FINC 475 - REIT COMPANIES SUMMARY

Pebble Brook Hotel Trust This REIT was created in 2009, and specializes in investing in Retail properties. In particular, the REIT specializes in up-scale, luxury hotels, predominately located in "Gateway" cities. Pebble Brook Hotel Trust currently owns 25 properties in the USA. Their CEO was from Jones Lang Le Salle, which is a real estate firm based in Houston. As far as financials go,they have a low debt structure, and are known to acquire properties at a 35% discount. Hines Global REIT The Hines company began in 1957. They recently opened a new branch to their company that handles the REIT, which started in 2009. This company is responsible for much of the beloved Houston skyline. The company is public, but not traded in public markets. The company is responsible for 800 properties, which it manages with excellence. They are currently in the fundraising state of the REIT process, and will start investing in properties once they have raised $3.5 billion. If one wants to invest in this REIT, the minimum investment is %$2,500 and claims it will get a 6.5% annual return on the investment. The REIT will specialize in office space, and will sell all properties in 2019, hoping to have increased their value to return maximum profit to investors. American Campus Communities This REIT specializes in student housing communities. The company is known to make deals with universities to create on-campus dormitories, and is also known to invest in off-campus housing. American Campus Communities specializes in up-scale student living. Some examples of their investment in the local arena are Callaway house and villas, and Aggie Station. Because the company's niche is high end student living, the project size must be over $10 million or it is not worth the time or investment. Taubman This REIT specializes in high-end shopping centers or malls. The company is known for it's luxurious retail environments. The company became public in 1992. They are known for their excellent management team and their savvy acquisitions. The average property they own is 23 years old. Their malls have the highest average sales productivity in the nation. The REIT's stock price is currently valued at $78 a share, which is very impressive. Public Storage REIT Public storage is one of the largest members of it's industry. The REIT owns and operates over 2,000 different storage facilities all over the United States. The company opened it's first storage facility in 1972. The investment strategy of the firm is very interesting. Instead of opening new facilities that would take away market share from existing facilities, their strategy is to acquire storage facilities from other companies. SL Green This REIT specializes in office space. Their investments are highly populated in the New York area. It was created in 1980, and the REIT went public in 1997. They are known for their expansive market in the Manhattan area. The company owns interest in 77 properties in the Manhattan area. The company manages all of the properties it acquires. One of their most impressive properties is the building on 1515 Broadway. MY GROUP WAS SIMON

