -after obtaining information for year one -apply inflation rate for other years -inflation rate will depend on market and property type -inflation rate may also vary by expense type typical: management fee 8%, prop tax growth rate 2%, property insurance growth rate 2%, maintenance and repair growth rate 3%, other operating expense growth rate 4%

why is suburbanization greater in the US than in other developed countries?

-history: US cities developed incomes were higher and cars more widespread -cultural drive towards homeownership -policy support for transportation and homeownership -more extensive system of freeways; lower gas taxes -greater push for homeownership -political structure: greater suburban fiscal autonomy (linkage between services and location)

labor demand-led development

-if a new grocery store opens, will it increase labor demand in the city? -grocery stores do business predominantly with local residents -they do not generally produce export goods (goods that attract shopping from tourists) -residents are unlikely to increase spending because of the new store, they would probably stop shopping in an existing store -while there are new workers in the store, overall employment should remain unchanged (it may reallocate) -labor demand is more reactive to changes in the demand for export goods -how sensitive? depends on the size of the multiplier

causes of sprawl: a portrait from space (Burchfield)

-in sprawling areas, much of the land immediately surrounding the average house will not itself be developed -in compact areas, there will be high proportion of developed land in the immediate vicinity of the average house -for each 30x30 meter cell of residential development, they calculate the % of undeveloped land in the immediate sq km -average this measure across all developed cells in a metro area results in an index of sprawl -final index: % of open space in the sq km surrounding an average residential development

income approach to value

-income capitalization approach -used to estimate the value of income producing properties such as apartment complexes, office buildings, shopping centers, etc. -striaghtforward when the property can be expected to have a future income and when its expenses are predictable and steady -estimate NOI of the property based on reasonable assumptions and divide by the appropriate cap rate

households and income

-income pulls in two directions: 1) high travel costs suggest wealthy should live downtown (high opportunity costs of commuting) 2) wealthy tend to want larger homes and more land (this will tend to make the bid-rent curve flatter for the wealthier household) two competing forces: time costs of commuting and the demand for housing, the end result will depend on which of these changes more rapidly with income -income elasticity of commuting costs (how commuting costs change with an increase in income) -income elasticity of demand for land (how consumption of land changes with an increase in income)

agglomeration and diversity

-industrial diversity may lead to more rapid economic growth (Quigley 1998); diversity may invite new firms to use new tech; diversity fosters specialization so that a variety of inputs are available, leading to efficiency (again input sharing) -cities facilitate spontaneous interactions (Jane Jacobs); most important ideas come from unplanned combinations of existing ideas; complex new knowledge difficult to communicate over long distances -cities may act of 'nurseries' (Duranton and Puga 2000); firms initially locate in a diversified city and produce prototypes until they find their ideal production process; they then relocate to smaller specialized cities to start mass production at a cheaper cost

agglomeration and innovation

-innovation is greater in larger and more diverse cities -between 2000 and 2015, 59% of US patents were awarded to applicants living in 20 metro areas, with only 36% of the population -patents are much more likely to cite pre-existing patents that were registered in the same metropolitan area -the share of STEM-educated college graduates in metro area is positively associated with higher patenting levels -the spatial concentration of patenting has increased since the early 1990s

value today vs value tomorrow

-investors may be more concerned about current or future income flows or sometimes both -perhaps they need to incur a big expense in a few years (home purchase) -perhaps future income will be used for personal consumption at retirement or even for future generations (bequests) -investor's cash flow preference will depend on her risk tolerance/attitude -value of investment today will also depend on aggregate economic conditions of tomorrow -do we expect economy to grow over next few years? -if so, prices will likely increases and this would affect the value of money in the future

why can't gains to landowners get eroded like benefits to workers?

-land does not migrate -the supply of land is fixed (especially in the short run and in cities with high regulation) -the more 'inelastic' (steeper) player (ie landowners) reaps the benefits of growth -the empirical evidence is pretty strong that economic growth leads to increases in land prices -it is not really possible to know who the "landowners" (and where they live): a mix of ordinary homeowners and owners of rental buildings

factor substitution for land

-land is a factor of production -a farmer, firm, or developer can substitute land for other factors or production (labor and capital) and vice versa -as firms move toward CBD, price of land increases -thus, firms economize on land and use more labor and capital -so they produce the same output on a smaller plot of land -developers do this too, as land prices increase, they tend to build taller buildings, and use a smaller land footprint -as land prices increase, firms can reduce costs and increase their profit on a smaller plot of land -they will be willing to pay a higher rent per unit of land (steeper rent function)

land use regulations and the bid-rent curve

-land markets are heavily regulated both in the US and in many cities around the world -how do land use regulations affect the bid-rent function? prevent us from using land to the highest and best use

aspects of land use models

-land rents exhibit a negative slope as we move away from the city center -they are quite high near the city center -they fall rapidly as we move away population density and built up land also show a decline with distance to city center -little available land at the city center (most of the land is already built up) -plent of open space the farther we move away from city center (agents consume more land per capita) over time, population density 'gradients' become gradually less steep -although we observe some mixed areas, it is clear that some land uses dominate over others in different parts of the city -multifamily residential and commercial space are more likely to be located close to the city center -single-family residential is more suburbanized

leveraged IRRS vs unleveraged IRRS

-leveraged IRRs usually have higher returns as the investor benefits from greater (relative) appreciation in the value of the property -not always the case; negative leverage decrease cash returns when the debt constant exceeds the free and clear return

variable operating expenses

-maintenance and repairs -management fees -administrative (account, advertising) -utilities -other: security, cleaning ultimately, variable costs will change based on the level of occupancy of the building

capital expenses

-major expenditures for long-term improvements to the physical quality of the property, required to maintain or add value to the property -property improvements and structural reserves -major repairs, equipment replacement, remodeling, expansions -notes on leasing costs -tenant improvements: the expenses for improving a unit after a tenant vacates (new paint, replacing finishings) -leasing commissions to brokers -both depends the local market and overall economy -some parts of the country have very high leasing commissions -in times of economic downturns tenant improvements may be higher as landlords are courting tenants

consensus in urban planning circles that sprawl is:

-marked by spread-out, low-density development, low-rise residential/commercial/industrial areas -designed to be navigated by the private automobile -"excessive" spatial growth

the asset market

-market for the ownership of real estate assets (that is, real property, including land parcels and buildings on them) -real estate assets compete in the capital market with other forms of capital assets, such as bonds or stocks -net rents generated by a building are analogous to the dividends paid out by a stock or interest paid out by a bond -property competes for investors' capital against stocks, bonds, and other types of investments -real estate asset market must be viewed as part of the larger capital market, the market for capital assets of all types

The Space Market

-market for the usage of real property (land and built space) -Demand Side: individuals, firms of institutes that want to use space either for consumption of production purposes -Supply side: real estate owners who rent space to tenants -Rent: the price of the right to posses and use space for a specific period of time -Highly segmented market: both supply and demand are location and type specific (barriers between markets, submarkets within metros, property usage type segmentation)

when do we use a pro forma?

