Faculty
Professor John H. Vogel Jr
Objectives
This course is designed to provide an overview of the real estate industry and the basic analytic techniques for investing in this asset class. Students will find that this course takes a practical, hands-on, problem solving approach. Cases are used in every class because they reflect the project oriented nature of this industry. It is a general management course that blends quantitative and qualitative analysis. The course also emphasizes the entrepreneurial management style and risk analysis techniques used by successful investors and developers.
Requirements
Grading Weights
Financial Analysis Workbook (Exercises 4-6) 10%
Angus Cartwright III: 20%
Final Exam: 40%
Class Participation: 30%
Financial Analysis Workbook - Feb 11 - (To be handed in at the beginning of class). Fill out and hand in exercises 4-6. For this assignment you may work individually or with a partner. Please hand in one copy of these exercises at the start of class with the name or names on the cover page. A template is available in the course folder.
Angus Cartwright III. — February 18 — (To be handed in at the beginning of class). Fill out all exhibits in the case with backup analysis for Exhibits 5 and 8, using the same format as in the case, and hand in one copy at the start of class. A template for the case has been posted in the Real Estate course folder on the Tuck computer network, which may save you some time in typing and formatting. For this case, you may work in groups of up to three people. The assignment is quite lengthy. Please plan your time accordingly.
Materials
In your course packet you will find a chapter written by Professor Vogel about Real Estate for the Handbook of Modern Finance. No specific readings from this chapter are assigned, but it provides a good overview and you are encouraged to read relevant sections as a supplement to the assigned readings.
On Course Reserve — Feldberg Library
The following books are on reserve at the Feldberg Library and are an excellent reference source:
Creating and Growing Real Estate Wealth: The 4 Stages to a Lifetime of Success,William J. Poorvu with Jeffrey L. Cruikshank, FT Press (Financial Times, c. 2008)This book traces a number of individuals and families through the various stages of their careers. Of particular interest are the early chapters where Professor Poorvu describes different approaches these people took when they were starting out and doing their first deal.
The Real Estate Game: The Intelligent Guide to Decision-Making and Investment,
William J. Poorvu with Jeffrey L. Cruikshank, (The Free Press, c. 1999).
This book is a great supplement to the course because the author approaches real estate concepts from the same perspective as your instructor. The chapter on "Using the Numbers" is very helpful for those who are struggling with, or want deeper insights into, the "back of the envelope" approach used in the course. There is also a useful "back of the envelope glossary" at the end of the book. All of the chapters provide great insights into what motivates the different players in the real estate industry.
Real Estate Development: Principles and Process, Third Edition, Mike E. Miles, Gayle Berens, Marc A. Weiss, (Urban Land Institute, c. 2000).
The first edition of this book was the top seller published by the Urban Land Institute. It was updated and revised in 2000. The book supplements the case studies by giving an in-depth look at market studies, discounted cash flow analysis and the steps in the development process. Two chapters that are particularly interesting are the ones on “Innovations in Real Estate Finance” and on “Asset and Portfolio Management”. The book contains an excellent real estate glossary.
Commercial Real Estate Analysis and Investment, David M. Gettner, Norman C. Miller, (South-Western Publishing, 2001).
Professional Real Estate Development, Richard B. Peiser and Anne Frej (Urban Land Institute, 2003).
The following real estate periodicals are also available at Feldberg Library.
They are a good source for timely and interesting articles:
Real Estate Finance New York: Institutional Investor. (Quarterly)
Real Estate Review Boston: Warren, Gorham & Lamont. (Quarterly)
National Real Estate Investor New York: ARGUS Business (Monthly)
The Wall Street Journal, especially the Property section published each Wednesday and the real estate section of the Sunday New York Times.
In the Real Estate folder, you will find the URL and a brief description of 25 of the most useful real estate sites on the internet. They contain interesting and up-to-date information, as well as useful tools like mortgage calculators. Several of the sites also have excellent Real Estate Glossaries.
Class Attendance
Attendance and participation in class are very important. Please bring with you, and display your name card prominently. If an emergency arises, please notify the professor as soon as possible.
Daily Class Preparation
As you prepare for class, you may work in groups and exchange ideas and recommendations. However, each student is expected to prepare each case fully and to contribute to the group discussion.
Missed Classes for Non-emergencies
Everyone is expected to attend and to prepare fully for each day. Failure to attend class can adversely affect your grade. If you must plan on missing a class, let your instructor know in advance in writing. If you miss class, you must hand in a one to two-page memo which answers the study questions. This memo is due one week after the class you missed.
Tutoring
You may consult with anyone in either section of the course in preparation for class. Although the material you need for the classes is contained in the cases and notes, you are welcome to use other materials such as the Internet sites noted in the Course Folder. John Goldsmith is the teaching assistant for this course. His office hours will be Tuesdays, Feb. 10, 17 and March 3 from 6:30-8:30 pm in Danziger.