FINC 371 Project

Executive Summary: A Montessori school offers a unique learning experience and appealing to families with young children. In this growing affluent area 27 miles north of Houston, it will surely be a very profitable real estate investment. Real Estate in The Woodlands is and has been on a trend of growth and prosperity. The financial analysis of this investment has proven that it is a sound investment. The report that follows will prove this point to you. Company profile: Montessori education emphasizes “independence, freedom within limits, and respect for a child’s psychological development” started by Italian doctor and education Maria Montessori. Each of the instructors is trained at a special facility known as Montessori Accreditation Council for Teacher Education. It breaks free of traditional practices of education creating a unique learning experience for each student. Additionally, it has a corporate gaurantee from La Petite Academy, Inc. a Deleware Corp. Market Analysis: The Woodlands area is affluent suburban area targeting families. Although the location of the daycare facility is in an older part of the area, the cost reflects its age. In addition, the location is extremely central and easily accessible from neighboring towns because of it’s proximity to I-45. However, the target market is a well off family with young children and the immediately surrounding area is consistent with the target market. Additionally, the area is growing making a growing need for daycares. Average income within a mile radious is over $106, 000. Typically, the values of Montessori schools focus on hands on learning and uphold a well respected reputation. We will have four instructors paid $14,500/year and one director paid $20,000/year. We anticipate to have approximately thirty students. The purchase price is $1,363,529. One example of a sales comp was in Tomball, TX where another daycare facility sold for between $1,000,000-1,500,000 and had 13,708 available square feet. -Pictures/information about comparable properties -rental rates, occupancy, amenities, rent abatements (free rent for 1 month? Inventory/vacancy rate for property type -Supply/Demand Competition -SWOT Analysis-Property’s Strengths, Weaknesses, Opportunities, and Threats Property Description: The property is 5,964 square feet and goes for $228.63 per square foot. Signage is limited in this area due to restrictions by The Woodlands Association in attempts to maintain a certain asthetic in the area. It is accessible from a driveway from Many Pines Road and is not visible from the road because of a barrier of trees. Financial Analysis This section will tell reveal to you the financial details and analysis of Montessori Unlimited. This will allow you to make the most educated decision as to whether the investment is ideal for you. First off I would like to state and explain some of the assumptions and values that were used in the calculations. The going in cap rate was listed on the property as 8.5%. As for expenses, comparable daycares were looked at to get a good estimate of the operating expenses we expect to be incurred. To find the growth rate of potential growth income, we looked at a national forecast of similar retail environments. We did the same to come up with the growth rate for operating expenses. We also researched local property taxes to come up with a solid figure, the property tax came out to be around $27,000. This is a large amount, but is made up for by Texas’ policy of not having income tax. Thus, in the calculations to find after-tax cash flow, we used sales tax instead of income tax. The sales tax in The Woodlands is around 9.8% of the sale of products or services. The last assumption we made by looking at historical trends was to come up with a terminal cap rate, which we estimated to be just slightly lower than the going in cap rate at 8.2%. Upon doing research, we felt safe with a loan to value of 75%. Looking at the history of banking with small businesses in the area, we assumed the loan would come at a 7.5% interest rate. The first calculation that will give insight into the profitability of this investment is the unleveraged NPV, which is the net present value if there was no debt financing involved. The table above is used to find the unleveraged NPV. This is found by having an initial investment of $1,363,529, and using the NOI for each year as a cash flow. Also, in year 10 we add in the selling value of the property which is calculated by dividing year 11’s NOI by the terminal cap rate. This number is $2,352,850.85. It is also important to note that we used a required of return of 6.47%, which is the average cost of capital for educational services. The NPV= $931,68206 We use the same numbers and process for the unleveraged IRR IRR=14.03% The leveraged NPV and IRR take into account debt financing. In this case, the initial investment is the amount of equity you have to invest. In this case, the LTV was .75 so the investor must invest .25 the purchase price in equity. This value is 340882.25. The after tax cash flows are the yearly cash flows used for this calculation. The year 10 cash flow gets the selling price minus the carrying value on the loan added to it. This value is $1,664,289.74. The leveraged NPV is $810,915.41 The leveraged IRR is 21.81 If you have the capital to be able to buy the property out-right, then that is the most profitable choice as it results in the higher NPV. But, by leveraging you don’t take on as much risk and you have a higher IRR. A vital factor that is playing into these values being so positive is the low cost of capital in the industry which results in a low required rate of return. My advice pertaining to this property is that it is a good investment. It is in a blossoming part of Texas where real estate is growing very fast. In fact, investing in this property for the land alone would not be the worst idea. The Woodlands is quickly becoming a luxury destination and has residents with high average incomes. This is good for any business in the retail sector. To conclude, the Montessori Unlimited daycare is a profitable investment and is worth looking into.

FINC 371 Real Estate Financing

The two most common loans in real estate are the fixed rate mortgage and the adjustable-rate mortgage. A hybrid loan is a combination of both. There are also reverse mortgage loans, and loans that use a different term for the amortization as the loan term. Often time people want to have the term of the loan coincide with the time they want to hold the property, but this is not always the case. For mortgages, a common example of a loan term is around 30 years. There are many sources of capital for real estate. This can come in the form of equity or debt. For example, a REIT that is public will sell shares of it's stock to get capital for real estate. There are many ways to "Creatively" finance your real estate firm. I believe that a firm should be highly levered, meaning it should favor debt over equity, because interest is tax-deductible. Firms can also offer subsidized housing to lesser off families to receive tax credits.

FINC 371 Overview of Real Estate Finance

Real estate finance is essential in real estate investments because many times one needs a loan to acquire a property. Major employers in this arena include commercial banks, and regular banks, who give out loans to people who choose to use debt financing to acquire a property. Another employer in real estate finance is appraisal firms. Jobs in real estate finance include brokerage, real estate appraisal, mortgage banking, and title insurance. Some trade organizations in real estate are the American Land Title Association, the Building Owners and Management Association, and Mortgage Bankers Association of America. Real Estate financial markets have been on an increase since the housing downturn in the 2000's. http://finance.yahoo.com/news/everybody-says-downsize-everybody-may-213800235.html This article contends with the idea that downsizing to create a cash inflow can be the wrong idea. It claims that selling your house to beef up retirement accounts can be a bad decision because of the state of the market. It also says that your property can gain significantly in value, thus you will be losing money.