-most aspects of housing and development rely on the information in a proforma -property development analysis -property disposition phase -property valuation -property budget -property loan underwriting

policies to limit urban growth

-municipalities use other land use regulation tools to limit growth -what is their motivation? limit growth in order to curb undesirable side effects of growth (congestion, destroying neighborhood character) -2 important examples of regulation tools are building permits and urban growth boundaries -we should be skeptical about stated motives

labor demand

-negative relationship between wages and level of employment -as wages rise, firms demand fewer workers (they will try to substitute labor by other inputs) -labor demand shifters: make firms interested in hiring more or less workers in a particular location -change in demand for city exports (the products the city specializes in become more or less popular) -workers may become more or less productive in a city -prices of other inputs may fall (depends if those inputs are substitutes or complements with labor) -most relevant shifter to study is a change in exports produced locally

suburbanization worldwide

-negatively-sloped density and land price gradient, much steeper closer to the CBD -variations in the slope of that gradient and the amount of land consumption per person across cities and countries -steeper land use gradients around the world, especially in Asia -suburbanization has occurred throughout the world -average built-up density declined in all 32 cities in developed countries between 1990-2000 and in 25 of 88 cities in developing countries -evident suburbanization in 30 global cities from 1800 to 2000 -suburbanization more extensive in US

what makes real estate unique?

-non-standard pricing (illiquid, traded in private markets) -highly leveraged (debt or mortgages are a big share of project value -durable (long lifespan) -highly regulated (Subject to zoning issues) -fixed location (metro area + neighborhood) -highly cyclical

location of businesses in mono centric city model

-office firms "win" land in CBD -if it swapped location with a manufacturer located nearby, the loss to the office firm exceeds the gain to the manufacturer -land will go to most socially-efficient user (highest and best use) if there are no 'externalities' (spillovers or side effects) in land use -this can be generalized to multiple users -land rent gradients are steepest close in and get flatter and flatter as you more away from the CBD -existence of users with different displacement costs is one reason that bid rent curve tends to be convex -users with steep gradients win the land in the CBD, so their bids determine price at the center

zoning

-one type of regulation that local governments can enforce in the US -designates a set of allowable land uses for plot of land -usual justification: it controls land use externalities that might undermine health, safety, and public welfare -three types of zoning: 1) use/nuisance zoning 2) fiscal zoning 3) characteristics zoning (max height, minimum lot size)

other sources of potential revenue

-parking revenue -storage revenue -late fees -retail revenue expense reimbursement revenue -if there are expense reimbursements from the tenants, these will be added into the effective gross revenue

graduated payment mortgage (GPM)

-payments begin at a lower level than under a level payment mortgage and increase gradually over the first years of the loan -after a certain point, the loan will self-amortize

debate on policies to address sprawl

-policies designed to attack urban sprawl take on key element of American lifestyle: consumption of large amounts of living space at affordable prices -policies to address sprawl would limit the supply of land for residential development, raising the price of housing -sprawl has probably lowered housing prices for households and minority households in particular -increased fringe urbanization leads to greater supply of land for development, which increases affordability -as jobs move to the fringe in older sprawling metro areas (eg Detroit and Philadelphia), the durable inner-city housing stock becomes even cheaper

how are poor households affects by sprawl?

-poor further away from jobs because of distance ("Spatial mismatch") -people tend to be less willing to help poor households when they live further away from them -on the other hand, lower housing costs

fixed operating expenses

-property taxes (may change with reappraisal after sale) -insurance

types of real estate

-residential -office -retail -industrial -land

replacement cost approach

-separate estimates of value for the building and the land, taking depreciation into consideration -approach is useful when the property being appraised is a type of property that is not frequently sold and is not income-producing property like school, church, hospital, government building steps: 1) estimate value of land as if it were vacant and available for highest and best use 2) estimate current cost of constructing the building and site improvements 3) estimate the amount of depreciation of the improvements resulting from deterioration, functional obsolescence, or economic obsolescence 4) add the estimated value of the land to the depreciated cost of the building and site improvements to determine the total property value

construction financing

-short-term lending during construction period -risker and structured differently, thus involve higher rates of repayment -different from typical financing because they do not require payments during construction -lenders usually look at: design, environment, permits, insurance; credibility/cash, capacity, disbursement requirements

household and intrametropolitan location decisions

-single center/transit hub that everyone would like to be near or jobs located at -public services do not vary over space -homogenous households transport costs for households? -commuting costs -travel costs to amenities -generally assume that households have lower transportation/travel costs than firms -they aren't willing to pay as much to locate right at the center -they locate much further from the CBD

ways to address sprawl

-some government programs that distort residential decisions (the mortgage interest deduction) have been partially eliminated -taxes/subsidies: -charge people the full costs of development (pay more for driving during rush hours) -caveats: implementation problems, political opposition -impact fees: let developers pay for the social costs (pay for building on open space or additional cost of service provision) -caveats: who regulates the impact fee? at what geographic/economic level should the social cost be estimated? how do we value open space? -regulation -growth boundaries and building permit caps likely to increase land prices and housing prices, respectively -we would need to set the boundary correctly and modify it when needed (not easy) -zoning could take into account sprawl externalities (through large-lot zoning requirements are probably exacerbating them) -change decision-making unit: -land use: regional nature of problem, localized scope of land-use powers; local politicians take parochial perspectives -taxation: moving to metro taxing authority would remove fiscal incentive to sort -move to more regional system of government (politically difficult)

flat beyond kink point

-some researchers claim that in the "typical" space market in the US the long run supply curve has tended to be nearly flat beyond the kink point -aggregate rent levels have not risen faster than inflation even as supply of real space has greatly expanded -this result may be specific to the US or to some cities (not necessarily for coastal or big cities)

learning mechanisms

-source of agglomeration; agglomeration mechanism -knowledge generation -knowledge diffusion -knowledge accumulation

sharing mechanisms

-source of agglomeration; agglomeration mechanism -sharing indivisible goods and facilities (eg airports, convention centers, water provision) -sharing the gains from variety (firms in denser locations are more likely to outsource from local suppliers and produce using a wider range of inputs) -sharing the gains from individual specialization and thus productivity gains (eg. physicians perform a narrower range of activities in large markets Baumgardner 1988) -sharing risk (labor pooling: workers find other firms to use their skills in case of layoff)

matching mechanisms

-sources of agglomeration; agglomeration mechanism -improving the quality of matches (no direct evidence; indirect evidence that workers change occupation and industry less in big cities when old but not when young) -improving the chances of matching (Costa and Kahn 2000 shows that the 'power couples' locate disproportionately in big cities, and not just because they meet there

capital markets

-the market for capital assets of all types -four categories: public, private, traded as equity or debt

agglomeration economies

-the most important factor to explain the existence and size of cities nowadays -firms (and workers) locate nearby each other to benefit form positive spillovers -a positive location externality: when a firm decides to locate next to other firm does not internalize the advantage it may spur to other firms -2 types of agglomeration: 1) localization economies: explains industry clusters of similar firms (same economic sector, standardized products) 2) urbanization economies: explains clusters of overall economic activity (eg large cities, non-standardized or complex products)

why do we need a pro forma?

