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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: Thursday 1:00-2:00pm by appointment, Fisher 606A

Teaching assistant: Mark Johnson johnson.7095@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 http://cb.hbsp.harvard.edu/cbmp/access/57642592. Other materials will be posted on

Canvas.

Attendance

Attendance is mandatory ONLY for guest speaker sessions and midterms. Students can

attend either Sections that are offered. During midterms, students must attend their

registered session.

Evaluation

Grades in this course will be based on the following components:

1. Finance review homework: 5%

2. 4 group case studies: (4 x 8% = 32%)

3. 1 individual assignment: (1 x 7% = 7%)

4. 3 midterm exams: (3 x 16% = 48%)

5. Attendance (guest lectures): 8%

The following are the primary principles for evaluation:

Grade scale:

Score Letter grade

95-100 A

90-94 A-

85-89 B+

80-84 B

75-79 B-

70-74 C+

65-69 C

60-64 C-

55-59 D+

50-54 D

45-49 D-

0-44 F

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.

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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.

Electronic Devices Policy

Electronic devices (phones, laptops, notebooks) are not allowed in the classroom. If you

wish to take notes on a laptop or notebook, you need my approval and sign a no-

personal use statement. Personal use of electronic devices is not allowed. All devices

should be silenced. Cell phones should be put away; 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 silent mode and let me know in advance. If you leave the classroom to take

a call, I will understand why.

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.

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 variable (adjustable, floating) 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 1/9

Classroom Discussion:

Introduction

Finance review I: Annuities, perpetuities, DCF, Gordon model

Attendance at the beginning of class is mandatory (university rules)

2 1/11

Classroom Discussion:

Finance review II: Risk and return, Portfolio Theory, Capital Asset Pricing

Model (CAPM)

Attendance at the beginning of class is mandatory (university rules)

3 1/16

Classroom Discussion:

Valuation: Cap rate

CVS Case (cap rate)

Pre-class Preparation:

Read: Financial analysis of real-estate property investments (Packet)

Read: DCF analysis (Canvas)

Watch: https://www.youtube.com/watch?v=UwnVWZJp0B0

Finance review

homework

4 1/18

Classroom Discussion:

Valuation: Cash flow proforma

Valuing single and multi-tenant properties

CVS Case (Proforma)

5 1/23

Classroom Discussion:

Mortgages: amortization schedule

Mortgages: fixed and adjustable rates, interest only, negative amortization,

option ARM, prepayment penalty

Advantages and risks of debt leverage

6 1/25

Classroom Discussion:

Case discussion: Angus Cartwright IV

How do generate value in real estate

Alternative valuation methods; Class discussion on replacement cost and

Comps

Case Write-up

(Angus Cartwright IV)

7 1/30 Guest Lecturer: “Deal structuring”

Frank Kass (CEO at Continental Real Estate)

8 2/1

Classroom Discussion:

Case discussion: Offices Up-North

Tax abatement; rent growth

Case Write-up

(Offices up-north)

9 2/6 MIDTERM I

10 2/8 Guest Lecturer: “Lending with Real Estate as Collateral”

Tayfun Tuzun (CFO of Fifth Third Bank)

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11 2/13

Classroom Discussion:

Leasing vs. owning: residential and commercial

Solve midterm

Pre-class Preparation:

Read: Buy or lease: Commercial property decisions (Canvas)

Read: Lease vs buy: The corporate perspective (Canvas)

Watch: https://www.youtube.com/watch?v=kwlWeijKUNo

12 2/15

Classroom Discussion:

Case discussion: Residences at Scarlet & Gray

Pre-class Preparation:

Prepare Residences at Scarlet & Gray (Canvas)

Visit Scarlet & Gray site (drive by)

Case Write-up

(Residences

at Scarlet & Gray)

13 2/20

Classroom Discussion:

Lecture: Real estate partnerships

Solve partnership problem (class problems #5, 2a)

14 2/22

Classroom Discussion:

Case discussion: Wildcat Capital Investors

Solve partnership extension problems (class problems #5, 2b-d)

15 (no class 2/27)

3/1

Guest Lecturer: “Corporate Real Estate”

Chuck Digiovanna (Vice President of Real Estate, Macy’s Inc.) and

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

16 3/6 Classroom Discussion:

Case discussion: Wildcat Capital Investors

Case Write-up

(Wildcat Capital Investors)

17 3/8

Classroom Discussion:

Risk management

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

18 (Spring break:

3/13, 3/15)

3/20

CLASS CANCELLED

19 3/22 MIDTERM II

20 3/27 Classroom Discussion:

Lecture: Behavioral Finance and Real Estate

21 3/29

Classroom Discussion:

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

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22 4/3

Guest Lecturer: “Real Estate Investment Trusts (REITs)”

Seamus Brennan (Washington Prime REIT, Director, Strategic

Analysis, Capital Markets)

23 4/5

Classroom Discussion:

Securitization

Midterm review

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 4/10

Guest Lecturer: “The Financial Crisis of 2008”

Combined Section: Bob Schottenstein (CEO, M/I Homes) (3:45-5:15)

Hitchcock Hall 035, 2070 Neil Ave, Columbus, OH 43210

25 4/12 Guest Lecturer: “Institutional investors”

Russ Nicholson (Director, Midwest Region, STRS)

26 4/17

Classroom Discussion:

Financial crisis

Watch: https://www.youtube.com/watch?v=mzJmTCYmo9g

Watch: https://www.youtube.com/watch?v=EsA9lR2XB3A

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

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

27 4/19 MIDTERM III Individual Assignment

or

Unknown Outcomes case