Laptop Policy
If you use your laptop during class, it is only to be used for class activities such as taking notes or referring to a spread sheet. You are not to connect the laptop to the network and should not be doing any non-class activities during class time. The Tuck Laptop Policy applies in all respects in this course.
Grading
Financial Analysis Workbook (Exercises 4-6) 10%
To be handed in at the beginning of class Feb 11.
Fill out and hand in exercises 4-6. For this assignment you may work individually or with a partner. Please hand in one copy of these exercises at the start of class with the name or names on the cover page. A template is available in the course folder.
Angus Cartwright III 20%
Angus Cartwright III: due February 18 (To be handed in at the beginning of class). Fill out all exhibits in the case with backup analysis for Exhibits 5 and 8, using the same format as in the case, and hand in one copy at the start of class. A template for the case has been posted in the Real Estate course folder on the Tuck computer network, which may save you some time in typing and formatting. For this case, you may work in groups of up to three people. The assignment is quite lengthy. Please plan your time accordingly.
Class Participation 30%
Final Exam 40%
Schedule
02/05/2009
Day 1 Revere Street
Case Summary: Although inexperienced in real estate, Edward Alexander hopes that youthful enthusiasm and an $80,000 inheritance will help him enter the real estate business. This case chronicles his experiences in finding, evaluating, and acquiring a four-unit brownstone in need of renovation in the Beacon Hill area of Boston. The case also identifies the various players in the process.
READ: Revere Street case
READ: Real Estate Financial Analysis Workbook. Prepare Exercises 1-3. Do not hand in. Answers are at the back of the workbook.
Study Questions:
(1) How did Alexander go about searching for and evaluating this property?
(2) What people helped Alexander in the process and what functions did they perform?
(3) What are the problems relating to the rehabilitation work proposed?
(4) Should Alexander make this investment?
02/11/2009
Day 2 Doral Costa
Case Summary: Samantha Spar needs to advise her client about a real estate investment opportunity in Miami, Florida. The case enables us to discuss the key factors that go into a real estate investment: the site/location, the product, the market, the financing and the people.
READ: Doral Costa case
READ: Note to accompany Doral Costa (handed out after class).
Written Assignment: Exercises 4-6 in the Financial Analysis Workbook. Hand in at the beginning of class.
Study Questions:
(1) Does the Doral Costa project make sense? What are the strengths of the investment? What are the key risks?
(2) Based on the assumptions in the case will the project be profitable? What does the set-up tell you? Using Exhibit 9 and making an assumption about an appropriate capitalization rate, what kind of IRR will the project generate?
(3) With all the new projects coming on line, do you think there is sufficient demand for a project this size?
(4) Would you recommend that QRS make this investment?
(5) If you did make this investment, how would you modify the arrangement with Trammell Crow to mitigate the risks?
02/12/2009
Day 3 Shady Trail
Case Summary: Holt Lunsford was intrigued by the packet of papers that lay in front of him. The papers comprised a brochure that Lonestar Bank had put together in an effort to sell the Shady Trail Distribution Center in Dallas, Texas. Shady Trail was a five-year-old 120,000 square foot distribution warehouse facility located on the west side of Dallas. Lonestar was asking $4.0 million for the property. It was September 2003 and the Dallas real estate market was plateauing. Lunsford had convinced 11 friends to put up $100,000 each in addition to his own $100,000 to acquire one or two troubled properties. Lunsford decided to focus on warehouse properties due to their relatively small size, their strong historical performance and his relevant experience. He wondered whether Shady Trail would make a good investment. The focus of this class will be on financial analysis and the numbers.
READ: Shady Trail case
READ: Real Estate Finance: A Technical Note Based on Shady Trail (handed out after class)
Study Questions:
(1) Look at the assumptions Lunsford has made in creating his setup to date. What changes has he made and why?
(2) Prepare a new setup for the property based on the information in the case and calculate the return.
(3) What price should Lunsford offer for Shady Trail?
(4) Does this property fit Lunsford's criteria for investment?
02/18/2009
Day 4 Angus Cartwright III
Case Summary: In September 2003, Judy and John DeRight, looking to diversify their investment portfolios, have retained Angus Cartwright III to identify prospective real estate acquisitions. Mr. Cartwright has identified four potential properties, which merit an in-depth analysis. The case provides an opportunity to examine the various components of the real estate return — cash flow, tax benefits, and futures — and measure the profitability of a proposed investment through the calculation of net present value, internal rate of return, and capitalization rate. The class session permits discussion not only about techniques of financial analysis, and their usefulness, but adaptation of those methods to the needs of a particular investor.
READ: Angus Cartwright III case
READ: Recent Changes in Tax Law that Impact Real Estate
*WRITTEN ASSIGNMENT: To be handed in at the beginning of class. This is a very long and important assignment. Fill out all the exhibits in the case with backup analysis for Exhibits 5 and 8, using the same format as in the case. Hand in 1 copy of your team's work. This assignment is to be done in groups of up to three (3) people. Use the assumptions in the case. Do not include in the assignment to be handed in your response to study questions 2 and 3. There is a template in the Real Estate Folder that may save you some time in setting up and formatting the exhibits.