-to consistently analyze and evaluate a property's value -to calculate financial ratios and compare them against industry metrics

households and transport costs

-transport costs vary across households (costs can be broadly defined, beyond commuting costs) -high transport cost households should live close to the city -households with high commuting costs: two worker households, high-wage households (high opportunity costs) -households demanding less land (though there are some regulatory limits to this adjustment process): smaller households, less wealthy households -household in the smaller apartment is WTP a larger premium per square foot close to center

when do we use regulations?

-under what conditions might we want to use regulations instead of setting prices? -when health and safety are involved (cost of producing too much is very high) -nuclear plant, location of military exercises, smoking ban in public spaces, lead elimination -when it is hard to place dollar value on external cost of when some changes may be durable or irreversible -fairness issues

adjustable rate mortgage (ARM) with floor/ceiling

-variable rate mortgages allow the lenders to vary interest rates over the loan term -often subject to a floor and ceiling, or minimum and maximum rate level set forth in the original mortgage agreement

'inelasticity' of supply of land

-very steep -price of land is determined by height of demand curve -land is immobile and fixed in supply

agglomeration and wages

-wages are higher in big cities than in small cities -why is this evidence of agglomeration? -agglomeration economies increase productivity of workers and allow firms to pay higher wages -if workers were not more productive in large cities, firms would not be willing to pay higher wages or would relocate to cheaper locations -big city wage premium exists in US and in other countries: it is even larger in developing countries, some initial gain but wages mainly grow with time spent in a big city (and grow even more for high-skilled workers), in big cities workers learn throughout their careers (they take their big-city premium when they relocate to small cities)

when is the multiplier high?

-when firms hire high-skilled, high-wage workers -when export producers use more local inputs or intermediate goods (this varies by industry) -when local residents spend more of their money locally (this varies by location/geography) -these last two items suggest that larger areas capture a larger share of the indirect/induced effects

most compact, connected large metro areas

1 New York 203.4 2 San Francisco 194.3

factors that influence cap rates

1) income growth -faster income growth leads to a lower cap rate and higher value -if you expect strong appreciation then cap rates will be lower, because you are willing to pay more upfront if you are sure the property will grow 2) risk -greater risks must be met with greater returns -higher risk leads to higher cap rate and lower value -value and occurrence of future flows becomes more uncertain when risk increases -investors demand higher return and the less they are willing to pay per dollar of current income from the property 3) economic obsolescence: shorter economic life leads to a higher cap rate and lower value 4) interest rates or cost of capital -increase the cost of borrowing leads to higher cap rates and lower value 5) market conditions: stronger rental markets implies lower cap rates and higher values 6) property age: older properties typically have more risk due to greater repair volatility; higher risk leads to higher cap rates and lower values

indicators of sprawl

1) urban land cover 2) density 3) centrality 4) fragmentation (leap-frog development) 5) compactness

real estate is highly cyclical

1) vacancy declining and no construction 2) construction begins and accelerates while vacancy continues to decline ~demand/supply equilibrium~ 3) vacancy increases yet construction continues unable to stop 4) vacancy increases at a decreasing rate, some construction

two types of jobs

1)export jobs: associated with goods and services sold nationwide or worldwide (eg manufacturing, "tech", financial products) 2) local jobs: associated with goods and services that only face competition locally (eg retail, personal services, most of educational and health services, building services) -distinction is less clear for some activities like tourism "export" becomes anything that attracts spending that would not have otherwise taken place in the city

most compact, connected medium metro areas

13 Madison, WI 136.7 41 Stockton, CA 120.3

most sprawling large metro areas

182 Houston 76.7 184 Richmond, VA 76.4

most sprawling medium metro areas

185 Little Rock 76.1 191 Chapel Hill, NC 73.8

what has changed over the century to lead more households to opt for suburban locations?

3 categories: 1) natural evolution: emphasizes changes in transportation technology and demand for new housing (mono centric location model explanations) 2) flight from blight: emphasizes migration of high-income households to avoid fiscal and social problems of central city (local governments, beyond location model explanations) 3) government policies: further facilitated flight from blight

economic arguments to justify government intervention in addressing sprawl

3 types of economic arguments that can be made to criticize market outcome and justify government intervention: 1) market failure: externalities may distort the operation of land and property markets (elevated infrastructure costs, added automobile use etc.) 2) distorted markets (not a free market to begin with) 3) equity considerations:

homeownership in US

65% of people in the US own their home

aim for real estate investment

7% return

shifts in supply and demand example

9/11 attacks supply decreases (towers down, lost 1/3 commercial office space, price increase) demand decreases (fear, people don't want to be in the vicinity of such tragedy, prices fall) final equilibrium is at a lower price and quantity is decreased from before

property classes

Class AAA: trophy buildings, fancy architectural designs, highest quality materials, expensive trims, newest equipment Class A: top share of rents, good locations, space anticipates future needs, above average maintenance and systems Class B: middle portion of rents, average locations, decent mechanical systems Class C: bottom share of rents in the market place, in less desirable locations, may have lots of maintenance/mechanical problems

cap rates across global metro areas 2013

NYC 6.97% London 5.78% Hong Kong 3.26% Paris 6.38%

the multiplier

Moretti's multiplier estimate is 2.5 for export industries -each job in the export industry "generates" 2.5 jobs in the local economy (1.5 of which from indirect/induced effects) winners: firms and workers in non-tradable sectors; were labor supply is inelastic (steep) losers: firms face higher wages, areas where labor supply is flat (more elastic), the wage increase for workers is smaller

largest US metros

NY, LA, Chicago

present value

PV = FV / (1 + discount rate)^n

movement along the demand curve

a change in the price of the goods causes movement along the demand curve (change in quantity demanded)

time value of money

a dollar today does not have the same value than a dollar in the future (generally it will be worth more)

a lower LTV

a lower LTV (perhaps due to a higher down payment) notably increases before tax cash flows

discount rate

a rate of type of interest that helps us measure future values in today's value (dollars) the underlying idea is to "discount" or penalize future flows since they lose value over time intrinsically related with opportunity costs mathematically operates like inflation adjustment of flows over time, yet they are not identical discount rate captures many other factors besides inflation -your opportunity cost or return on your investment -level of risk in future flows (what probability will you receive the income flows you anticipate)

market failure: automobile use

added automobile use is a market failure that argues for government intervention against sprawl -failure of individual consumers (and developers building in outlying areas) to recognize the social costs created by driving -external costs imposed by auto use: climate change, gasoline use, air pollution and (possibly) traffic -however, traffic may increase with density -commuting times have not increased much, distances have increased but so have travel speeds -makes public transit infeasible -Atlanta vs Barcelona (same population) -20% of trips in BCN are walking, not even recorded in ATL -ideally transit stops need to be within 10 min walk of homes -60% of BCN lives within 600 m of station, only 4% of ATL lives within 800 m of station -Atlanta would have to build 2,800 new metro stations to reach the same accessibility as Barcelona

adjustable-rate mortgage (ARM)

adjusted based on an index which reflects the cost to the lender or borrowing on the credit markets -typical indices: LIBOR (London Interbank Offered Rate), Treasury Index incentives or drawbacks of ARMS: -ARMs may have lower rates up front -but are generally considered riskier because they could fluctuate greatly over the life of the loan

