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BUSFIN 4410 – Real-Estate Finance Spring Semester, 2016-2017

Professor Itzhak (Zahi) Ben-David Class Schedule Section 1: Tuesday and Thursday 2:20pm – 3:40pm (Schoenbaum Hall 215) Section 2: Tuesday and Thursday 3:55pm – 5:15pm (Schoenbaum Hall 215) Instructor Prof. Itzhak Ben-David E-mail: bendavid@fisher.osu.edu Web: https://fisher.osu.edu/~ben-david.1/ Office Hours: Tuesday 5:30-7:00pm by appointment, 606A Fisher Hall. Teaching assistant: Hyeik Kim kim.6577@osu.edu Course Description This course provides a framework for analyzing individual real-estate transactions (both commercial and residential) and real-estate assets as an asset class. We will cover three topics in depth. First, we will examine several valuation techniques used in practice and their underlying assumptions. These methods include cap rates, and cash flow discounting. We will discuss financing of real estate properties through debt and equity. Second, we will discuss how real-estate assets are integrated in capital markets through Real-Estate Investment Trusts (REITs), private equity, and the securitization process. Third, we will discuss the role of the real-estate market in the macro economy, and in particular in the financial crisis of 2008. Prerequisites The only prerequisite is BUSFIN 3400 (Intro to Real Estate) or an equivalent (upon the instructor’s approval). Knowledge in finance (e.g., corporate finance) is an advantage. This is a quantitative class and you will need to have basic knowledge of microeconomics, statistics and math. You will need a calculator that has a xy function. A financial calculator is not required, but it can help you solve the problems we study faster. In addition, you will need a good command of Microsoft Excel in order to write the case reports.

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Course Materials An online course packet, which contains reading material and cases. The packet is available on https://cb.hbsp.harvard.edu/cbmp/access/43202313. Other materials will be posted on Carmen. Attendance Attendance is NOT mandatory. Students can attend either Sections that are offered. Nevertheless, they must take the midterms and exams in the Section to which they are registered. Evaluation Grades in this course will be based on the following components:

1. 4 group case studies (4 x 9% = 36%) 2. 1 group assignment (1 x 6% = 6%) 3. 1 individual assignment (1 x 6% = 6%) 4. 2 midterm exams (2 x 15% = 30%) 5. A final exam (22%)

The following are the primary principles for evaluation:

Grading is relative to the performance of your peers. I.e., the grade is curved.

The grade distribution is not truncated. It is possible to earn any of the official OSU grades in this course.

Please note that there will not be any make-up exams except as required by university policy. If illness or an emergency should force you to miss an exam, please contact me before the exam is given.

A bonus of up to 5% will be provided for active participation, at the discretion of the instructor.

Group Cases Group cases should be submitted by groups of up to 5 students. The instructions for the case will include grade breakdown. Please submit hard copies only; email submissions are not acceptable.

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Electronic Devices Policy If you need a laptop, tablet, or any other device for taking notes or otherwise participating in class, that’s fine. However, please do not use a personal device for any purpose unrelated to our class. All devices should be silenced. Cell phones should be put away, except in the rare instance that I ask you to use them for an activity. I recommend that you power them down. If there is a serious need to leave your cell phone on, such as a family emergency, please put it on vibrate and let me know. If you leave the classroom to take a call, I’ll understand why. I routinely reduce professionalism grades for cell phone / laptop use unrelated to class. Regrading Policy All regrade requests must be made within one week of the day the exams or cases are returned. Any exam submitted for regrading of a question is subject to a complete regrade. As a result, the regraded score may increase, stay the same, or decrease. Note that I will not consider any regrade request after the one week deadline has passed. Department of Finance Policy on Electronic Devices in Finance Classes The absence of unnecessary distractions and interruptions is essential for a positive and effective learning environment. Thus, students may not use any electronic device in class, unless explicitly permitted by the instructor. All electronic devices must be turned off and put away prior to the start of class. Students who want to take electronic notes may do so but only if it is on a tablet device and that tablet must remain on the flat table top for the entire class time. Academic Integrity You have affirmed to adhere to the following honor statement: As a member of the Fisher College of Business community, I am personally committed to the highest standards of ethical behavior. Honesty and integrity are the foundation from which I will measure my actions. I will hold myself accountable to adhere to these standards. As a leader in the community and business environment, I will pledge to live by these principles and celebrate those who share these ideals. In addition, the University's Code of Academic Integrity is designed to ensure that the principles of academic honesty and integrity are upheld. All students are expected to adhere to this Code. Please visit the following website for more information on the University's Code of Academic Integrity and possible sanctions: http://oaa.osu.edu/procedures. In accordance with University Faculty Rule 3333-5-487, all instances of academic misconduct will be reported to the Committee on Academic Misconduct which recommends appropriate sanctions to the Office of Academic Affairs. There will be no exception to this rule.

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Topics to be Covered Direct Holdings of Real Estate 1. Valuing cash flows

a. Annuities b. Perpetuities c. Gordon model d. Risk and return: CAPM e. Cost of capital

2. Equity-financed properties

a. Valuing single-tenant properties b. Valuing multi-tenant properties c. Alternative valuation methods: replacement cost, sales comparables

3. Economics of mortgages

a. Amortization schedules b. Types of mortgages: fixed and floating (variable) rates c. Types of mortgages: interest only, negative amortization, option ARM,

prepayment penalty d. Advantages and risks of leverage

4. Equity- and debt-financed properties

a. Cost of capital b. Valuing properties with debt c. Debt and mezzanine d. Rent vs own e. Corporate real estate f. Moral Hazard and Adverse Selection

Real Estate and Financial Markets

5. Private equity and partnerships

a. Contractual structure b. Valuing properties with debt, equity general partner, equity general partners