FINC 371 Overview of a Real Estate Appraisal

An appraisal is a document that approximates the value of something. In this case, that  something would be a real estate property. Appraisals take into account  many things, such as the value of the land and the expected revenue that comes from the property. Appraisals aim to get as close as possible to the marker value of the property. Appraisals are perceived as an opinion. You may agree or disagree with an appraisal. A bad appraisal would be one that you don't agree with the value that the appraiser assigns to the value. There are many types of appraisals. Sometimes they are done to evaluate an estate for a will. Sometimes appraisals are used by banks when a house is foreclosed on. The government also uses appraisals for tax purposes. With the influx of information available to the public, I believe appraisals will decline, as people will attempt to do their own appraisal.

The appraisal is also very important for your loan. As this article shows, an appraisal that is too low can mess up your valuation which can cause you to not get your mortgage loan. This is due to the fact that some banks use a loan to value calculation when deciding to give a mortgage or not. I believe in cases like this appraisers should lean to a higher value than lower when making a tough decision. This is a similar article which contends with appraisals that are on the low side. In this article it is the realtors who are complaining about the appraisals. Low appraisals are bad for realtors in that it effects their customers getting loans and it effects their sales price.

FINC 371 Overview of a real estate appraiser

Being a real estate appraiser sounds like an enjoyable job where you get to use your analytical and social skills. The first step in becoming an appraiser is getting a trainee license. The next few stages you don't make much money, but it is wise to find a job where you will have someone to show you the ropes and help you network. Last, you must get a real estate license, and you will be ready to appraise on your own after you become a certified appraiser. Right now there is high competition for real estate appraisers, the demand is not quite as high as the supply.

This article explains the pay, and the day to day activities of a real estate appraiser. On average, they make around 50K a year. The main day to day activity of an appraiser is appraising. Which means they go out to properties and provide estimates for clients. These can be used for a variety of reasons

One example of a major real estate appraisal firm is The Scott Appraisal Company. This specific company works in central California. They appraise any real estate from industrial to residential. An interesting fact that I saw on the website was their court experience. This leads me to believe that sometimes their appraisals are so serious they are used in a court of law.

FINC 371 Property Rights and Legal Descriptions (Due 9/16)

Property Rights deals with the rights to ownership of land, objects, and natural resources. An example of a property right would be if there is oil on your land. The details of your housing situation and the contract/lease you signed would provide more insight as to the ownership of the oil. Another example of property rights is who the fixtures inside a renting home belong to. Details such as if the fixture is permanently connected to the household would be looked at to determine the property rights. Another issue is if you live in a condo or town house, and there is a plot of land in the backyard. The property rights will determine if you own any of that land or you share it with the other tenants.

http://www.washingtonpost.com/wp-dyn/articles/A58185-2005Feb27.html
This article contends with a property right dispute in Oregon. Some Oregon land owners feel they should be compensated by the government because their anti-sprawl and land use restrictions have decreased the value of their land. In fact, there is a property right law that says the government should indeed compensate these people. In my opinion I don't think the government should have to compensate people for trying to protect the wildlife of Oregon.

Real Estate much have a legal description for the land that it is on. There are three methods to determine the legal description: metes-and-bounds, rectangular survey, and recorded plats. The legal descriptions fall into two categories, either platted or unplatted.  This article provides examples and the methods to come up with the legal descriptions.Examples of a platted development are subdivisions and condos. Unplatted refers to all the land that does not have a legal designation, and it is all about location and dimension. Unplatted descriptions usually take the form of metes-and-bounds.

FINC 475 Supply & Demand in a Real Estate Context (Due 9/16)

http://www.investopedia.com/articles/mortages-real-estate/11/factors-affecting-real-estate-market.asp#axzz26qIXeptl
This article lays out the main factors in the supply and demand in the real estate market. One of the key factors is the demographics of the area. The article puts a lot of stock into the demographics as a key factor, which I slightly disagree with. The article claims different demographics prefer different types of real estate. Further evidence for this point is found in this article about the real estate in College Station, TX.. It shows the demographics of the area for potential investors of real estate. Obviously this is pertinent information for investors. Thus, the demographics of a country can dictate the type of demand in real estate. One of the main factors in the supply and demand of real estate is interest rates. Interest rates dictate if a person is going to be able to have the money to purchase the real estate. When interest rates are low, there is a high demand for real estate. When interest rates are high, people do not want to take loans thus the real estate market goes down. The overall economy also dictates the supply and demand of real estate. When the average GDP is higher more people have money to invest. Government policies/subsidies can effect the supply of the real estate market. When a government gives out a subsidy it opens up more real estate and homes for people to buy.