Chicago metro area location quotient

air transportation 4.23 museums, historical sites, zoos, and parks 2.46 securities, commodity contracts, investments 2.36 ... agriculture and forestry support activities 0.01 oil and gas extraction 0.00

comparable sales approach

aka market approach -evaluate cap rates on comparable properties sold recently and then make judgment about the appropriate cap rate for the subject property course -the rate derived by this formula implicitly includes all of the assumptions about specific investor expectations incorporated in that sale transaction

race and the suburbs

although minority presence is growing in suburbs, we still see large concentration of minorities in cities and concentration of whites in suburbs in 2010: 69% of metro area white population live in suburbs; 44% of metro area blacks live in suburbs; 49% of metro area hispanics live in suburbs why? combination of factors such as income, preferences, social networks/information, discrimination central city residents are less well-off by a variety of measures (income, poverty) -pattern holds true with racial groups -whites in central cities worse off than whites in suburbs

down payment

amount of purchase price required to put down up front -equivalent to equity in the property -for personal home purchasers it fluctuates between 10-20% -for commercial real estate it is usually higher at 30% -vary depending on person finances, risk profile, or business cycle -during real estate bubble, personal home loans that were called 80/20s became popular -80% of the property's value from one lender and the extra 20% from another lender

market failure

an argument in support of government intervention against sprawl -if market failures are present, then the individual decisions to move to outlying areas may not be socially optimal -evidence suggests that several kinds of 'externalities' may distort the operation of land and property markets -in making private decisions to build in low-density areas, developers may not take into account a set of external costs -in making residential decisions, households may not take into account a set of external costs -outcomes of "natural decisions" may not be socially optimal possible externalities: 1) elevated infrastructure costs 2) added automobile use 3) removal of open space 4) other potential costs (eg social interactions, health)

renewal probability

an estimate of the probability that a tenant will remain in the space at least expiration typically 70%

debt constant

annual debt service/ original loan amount -measure of relative annual debt service burden vis a vis the original loan amount -the annual debt service (principal and interest) divided by the original amount of the mortgage -if loan interest only (no principal on the debt service), interest rate = debt constant -the longer the loan term, the lower the constant (debt service falls)

equity concerns related to sprawl

argument for government intervention against urban sprawl -many blame sprawl for concentration of poor households in inner-city, high-poverty neighborhoods with poor quality schools, poor public services, etc. -but isn't this poverty concentration caused by the development process itself or suburbanization and not sprawl? -we should be concerned if it is caused by: -fragmented land use control and exclusionary zoning -tying fiscal support of local governments to the wealth of their own residents -racial segregation in housing markets

labor and cost of living

as workers move to the area, demand for other local inputs and services increase -land and housing become more expensive, especially if supply is steep (more inelastic), offsetting wage gains if there were absolutely no moving costs (hypothetical) -labor supply would be flat (infinitely elastic) -landowners would be the only local residents who benefit from economic growth intermediate model (more realistic) -people other than landowners gain for a while -but gains are progressively transferred to landowners over time

equity assets

assets that give the owner the "residual" claim on the cash flows generated by the underlying asset -this claim is subordinated to any other debt owed by the asset -they provide control rights to manage the asset -they are infinitely lived -more sensitive to news -most common type of asset in real estate is direct ownership of whole properties and takes place in a private market (known as real estate asset market) -individual real properties are traded between parties that have usually "matched" through a broker

gross square footage (GSF)

calculated from the outside of the exterior walls and is inclusive of all space within (includes building core and common areas such as elevator, mechanical areas, etc.)

capital expenses- after NOI

capital expenditures fluctuate much more than operating expenses (they are irregular and discretionary) -when included after, NOI becomes more stable and more easy to forecast -makes financial metrics more stable

private markets

capital market in which the assets are traded in private transactions arranged between individual buyers and sellers as a result of a search process -are generally less liquid than public markets -finding a match, trying to find a fair price

public markets

capital market with those in which small shares of ownership in assets are traded in public exchange among many sellers and buyers -price quotes available for all -relative high degree of liquidity -quick buyer find

why growth in southern US?

car regulations, cheap land, affordable housing, jobs, AC allows people to work in hot conditions leisure activities more common place; less manufacturing in US people moving out of industry cities like Detroit, Cleveland, etc.

cash on cash return

cash flow / equity -most commonly used measure of rate of return by real estate investors -represents the cash return on the investor's cash investment or return on their equity contribution -two properties may have similar NPVs but different cash returns over time

government policies influencing suburbanization

cause of households suburbanization some policies have facilitated/accelerated flight from blight 1) making flight cheaper -subsidies for homeownership: mortgage interest deduction, FHA mortgage insurance programs -subsides increase housing consumption, make people want to live where housing is relatively inexpensive -commuting externalities (highway construction): government does not fully charge people for the costs that their commuting imposes on others -if we truly taxed people for the social costs of commuting, more people would live closer to their jobs 2) not charging full price for other infrastructure -government fragmentation (locally funded public services) and land use controls have contributed to suburbanization

demand-led growth

changes the shift the labor demand curve (make firms interested in hiring more workers in a particular location) -decline in demand for manufactured goods produced in the rust belt -location/natural resources have become less of an advantage -decline in transportation costs made natural resources less important; areas that had cost advantage no longer do and labor demand is falling there -transportation technology changed: the truck became more important and access to rivers or ports less so -skills of workers have become more important over time -increase in demand for skilled labor in idea-based cities -higher productivity: education/human capital spillovers -more educated workers are more adaptable to change (they contribute to the reinvention of cities)

Jane Jacobs (agglomeration and diversity)

cities facilitate spontaneous interactions -most important ideas come from unplanned combinations of existing ideas -complex/new knowledge difficult to communicate over long distances

Duranton and Puga 2000 (agglomeration and diversity)

cities may act as "nurseries" -firms initially locate in a diversified city and produce prototypes until they find their ideal production process -they then relocate to smaller specialized cities to start mass-production at a cheaper cost

value of housing

city where house is located will affect its value -characteristics of the property (lot size, # of bedrooms bathrooms, pools, material quality, age of property etc.) -distance of accessibility to job opportunities -physical amenities (access to beach, mountain, good restaurants) -land use regulations (historic district, only singe-family houses allowed) -demographic composition of neighborhood (people may prefer to live next to other people that share similar characteristics such as income, race, or culture)