Study Questions:
(1) Using the method for financial analysis employed by Cartwright for Alison Green, and assuming the figures given in the case, what are the financial returns for the other three properties?
(2) Consider under what circumstances it would be valuable for you to make the calculations in the various exhibits?
(3) Which potential investment, if any, would you suggest for each of the investors?
02/19/2009
Day 5 The Sherman Building
Case Summary: Like a number of business people, Jennifer Sherman go into the real estate business because her company outgrew their space. Because her family owns the existing building, she needs to sell it. In order to get the best price she needs to figure out the highest and best use for this commerical property.
READ: The Sherman Building case
Study questions:
(1) Of the three options described in the case, which one would you recommend that Jennifer pursue? Why?
(2) Which option is the most profitable?
(3) As a creative advisor, are there other potential uses for the property that Jennifer should consider?
(4) What would you advise Jennifer to do?
(5) How should Jennifer split the sales proceeds with her father?
02/25/2009
Day 6 Starwood Capital
Case Summary: D. Arne Arnesen, Managing Director at Starwood Capital needs to make a decision about the Motorola property. Although it is attractively priced, he wonders if the rewards are sufficient to warrant this kind of risk, and if the property will generate sufficient returns to meet the expectations of Starwood's investors, who expect a 20% IRR.
READ: Starwood Capital case
Study Questions:
(1) What kind of pre-tax IRR can Starwood expect to generate from this property (before taking into consideration the allocations between Starwood, Berkeley and Starwood's investors)? Would you recommend that Starwood Capital make this investment? Why or why not?
(2) Is Fort Worth, Texas an attractive real estate market to invest in at this time? What are the key market factors that Starwood needs to consider in making this investment? What are they betting on?
(3) Motorola both owns and leases real property. If you were in charge of Motorola's real estate department, what would be the key factors going forward in deciding whether to lease or buy new space?
(4) This case illustrates the interaction between the real estate markets and the stock and bond market. In what ways is the real estate market impacted by what is happening in the stock market?
02/26/2009
Day 7 Smugglers' Notch Resort
Case Summary: The Village at Smugglers Notch is located in Jeffersonville, Vermont at the base of three mountains, including Madonna Mountain. Having faced many challenges, Bill Stritzler and his management team need to develop a plan for the North Hill. (Note in addition to the case please read the short newspaper article about the recent sale of Okemo. Bill Stritzler will be interested in your ideas about how to deal with this new competitive threat).
READ: Smugglers' Notch Resort case
Okemo ski area sold for $132 Million, Rutland Herald, Dec. 6, 2008.
Study Questions:
(1) What is the key to Smugglers’ success? How is it that they continue to be profitable when other resorts are not?
(2) How much money will Smugglers’ Notch earn on the 12 timeshare units they built last year? Why do they not build more units?
(3) How many units should they build on North Hill in Year 1? What type of units should they build (timeshare, family share, full ownership)?
(4) What kind of theme and amenities should be created on the North Hill?
(5) In the design, marketing and development of the North Hill, what should Smugglers’ Notch do to make it successful?
(6) Now that the owners of Okemo have $132 million to spend, what should Smugglers' do to stay competitive?
03/04/2009
Day 8 The Birmingham Fed: A Green Building
Case Summary: Melaver Inc. is one of the leading developers of LEED Certified “green” buildings. They are currently planning a $113 million, mixed use, environmentally sensitive building in Birmingham, Alabama which will include retail, office and a hotel. The case begins with a meeting between the developer and law firm which is interested in renting 100,000 square feet of space.
READ: The Birmingham Fed: A Green Building case
Study Questions:
(1) In making the case for moving the law firm to the Birmingham Federal project, what issues whould yo emphasize? What should Melaver say?
(2) Why is it so important to sign this lead tenant? If they can secure a 100,000 square foot lease at $26 per square foot, will it ensure that the project is financially successful?
(3) What are the pros and cons of building a hotel as part of the Birmingham Federal Reserve office project? What are the greatest risks associated with mixed-use development as opposed to a single-use development?
(4) Take the tenant’s perspective. From a hotel guest’s perspective what are the benefits of staying in a ‘green’ hotel? Do you think hotel guests will pay a premium? Would you?
(5) How do the financials look? Which part of the project offers the best return: the office and retail, the hotel or the apartments? What kind of return can an institutional investor expect?
(6) If Melaver, Inc. cannot secure a large anchor tenant, should it go forward with this project?
03/05/2009
Day 9 How to Buy a House
Case Summary: Many of you will make your first venture into real estate in the next few years when you buy a house. This class is designed to provide some guidance.
Optional: There is no formal assignment, but you may want to look at the folder I have created on How to Buy a House. You will find it on the public drive (P Drive) in a folder called “Tuck Information”. You may also want to check out the following web sites:
• eNeighborhoods (a subscription site for brokers, that you can access from the How to Buy a House folder)
• www.zillow.com
• www.nneren.com
• www.redfin.com