The real estate market efficiency hypothesis contends with the idea that the price and value of real estate reflect all available information. This is a hot topic for debate, as many people believe the seller always has more information than the buyer. This article contends with the debate in the real estate market in Vancouver. The author claims there is data that goes against the efficient market hypothesis. The author claims that some purchases are based on irrational expectations for future returns. He claims there is deviations between the intrinsic and market values of properties, which would cause the efficient market hypothesis to not hold.

FINC 475 Real Estate as an Investment (Due 9/16)

Investing in real estate has changed over the years. In the past one could acquire real estate and hold on to the property for many years and receive a solid return on their investment. Presently, investing in real estate is a lot like investing in the stock market. The more return you want the more risk you have to take on. There is no longer a constant growth in the real estate market, you are gambling every time you invest. Just like the stock market, you can hedge your risk by investing in multiple markets. If you put all your money in one real estate market you could win big, or you could lose big. By investing in a variety of real estate markets you don't put all your eggs in one basket. This is similar to investing in a mutual fund in the stock market, some stocks may go down but others will go up. By doing this, you minimize risk.

http://www.theinvestortoday.com/articles/what-are-the-risks-of-real-estate-investing/
This article lays out the different risks in real estate. It also correlates your personality as to how you deal with risk. One risk the article claims in real estate is negative cash flows. The business you invest in on the real estate can go south and not be profitable. This leaves you with a negative investment. Another risk when speculating on real estate is that there will be no appreciation. If an investor plans on flipping a property, and the appreciation on the property is not higher than inflation, the investor will lose money. The article claims you should only buy real estate that you know you can sell for a profit. This statement is a bit ridiculous, there are few times you know you can sell something for a profit before you buy it. There must be some sort of speculation or everyone would do it.

http://www.creonline.com/blog/9-ways-to-eliminate-real-estate-investment-risks/
This article gives you insight on how to eliminate risk when investing in real estate. In my opinion, the article makes investing look easier than it is. It says vague things like "buy the right house". It is often difficult to know what is the "right" house. The part of the article I agree with is the section talking about using the right financing. I find this to be very important in real estate because if you choose the right financing you have a higher chance of making a profit on the investment.

http://articles.economictimes.indiatimes.com/2011-04-08/news/29396722_1_real-estate-bse-realty-index-stock-market
This article explains the similarities in the real estate market and the stock market. It claims that the trends are very similar, and they both are very related to the economy as a whole. It also explains that stocks are much more liquid than real estate, which I agree with. Some real estate investments can take years to get out of, but stocks always have a market to be sold in.

FINC 371 Private Restrictions (Due 9/16)

Private Restricts on ownership refer to the rules home owners must follow in certain developments. Common developments that have private restrictions are subdivisions, town homes, or townships. If you live in a town home the private restrictions for that development will dictate how you can use the common area or backyard. I used to live in The Woodlands, a town full of subdivisions, where we had to keep our house looking a certain way and would have to have the landscaping kept up with. We also had to pay monthly fees to the township. These are both examples of private restrictions. They can limit what you can build in your front yard and can even limit how you can design your house on a plot of land.

This article shows the private restrictions for where I used to live, The Woodlands, TX. This document lays out all of the rules home owners must abide by when living in the Woodlands. It has important restrictions on detached add ons such as a garage. It even has restrictions on how to remove a tree. The purpose of all of these private restrictions is to make the community live up to a certain standard so it is a more desirable place to live.

Another example is the Private restrictions in Napa. Like the Woodlands, Napa has their own list of restrictions that their citizens must abide to. These restrictions seem like they are a hassle and limit what you can do on the land YOU bought, but they do make the community nicer which drives up the price of your home when you need to sell.