"Law of demand"

consumers are willing to buy more of a good at a lower price

operating expenses

costs of daily operations and maintenance -fixed: -property taxes (may change with reappraisal after sale) -insurance Variable: -maintenance and repairs -management fees -administrative (accounting, advertising) -utilities -other: security, cleaning -ultimately variable costs will change based on the level of occupancy in the building

displacement costs

costs of transporting goods to center (CBD)

San Francisco Metro area location quotient

data processing, hosting, and related services 3.32 air transportation 2.63 petroleum and coal products manufacturing 2.46 ... pipeline transportation 0.17 wood product manufacturing 0.16

local government fragmentation

decentralized control over land use policies local government finance: tying fiscal support of local governments to property wealth given people incentive to move to different jurisdictions with lower taxes, better services, and more affluent communities local control of land use/zoning: through exclusionary zoning localities attempt to control growth (good for homeowners, protects homogeneity and property values) and push it to outlying areas

mortgage document

deed of trust -pledges the property as collateral for the loan

earnest money

deposit that shows the seller that a buyer is serious about purchasing a property -when transaction concludes, funds are put toward buyer's down payment -if deal falls through, buyer may not be able to reclaim the deposit

different transportation costs

different types of businesses may have very different transport costs and different bid rent curves manufacturing firms vs office firms -office firms higher transport costs -office firm bid rent function relatively steep -manufacturing firms with high bid rent curves = publishers, bakeries (because output is costly to ship), firm that rely on face to face interaction

energy conservation

economic factor that help explain the existence of cities -reduction of carbon footprint -cities make more efficient use of energy and transportation technology -less driving more mass transit, cheaper to provide services like gas, electricity, and water -maybe this is not a reason for their existence but it may be a reason that cities will continue to thrive in the future

market failure: infrastructure costs

elevated infrastructure costs are a market failure argument in favor of government intervention against sprawl -externality imposed on taxpayers -developers do not have to pay the full infrastructure costs when they choose to build new, low-density housing in outlying areas -examples of infrastructure costs: sewer, roads, (probably) schools -why are developers not paying full freight? -new residents may pay average price while infrastructure costs may in fact be higher on outlying, undeveloped land -building new lines is more expensive than using existing capacity (eg sewage) -public services may be more expensive too (eg subway) -"excess" costs are then passed onto all residents in form of higher property taxes

manufacturing in the city

evidence shows manufacturing is declining nationwide but some special kind of manufacturing firm finds it advantageous to locate in central cities -small, specialized production (no assembly line) -customized production, need to be near customers

suburbanization of firms

firms face a trade-off we have described: -lower land costs in suburbs (less benefits from agglomeration) -higher transportation costs in suburbs what has changed over the century to lead more firms to opt for suburban locations? 1) lowered transportation costs have let firms move out 2) single-story plants 3) suburban airports

acquisition

first step in stages of development -pre-contract analysis -feasibility analysis -site evaluation offering memorandum: -legal document stating the objectives, risks, and terms of the investment involved with a private placement -provides buyers with information on the offering due diligence and earnest money -due diligence: taking caution, performing calculations, reviewing documents, walking the property, etc. -doing your HW for the property before you actually make the purchase -typically this takes place during a formal period agreed upon in an initial contract -earnest money: deposit that shows the seller That a buyer is serious about purchasing a property -when transaction concludes, funds are put toward buyer's down payment -if deal falls through, buyer may not be able to reclaim deposit -closing timeline: offering memorandum letter of intent due diligence period final purchase agreement closing

capital markets

four categories public private, equity or debt

the mono centric city model

goal: to study how location choices of businesses and residents are made within metro areas and how land rents and land use vary within a metro area model will be important to better understand income segregation, suburbanization and urban sprawl assumptions: -competitive markets, firms are price takers -single center/transit hub that everyone would like to be near (CBD) -public services do not vary over space -all firms are identical

sprawl as a market outcome

if suburbanization is the result of a natural evolution of technology and incomes, then government should be fairly neutral -some authors argue that sprawl is simply a market outcome -people have ended up in sprawling suburbs due to their own choices and preferences -this would suggest they are happier in suburbs -hand-off approach

surplus

if the market price is above equilibrium, there is: -a surplus of supply -producers lower prices -quantity demanded increases and quantity supplied decreases -the market continues to adjust until the equilibrium (market-clearing) price is reached

market mechanism

in a free market, prices adjust until the market "clears" (Q supplied = Q demanded) -characteristics of the equilibrium: Qd = Qs, no surplus, no shortage, a single price is determined with no pressure on the price to change -supply and demand interact to determine the market-clearing price -when a market is not in equilibrium, prices will adjust to alleviate a shortage of surplus and return the market to equilibrium

different land intensity

in reality, not every firm uses the same amount of space -some uses are extremely land intensive (auto manufacturing, big box stores) -factor substitution: mechanism that allows firms to use more valuable factors or production more intensely

labor demand benefits

in short run wages increase, but in long run labor supply is more flat (elastic) and the wage gain may partially or fully erode migration offsets a great deal of benefits that workers might reap from city growth -people move frequently in the US -people move to areas with better job opportunities

positive leverage

increases the annual return on the equity invested (increases cash on cash return) -occurs when cost of debt is lower than the Free and clear return -debt constant < free and clear return

compounding

interest in an investment or savings account builds up over time as interest collects on interest payments

interest

interest may or may not vary over time -ARM, adjustable-rate mortgage -fixed-rate mortgage

internal rate of return (IRR)

interest or discount rate at which the net present value of all cash flows from a project or investment equal zero -includes negative purchase price year 0 -used to evaluate the attractiveness of a project or investment -rate in which the money in the investment grows or compounds

lowered transportation costs have let firms move out to suburban locations

invention of the truck introduced in 1910, widespread in the 20s -era of horse-drawn wagon and streetcar, cost of moving freight was more expensive -era of intracity truck, pull toward CBD weakened and suburbs won more frequently -allows manufacturers to outbid residences further out from center interstate highways systems -two/three decades after truck was introduced, manufacturing firms started using it for inter-city transport -freed firms from dependence on railheads and ports in city center -firms were more concerned about being accessible to inter-city highways -manufacturers likely to outbid other users for sites near suburban beltway automobile: -in hub and spoke streetcar city, firms would locate close to center to be accessible to largest number of workers -in auto city, firms less likely to locate near streetcar nodes

export jobs

jobs associated with goods and services sold nationwide or worldwide -manufacturing, "tech", financial products (tourism unclear but "export" becomes anything that attracts spending that would not have otherwise taken place in the city)