6. Real estate investment trusts (REITs)

a. REITs history, tax treatment, and market analysis b. REITs and market sentiment

7. Securitization

a. Mechanism of securitization

8. Institutional investors a. Goals of institutional investors b. How do institutional investors invest in real estate

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Real Estate Cycles, Real Estate Crises 9. Real estate and behavioral finance

10. Financial crisis

a. Incentives in the real estate market b. What caused the crisis? Theories of real estate cycles

Real Estate and the Community 11. Externalities and inequality

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Tentative Course Calendar

Class Number

Date Topic & Readings Assignment Due

1 1/10

Classroom Discussion: Lecture: Introduction Lecture: Annuities, perpetuities, DCF, Gordon model and cap rate, risk and

return, Capital Asset Pricing Model (CAPM) Pre-class Preparation: Read: Financial analysis of real-estate property investments (Packet) Read: DCF analysis (Carmen) Watch: https://www.youtube.com/watch?v=UwnVWZJp0B0

2 1/12 Classroom Discussion: Lecture: Valuing single and multi-tenant properties, CVS Case

3 1/17 Classroom Discussion: In-class case: Offices up-north

Case Write-up (Offices up-north)

4 1/19

Classroom Discussion: Lecture: Alternative valuation methods: replacement cost, sales

comparables Lecture: Mortgages: amortization schedule

5 1/24

Classroom Discussion: Lecture: Mortgages: amortization schedule Lecture: Mortgages: fixed and floating rates, interest only, negative

amortization, option ARM, prepayment penalty Lecture: Advantages and risks of debt leverage

6 1/26 Guest Lecturer: “Deal structuring” 1st Section: Frank Kass (CEO at Continental Real Estate) 2nd Section: Frank Kass (CEO at Continental Real Estate)

7 1/31 Classroom Discussion: Case discussion: Angus Cartwright IV

Case Write-up (Angus Cartwright IV)

8 2/2 Classroom Discussion: Review for midterm

9 2/7 MIDTERM I

10 2/9 Guest Lecturer: “Developing Real Estate for the Community” 1st Section: Brent Crawford (Principal, Crawford Hoying) 2nd Section: Brett Kaufman (CEO, Kaufman Development)

11 2/14

Classroom Discussion: In-class case: Residences at Scarlet & Gray Pre-class Preparation: Prepare Residences at Scarlet & Gray (Carmen) Visit Scarlet & Gray site (drive by)

Case Write-up (Residences

at Scarlet & Gray)

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12 2/16

Classroom Discussion: Lecture: Externalities and Inequality Lecture: Moral hazard and adverse selection Pre-class Preparation: Watch: https://www.youtube.com/watch?v=vttbhl_kDoo Read: http://www.economist.com/news/economics-brief/21702428-george-

akerlofs-1970-paper-market-lemons-foundation-stone-information

13 2/21

Classroom Discussion: Lecture: Leasing vs. owning: residential and commercial Pre-class Preparation: Read: Buy or lease: Commercial property decisions (Carmen) Read: Lease vs buy: The corporate perspective (Carmen) Watch: https://www.youtube.com/watch?v=kwlWeijKUNo

14 2/23

Guest Lecturer: “Corporate Real Estate” 1st Section: Chuck Digiovanna (Vice President of Real Estate, Macy’s Inc.)

and Lauren Kirk (Senior Manager, Real Estate, Macy’s Inc.) OK 2nd Section: Chuck Digiovanna (Vice President of Real Estate, Macy’s

Inc.) and Lauren Kirk (Senior Manager, Real Estate, Macy’s Inc.) OK

15 2/28 Classroom Discussion: Lecture: Real estate partnerships

16 3/2 Classroom Discussion: Case discussion: Wildcat Capital Investors

Case Write-up (Wildcat Capital Investors)

17 3/7 Classroom Discussion: Lecture: Behavioral Finance and Real Estate

18 3/9 Classroom Discussion: Review for midterm

19 3/21 MIDTERM II

20 3/23 CLASS CANCELLED

21 3/28

Classroom Discussion: Lecture: Real Estate Investment Trusts (REITs) Pre-class Preparation: Read: BofAML-REIT-Primer (Packet) Read: FAQs about REITs (Packet) Watch: https://www.youtube.com/watch?v=yDl1_uLR5Os

REITs Group Assignment

22 3/30 Guest Lecturer: “Real Estate Investment Trusts (REITs)” 1st Section: Joe Weisenburger (VP Senior Housing at Health Care REIT) 2nd Section: Joe Weisenburger (VP Senior Housing at Health Care REIT)

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23 4/4

Classroom Discussion: Lecture: Securitization Pre-class Preparation: Read: What is securitization? (Packet) Read: Asset Securitization (Packet) Watch: https://www.youtube.com/watch?v=oosYQHq2hwE Watch: https://www.youtube.com/watch?v=eYBlfxGIk28

24 4/6

Guest Lecturer: “Institutional investors” 1st Section: Russ Nicholson (Director, Midwest Region, STRS) OK 2nd Section: Todd Harrop (National Director of Capital Markets,

Bellwether) OK

25 4/11

Classroom Discussion: Lecture: Real estate cycles

Pre-class Preparation: Read: http://www.economist.com/news/economics-brief/21702740-

second-article-our-series-seminal-economic-ideas-looks-hyman-minskys

26 4/13

Classroom Discussion: Lecture: Financial crisis Watch: https://www.youtube.com/watch?v=mzJmTCYmo9g Watch: https://www.youtube.com/watch?v=EsA9lR2XB3A

Individual Assignment

27 4/18 Guest Lecturer: “The Financial Crisis of 2008” Combined Section: Bob Schottenstein (CEO, M/I Homes) OK

28 4/20 Classroom Discussion: Review class

TBD FINAL EXAM