FINC 371 Public Restrictions (Due 9/16)

Public Restrictions are the government restrictions for ownership of real estate. These restrictions come in four categories: taxation, escheat, eminent domain, and police power. The government has the right to issue property tax on one's real estate. This property tax is usually based on the market value of the real estate. The government also has the right to escheat, which means that the government can claim ownership to real estate in which the owner dies and he/she does not have an heir or a will that dictates who the real estate should go to. The power of eminent domain is used by the government to acquire property from individuals or corporations for public use. The owner of the land must be justly compensated. An example of this would be the government acquiring property to build a highway. Police power gives the government the right to monitor and police private property to protect the public. Examples of this is requiring certain environmental standards on power plants.

http://www.cnn.com/video/#/video/bestoftv/2009/11/20/roberts.eminent.domain.cnn
This article contends with the government power of eminent domain. The plaintiff is the last resident living in his condo that is in consideration of being acquired by the government to open a new arena for the New Jersey Nets. He complains that the arena is not a public use project, and is hoping the courts overrule the decision to give the property to the government. The government counters his complaints by saying that the arena will create 10,000 new jobs.

http://www.nytimes.com/2007/07/29/nyregion/nyregionspecial2/29RDOMAIN.html?ref=eminentdomain
Homeowners in in Long Branch, New Jersey have been in a 12 year battle for their homes. The city of Long Branch, New Jersey is attempting to use eminent domain to acquire their homes to give way to a private developer. The home owners are fighting this because they believe the city is doing this to increase tax revenue. The home owners have a fighting chance as it seems that the government is abusing their power of eminent domain, which is supposed to be used only for public use projects.

FINC 475 DCF CAP RATE (Due 9/16)

For a income generating property, you can find the value simply by dividing the net operating income by the cap rate. The cap rate is found by comparing similar properties. Another option is the discounted cash flow method.

The discounted cash flow method is much more complex than the direct capitalization rate for valuing real estate. This article explains the differences in detail. For one, under the DCF method you must calculate future NOI for each property and the reversion value in the calculation. Under the direct cap method, you only need the NOI and the capitalization rate, found by comparing similar properties. This results in a problem, because  NOI's are based on an appraiser's estimates based on market conditions. The appraiser must consider vacancy and collection loss. Under the DCF method, vacancy and collection loss are written off as expenses. For the most part, when the real estate is anticipated to be stable you should use the direct capitalization method, but in a volatile environment the DCF method should be used because it uses NOI's for each future year. Doing a DCF analysis is more extensive and provides more insight in the property. Thus, the DCF method is considered an "art" because the appraiser must take into consideration so many variables that must be based on his/her estimates.

In this article an esteemed professional in the real estate world claims that the discounted cash flow method will replace the direct capitalization method. He claims that the DCF method reveals more quality information and valuation. He also claims that the DCF method is more responsive to change.

This article shows the negatives of the direct capitalization method, claiming that it results in valuations that are too low. It claims that appraisers are having a hard time finding comparable properties to determine the CAP rate because there are so few sales. The article claims that the direct capitalization method does not respond to changes in the market, and it does not account for market cycles in the appraisal process. 

FINC 371 The Importance of Real Estate (Due 9/16)

Real Estate has been an investment option since the beginning of the United States. As the colonies developed more and more people began speculating on land, especially in the west. When the idea of manifest destiny came about these speculators made huge returns on their investments. Real estate in today's economy still has a huge importance. It is an investment that takes skill in finding the right area and huge risks depending on if the real estate market will go up or down. Corporations with large amounts of capital stand to make the most off of real estate investments because they are able to buy huge plots of land or huge buildings and developments. If everything goes as planned, these corporations stand to make huge returns on their investments. Whereas an individual can speculate on a few properties, a corporation can speculate on thousands.

http://money.cnn.com/2012/08/23/real_estate/new-home-sales/index.html
This article shows trends in the individual real estate market as well as positive news for housing developers. The production of new homes increased around 25% from last year. This is a positive sign for the real estate market and for corporations planning on making housing developments. It also shows that the individual is willing to pay the money for a new house rather than renting or buying an older home.


http://realtytimes.com/rtpages/20120917_normalcy.htm
Related to the first article, this article shows that the real estate market is recovering from it's down years of late. The article has a direct tie to the economy as it discusses the minimization of risk and the renewal of constant growth on real estate. This makes real estate a much more desirable investment. The article is talking about southern California and the mitigation of people "wild speculating". This topic relates directly to the economy, the real estate market recovering is a good sign that the economy might start recovering.