local jobs

jobs associated with goods and services that only face competition locally -eg retail, personal shrives, most of education and health services, building services)

composite rate

known as the band of investment method -equates cap rate to a composite of debt and equity funds -overall cap rate is extracted by deriving the weighted average of the mortgage cap rate and the equity cap rate

land use across the city

land use varies across the city; more multi-family residential in center, single-family residential on outskirts, and commercial same amount throughout more expensive land transactions near the city center land prices fall steeply with distance from the city center

offering memorandum

legal document stating objectives, risks, and terms of investment involved with a private placement -provides buyers with information on the offering

term

length of the mortgage debt (number of years)

smart growth boundary

less strict variant on growth boundary steers infrastructure and development to areas targeted for high-density growth

single-story plants (suburbanization of firms)

let firms move out to suburban locations -to exploit new production technology (assembly line, forklift truck), manufacturing firms built single-level facilities -this meant increased land consumption, pull to suburbs where more land is available for cheaper

loan to cost

loan / cost -calculated for properties under development -value open completion will be greater than the cost to build it -ensure developer has cash in the deal

land use controls

one of the key tools/powers granted to local governments -land is very regulated type of property -use regulation to control actions that have social costs/externalities

loan to value

loan / value -measure of lender's collateral cushion -hire an appraiser -lower the ratio, higher the cushion and more secure the lender's interest in the deal -higher the ratio, less collateral cushion (less equity) in capital structure, the greater the risk to the lender -recall that safer projects tend to obtain higher LTVS

two types of agglomeration economies

location economies and urbanization economies

rents and transportation costs in mono centric city model

lower rent must compensate for increase in displacement cost sum of rent + transport costs must be constant across locations

rising supply function

main cause of a rising supply function is the cost of land -increasing rent as space users are willing to pay more to use the same location

labor demand shifters

makes firms more interest in hiring more or less workers in a particular location -change in demand for city exports (the products the city specializes in become more or less popular) -workers may become more or less productive in the city -pries of other inputs may fall (depends if those inputs are substitutes or complements with labor) -most relevant shifter to study is a change in exports produced locally

the asset market

market for the ownership of real estate assets (real property, including land parcels and buildings on them) -real estate assets compete in the capital market with other forms of capital assets, such as bonds or stock -net rents generated by a building are analogous to the dividends paid out by a stock or interest paid by a bond -property competes for investors' capital against stocks, bonds, savings accounts, art, and other types of investments -real estate asset market must be viewed as part of the larger capital market, market for capital assets of all types demand side: investors willing to buy property supply side: investors (or developers or owner users) willing to sell property they own

noncompetitive market

market where individual buyers or sellers can influence the price (electricity is one of the least competitive markets)

competitive market

market with large number of buyers and sellers; no individual buyer or seller can influence the price

Loan to Value (LTV)

measure of the ratio of mortgage to value of the property or purchase price -higher LTV implies more debt on the property and less equity (when LTV rises property is more leveraged) -higher loan to value is also a measure of risk -you first owe the bank for funds from the property -the debt is senior the equity, so the highest debt on the property, the riskier it is for the investor -although if risk of property is low, lenders are willing to provide lots of funding (ex prime AAA office building in LA -one can buy more expensive properties with an increase in LTV, even keeping equity constant -periods of increased debt tend to drive up property prices

factor substitution

mechanism that allows firms to use more valuable factors or production more intensely -shifting of input proportions as input prices change -if the price of labor rises, a firm engaging in factor substitution will use fewer workers and more machinery

investor surveys

methods to calculate cap rate -real estate organizations collect historical data and investor expectations by surveying investors and other parties to transactions -surveys published periodically -data is generally useful to help establish parameters in a market where no similar properties of that type have sold

debt

mortgage document or deed or trust pledges the property as collateral for the loan -promissory note contains the contract terms between the borrower and lender (written promise by one party to pay another party a definite sum of money at one point in time) -whenever there is a mortgage on the property, owner's equity is subordinate to the lender's interest in the property

types of mortgages

mortgages vary with regard to their payment patterns of interest and principal depending on a lenders and investors objectives level payment/self liquidating -balloon mortgage -graduated payment mortgage -adjustable rate mortgage with floor/ceiling

real estate asset market

most common type of asset in real estate is direct ownership of whole properties -takes place in a private market (known as real estate asset market) where individual properties are traded between parties that have usually 'matched' through a broker -you can also own shares in companies that own and operate income-producing real estate (REITs) -REIT (real estate investment trust) -analogous to mutual funds in the banking industry

sources of agglomeration

most standard classification of agglomeration mechanisms: sharing, matching, and learning

LA metro area location quotient

motion picture and sound recording industries 10.99 apparel manufacturing 9.43 ... agriculture and forestry support activités 0.10 mining except oil and gas 0.06

debt coverage ratio

net operating income NOI / debt service -measure of a lender's income cushion -higher the debt coverage ratio, lower the risk of default from lender's standpoint

free and clear return

net operating income NOI / purchase price (or project cost) -if property were not subject to financing the NOI would = the cash flow (unleveraged cash flow) -recall project cost = debt + equity -in unleveraged cash flow, investor's equity is the entire cost of the project so this ratio measures the return on equity as if the project were free and clear of all debt

suburbanization of office firms

offices have suburbanized too, though not as extensively what has facilitated suburbanization of office employment? -communications technology (decoupling of firms) -decentralization of population (jobs follow people) -suburban airports although mostly back office operations have decentralized, we still see clustering in suburbs -agglomeration remains powerful force for office firms (90% of suburban offices are located in clusters) -offices tend to cluster around freeways and rail stations

break-even gross revenue

op ex + prop tax + de bt service / current occupancy

break even point

op ex + prop tax + debt service / potential gross rent -occupancy you need to break even -the % vacancy a project can withstand at a given rent and meet all expenses

break-even point

op ex + property taxes + debt service / gross rent -measure of project's operating risk -break-even occupancy -percentage of the property that must be leased in order to cover all expenses and debt service obligations -(1- break even point) also shows the max vacancy rate that still allows to continue paying all bills and loan payments on time

market failure: open space

open space is a market failure that argues for government intervention against sprawl -failure to consider the full social costs of removing land from open space leads to building up on open land -loss of farm land: -but farmers get ever more efficient and US face agricultural surpluses; do we really need more farmland -wouldn't the market take care of this? -loss of open space -how should it be valued? there is no shortage of land in the US -are there more or less forests? -other costs: -reduction in social interaction: failure to consider the impacts of the decision to live in outlying area on social capital -obesity/lack of exercise? leads to medical costs for all of us

San Jose metro area location quotient

other information services 20.29 computer and electronic product manufacturing 14.22 ... apparel manufacturing 0.13 petroleum and coa, products manufacturing 0.05

capital structure in real estate projects

owners can purchase a property or finance a development though equity or debt (this mix is capital structure) usually under 40% equity, and over 50% debt = project value

balloon mortgage

partially amortized loan which calls for repayment of principal before it is fully amortized -ex loan might have 25 year amortization and 10 year term, in which case the remaining principal would be due at the end of 10 years

balloon payment

payment of full principal owed at the end of the mortgage period

urban sprawl

planners look at sprawl through different indicators: urban land cover, density, centrality, fragmentation (leap-frog development), compactness consensus in urban planning circles is that sprawl is: -marked by spread-out, low-density development, low-rise residential/commercial/industrial areas -designed to be navigated by the private automobile -"excessive spatial growth"

density and distance

population density declines with distance from the city center

density and time

population density gradients become less steep over time

labor supply

positive relationship between wages and level of employment -as wages rise, workers will (usually) supply more hours of work -labor supply shifters, changes that make location more or less desirable to workers: -changes in environmental quality -new amenities -reductions in residential taxes -improvements to residential public services (schools)

tax shelter benefits and fees

potential benefits (unique to real estate) from depreciation allowance and interest deductibility

residuals

proceeds from the sale or refinancing of a property after all debts and other expenses have been paid off

amortization

process of paying off a debt over time through regular payments (months, yearly)

proportion of metro area employment in US central cities

proportion of metro area employment in US central cities is falling 70% of metro area jobs in central cities in 1950 53% in 1980 42% in 2000 % of jobs in CBD is even smaller in 2006 only 21% of employees in the largest 98 metro areas worked within 3 miles of CBD 45% work more than 10 miles away cities have become less mono centric which implies more dispersed land use patterns

flight from blight

push theory of why households suburbanized -fiscal and social problems of central city pushed residents to leave 1) old housing 2) race and income 3) central city fiscal problems push factors that lead affluent central city residents to leave: -further deterioration in the fiscal situation of central cities -induces further out-migration

investment

putting time, effort, or money into something (good, idea, action) with the goal of achievement or reward -with a more narrow way, purchasing something with the hopes of using it to make money or selling it for money ex. stocks, bonds, businesses, savings accounts, real estate, art

location quotient

quick way to look at job specialization in a geography is to calculate the location quotient of industry i (LQi): LQi = employment share i / employment share US if LQi > 1: the city specializes in industry i relative to the US (and vice versa) Location quotients for local jobs/industries will tend to be near 1 in most cities

cap rate

rate of return used to derive the current value of the property based on the income stream value = NOI / cap rate cap rate = NOI / value cap rate is often lower than the overall rate of return the investor expects because it does not include appreciation of the property over the coming years

supply side of space market

real estate owners who rent space to tenants -is "kinked" -supply of office space is almost completely "inelastic" -if demand falls, office space cannot be reduced (extreme longevity of built space, reconstruction is costly) -"kink" occurs at the current quantity of built space at a rent level that equals the LRMC (long run marketable cost) of supplying additional space to the market -the "kink" means that future growth in demand may result in very little (if any) real increase in rent levels in many markets in the long run

market rent

rent that you would get from vacant spaces if you leased them at the market rate

vacancy

revenue loss -used to factor in current vacancy downtown: an estimate of how long it will take to find a new tenant after the previous tenant leaves (1-12 months depending on market) renewal probability: estimate of the probability that a tenant will remain in the space at lease expiation (typically 70%)

Barcelona vs Atlanta

roughly same population of 2.5 million -Barcelona covers 162 square miles -Atlanta covers 4,280 sq miles

New York metro area location quotients

securities, commodity contracts, investments 3.69 other info services 2.83 ... wood product manufacturing 0.12 animal production and aquaculture 0.04

decrease in demand

shift to the left, consumers willing to buy less at any given price

decrease in supply

shift to the left, producers willing to sell less at any given price

increase in demand

shift to the right, consumers willing to buy more at any given price increase in demand from eg increase in price of a substitute good creates a shortage at the current price prices rise until the shortage is eliminated, giving a new equilibrium

effects of urban growth boundary

short run: -discontinuity in bid rent function at distance of 6 miles -initially, no crucial issues, except for complaints form landowners outside of urban boundary -the absence of effects is due to the availability of land inside the urban boundary in the medium run: -landowners expect the urban boundary to be sequentially expanded -but it was not expanded so landowners realize they have an asset that suddenly is more valuable in long run: all the land gets developed -as population grows, price of land increases because shorter supply -housing prices increase -labor supply cannot increase much since there is little room for residential expansion and this leads to higher wages -ultimately, businesses leave since they can find cheaper labor and land elsewhere (bid rent for business land falls) winners: -landowners, and homeowners within urban boundary generally -growth controls lead to increase in housing prices -expensive for two reasons: land is expensive due to high demand or due to regulations -Postrel cities showing that in some parts of the country, price of homes is much higher than the cost of new construction -high-cost housing metro areas are also the places with the most stringent housing regulations losers: -potential in-movers -renters -landowners outside urban boundary

net lease

tenant pays all or a portion of the operating expenses

base of expense stop lease

tenant pays expenses above an agreed upon level in the least (most common in office leases)

discount rate of 0 indicates

that present value of money - future value of investment

level payment/self liquidating mortgage

the classical version of a mortgage -equal payments consisting of both interest and principal -initially, payment is almost entirely interest -over time, principal portion of payment increases due to amortization -payments near maturity (or final periods) consist mostly of principal -most typical mortgage for single-family homes

potential gross revenue

the combination of contract rent and market rent realistic assumptions -maintain clarity and realistic when making assumptions -in recent real estate crisis, assumptions that were too optimistic for an investment had terrible consequences -in real estate, cash flow projections for long term hold period -properties are durable asset and most investors hold them for long term periods, partly due to high transaction costs -even if the owner expects to sell the property shortly, the resale value depends on the property's operating income over the long term

promissory note

the contract terms between the borrower and the lender (written promise by one party to pay another party a definite sum of money at one point in time)

The Great Divergence

the growing divide between higher-skilled, higher-waged educated workers and lower skilled lower income workers -states growing most were states with lower economic activity in 1940 -1990, relationship not strong, weak convergence -1940-1980 wage growth in poorer metros outpaced larger metros by 1.4% -1980-2010: divergence, flat growth in wages, lack of convergence; college educated wages vs non-college educated people

interest

the interest rate on the property in annual terms

equilibrium

the intersection of the supply and demand curves gives the market equilibrium -this is the price and quantity in the market that, once reached, will remain constant unless one of the curves shifts -state of rest -characteristics of the equilibrium: Qd = Qs, no surplus, no shortage -a single price is determined with no pressure on the price to change

debt assets

the rights to the future cash flow to be paid out by borrowers on loans they have taken out -bondholders get a "senior" or "preferred" claim to obtain cash from the asset -payment flows are known in advance -finite lifetime, specific "maturity" -less sensitive to news

debt assets

the rights to the future cash flow to be paid out by borrowers on loans they have taken out -bondholders get a "senior" or "preferred" claim to obtain cash from the asset -payments flows are known in advanced -finite lifetime, specific "maturity" -less sensitive to news

supply

the supply curve measures how many units of a good producers are willing to produce/sell at each possible market price -price quantity relationship can be described by the following equation: Qs = S (P) -"supply" of a good is the relationship between quantity and price, not referring to a single number -supply curve slopes upward, demonstrating that firms are willing to sell more output at higher prices ("law of supply") -vertical axis measures price received per unit in dollars -horizontal axis measures quantity supplied in number of units per time period

"leftover principle"

the willingness to pay (for land in this case) is what is left over after covering all there costs, including non-cash costs, such as the value of your time, risk-adjusted use of capital, etc. -what will be the price of an area of each plot of land? -in competitive markets, price will be driven up and all cost savings will be passed onto owners of land through rents -land rent = excess of total revenues over non-land costs caveat: leftover principle will not hold if there are restrictions on entry and competition (monopoly power like patents)

financing

third stage in stages of development how do you pay for a property? -your money = equity sources of financing: -commercial banks, smaller banks -insurance companies, pension funds -REITs, private equity investors, foreign investors -other: bond market, CMBS Equity = project value - debt construction financing and then permanent financing

private market

those in which assets are traded in private transactions arranged between individual buyers and sellers as a result of a search process -generally less liquid than public markets -why? place an ad, find a match and try to ascertain a fair price for the asset (maybe sold with a discount)

public market

those in which small shares of ownership in assets are traded in public exchange among many sellers and buyers -price quotes are available for all -relative high degree of liquidity -are your Apple shares different from mine? are your US Treasury bonds different from mine? -find a buyer quickly

equity assets

those that give the owner the "residual" claim on the cash flows generated by the underlying asset -this claim is subordinated to any other debt owed by the asset -they provide control rights to manage the asset -infinitely lived -more sensitive to news

components of a pro forma

time frame: -start year is generally the first year after purchase -may vary based on objectives of the party doing the analysis -rule of thumb: proformas last ten years, but could be up to 30 and as short as five cash flow: -cash that comes into the property -cash that must be spent to maintain the property -cash flow that is related to owner expenses -crucial: decisions by developers, purchasers, leasing agents, and property manager are all intended to influence these cash flows

net square footage (NSF)

total square footage of all the rooms/areas on a floor minus non-assignable rooms

permanent financing

traditional mortgage following the construction period -lenders are interested in longer-term financing -similar construction financing concerns apply though cash flows of project matter even more

land rent with differences in land

two types of land: 1) high quality 2) low quality cost of production in high quality is lower; ex higher fertility in agriculture, differential accessibility or agglomeration benefits in urban areas -market of final goods is competitive, so producers are price takers and can't affect the market price (P) -each producer or firm uses one acre of land for production outcome? producers using the higher quality land will earn greater profits before paying rent than those using lower quality land how much are producers willing to pay in rent for each of these types of land? -up to their profit pre-rent -why? because competition drives economic profits to zero -intuition: if a tenant offers to pay less rent, a landowner can always find an alternative farmer/producer who is willing to pay a little bit more of rent

role of urban planner or developer in zoning

urban planners and developers should be skeptical of land use regulations and remember they impose costs too -do utilitarian calculus (MSB vs MSC) to make sure aggregate gains exceed aggregate losses -following Fischel, try to move up from local decision making to metropolitan wide planning and zoning -this will push individual suburbs to consider the implications of their zoning decisions on the region as a whole -would lead them to accept more density -consider alternatives like impact feeds -charge developers an impact fee to cover the full fiscal impact -think about feasibility and incidence

land regulations

use regulation to control actions that have social costs/externalities

supply and demand model

used to explain how prices are determined in perfectly competitive markets

income approach

using the income or flows from the proforma to estimate the value of a property determine the discount rate that we will apply to obtain the value of the property

present value

value of today of all the cash flows over the holding period in the analysis

how do we measure a good investment?

we need a measure of return or profitability cap rate = property operating earnings or net income / property asset price or value

use zoning in the presence of externalities

what if externalities exist? -private demand or willingness to pay no longer represents social value -we can use zoning as a mechanism to reach socially efficient outcomes manufacturing generates externalities (noise, pollution) -the unregulated, free market land allocation will be inefficient; too much manufacturing and we obtain a DWL -manufacturing bid rent curve shows the marginal private benefit (MPB) of using land manufacturing -how do we show the marginal social benefit (MSB?) should be below the MPB to account for externalities -MPB = MSB + net social (external costs) -some land for which MSB residential > MSB manufacturing is used as manufacturing land -zoning is a mechanism to allocate land use to the highest MSB

characteristics/design zoning

what is the underlying problem addressed? -design externalities or externalities of new development that is out of character/scale with existing streetscape -goal is to preserve character of area and thus value of existing properties what are the specifics of the approach? -designating historic districts -setting maximum-height restrictions, minimum parking requirements, number of houses per unit of land -regulating mc mansions expected market effects or consequences? -housing prices will likely increase, but developers are also more limited on possibilities for extensions, net effects could be ambiguous -vacant land will likely decrease; neighborhood may be more desirable but there are more restrictions on what you can build; again, ambiguous net effect -to think about: why should we worry about protecting existing homeowners? they did not buy a guarantee that the small colonial home across the street would be there forever -housing is another asset and thus is subject to market risk

fiscal zoning

what is the underlying problem addressed? fiscal externalities -as opposed to other rich countries, the US fiscal support is tied to wealth of residents In the locality (via property taxes and sales taxes) -intergovernmental transfers from federal or national levels are low compared to other rich countries -therefore, local jurisdictions have motivation to zone in areas that will contribute to tax base and zone out areas that will not contribute much to tax base -externality appears when individuals do not incorporate in their location decision how this may affect public services or tax collections in the locality -localities have a fiscal motive to be exclusionary -if new residents on average own less taxable property than old residents, then existing residents are likely to pay more for same level of services, though quality will not improve -localities want to attract households who are "fiscally neutral -families who use little in the way of services and who contribute a lot to the tax base What are the specifics of the approach? -minimum lot size zoning (exclusionary zoning) -limiting multi-family housing, mobile homes -think how to incorporate fiscal zoning into the classical location theory (mono centric) model What are the expected market effects or consequences? -developers are less able to benefit from factor substitution -value of land will probably decrease -housing values probably increase -neighborhood becomes more homogenous -winners: existing single-family homeowners -losers: potential residents, renters, neighboring communities -who votes for these zoning ordinances? -homeowners and voters who will benefit -reason to fear Tha zoning will not result in socially optimal outcome - should be careful about racial/social motives to be exclusionary -most legal cases attempt to sort out true motivations

positive location externality

when a firm decides to locate next to other firms, it does not internalize the advantage it may spur to other firms

cities as engines of growth

world population will continue to live in or move to cities -cities will remain engines of growth, concentrating economic and political power