Real Estate Finance and Investment

Units

1. 1

   Time value of money

   4 lessons

   1. Future and present valueCompute the future value of a sum today, FV = PV × (1 + r)ⁿ, and its reverse, the present value PV = FV / (1 + r)ⁿ, and explain how the rate and the time change them.
   2. Annuities and level paymentsValue a stream of equal payments, such as rents, with the annuity factor PV = PMT × [1 − 1/(1 + r)ⁿ] / r, solve it for the payment, and see how an annuity differs from a perpetuity.
   3. Compounding periods and effective ratesConvert a nominal annual rate compounded m times a year to the effective annual rate, EAR = (1 + r/m)ᵐ − 1, and use it to compare loans and to explain why loans compound monthly.
   4. Financial calculator and spreadsheet functionsSolve for payment, present value, future value, term and rate with the five time value inputs, as PMT, PV, FV, NPER and RATE do on a financial calculator and in a spreadsheet, using the sign convention and a monthly rate.
2. 2

   Mortgage loans, ARMs and APR

   4 lessons

   1. The mortgage payment formulaDerive and use the level payment of a fixed-rate mortgage, PMT = L × r / [1 − 1/(1 + r)ⁿ], with a monthly rate and a term in months, and explain how the rate and the term change it.
   2. The amortization scheduleBuild a loan's amortization schedule of beginning balance, interest, principal and ending balance, show that early payments are mostly interest, and read the balance and the effect of an extra payment from it.
   3. Adjustable-rate mortgagesCompute an adjustable-rate mortgage's rate at each reset as index plus margin, limited by the initial, periodic and lifetime caps, and the payment recomputed on the remaining balance, and compare it with a fixed-rate loan.
   4. Points, fees and the APRCompute the net proceeds of a loan after discount points and origination fees, solve for the APR that equates those proceeds to the payments, and compare loans with different points by how long the borrower keeps them.
3. 3

   Underwriting and credit

   4 lessons

   1. LTV, DSCR and debt yieldCompute loan-to-value LTV = loan / value, debt service coverage DSCR = NOI / debt service and debt yield = NOI / loan for a commercial loan, and test them against a lender's limits.
   2. Sizing a commercial loanFind the largest commercial loan as the minimum of three limits: LTV × value, NOI / (minimum DSCR × loan constant) and NOI / minimum debt yield, and identify the binding constraint.
   3. Residential underwriting ratiosQualify a home borrower with the front-end ratio = housing payment / gross income, the back-end ratio = (housing payment + other debts) / gross income, credit score bands and cash reserves, using a worksheet.
   4. Recourse, default and workoutsExplains recourse versus nonrecourse debt, default triggers, forbearance, loan modification and foreclosure alternatives, drawn as a flowchart that runs from a missed payment through notice, workout options and, last, foreclosure.
4. 4

   NOI and the pro forma

   4 lessons

   1. From gross income to NOIBuilds potential gross income, vacancy and collection loss, other income and operating expenses to NOI, with a one-year pro forma table and a waterfall chart down the lines.
   2. Capital expenditures, reserves and cash flowSeparates operating expenses from capital items and tenant improvements, then subtracts debt service to reach before-tax cash flow, in a table going from NOI to cash flow after capital.
   3. Multi-year pro formaProjects rent growth, expense growth and vacancy over a ten-year hold, with a table of annual NOI and a line chart of NOI against debt service.
   4. Reversion value and net sale proceedsComputes sale price as the next year's NOI divided by the terminal cap rate, less selling costs and loan payoff, shown on a cash flow timeline ending in net sale proceeds.
5. 5

   DCF, NPV and IRR

   4 lessons

   1. Net present valueComputes NPV as the sum of cash flows divided by (1 + r) to each year, minus the equity invested, and the accept-if-positive rule, with a timeline of discounted flows and a bar of PVs.
   2. Internal rate of returnSolves for IRR as the discount rate where NPV equals zero by trial and error, shown as an NPV curve against discount rate crossing the axis, with multiple-IRR and reinvestment caveats.
   3. Equity multiple, payback and MIRRComputes equity multiple, payback period and modified IRR, and compares projects with equal IRR and different holds, in a table and a bar chart of multiple versus IRR.
   4. Unlevered versus levered cash flowsSeparates property-level cash flows from equity cash flows after debt, computing both IRRs on one five-year timeline with loan proceeds and payments in a second row.
6. 6

   Leverage, taxes and depreciation

   4 lessons

   1. Positive and negative leverageShows leverage helps when the property yield exceeds the loan constant, and hurts otherwise, with a graph of equity IRR against loan-to-value at two mortgage rates.
   2. Leverage and risk to equityQuantifies how debt magnifies returns and losses, DSCR and breakeven occupancy BEO = (opex + debt service) / PGI, with a table of equity return under three value outcomes and a chart.
   3. Depreciation and taxable incomeComputes straight-line depreciation over 39 years for nonresidential property and 27.5 for residential, and taxable income from NOI, interest and depreciation, in a tax table by year.
   4. After-tax cash flow and saleCalculates tax on sale including depreciation recapture, capital gain, 1031 exchange deferral, and after-tax IRR, with a flowchart of sale proceeds split into recapture, gain and net cash.
7. 7

   REITs and mortgage securities

   4 lessons

   1. REIT structure and valuationExplains REIT qualification (90 percent payout, income and asset tests), FFO and NAV and trading at a premium or discount, with a structure diagram of shareholders, REIT and properties and a table of FFO from net income.
   2. Mortgage pass-through securitiesDescribes agency pass-throughs, servicing and guarantee fees and prepayment speed (CPR, PSA), drawn as a cash flow pipeline from borrowers to servicer to investors, with a prepayment curve.
   3. Tranching, CMOs and CMBSShows how sequential and senior-subordinate tranches redistribute cash and credit loss, in a waterfall diagram of three tranches, with a loss absorbed bottom-up bar chart.
   4. Securitization risks and the 2008 crisisReviews credit, prepayment and extension risk, rating errors and moral hazard in originate-to-distribute lending, with a timeline of subprime growth, default and losses, and a chart of delinquency rates.
8. 8

   Joint ventures and equity waterfalls

   4 lessons

   1. Joint venture structuresDescribes sponsor and capital partner roles, contribution percentages, fees and control rights, with an entity diagram of the LLC, GP and LP capital, and a table of equity splits.
   2. Preferred return and pari passu splitsDistributes cash first as an 8 percent preferred return, then return of capital and residual splits, using a one-year distribution table for the sponsor and the investor.
   3. Promote and IRR hurdlesBuilds a tiered waterfall with 20 percent promote above an 8 percent hurdle and 30 percent above 15 percent, in a stepped distribution diagram with dollars for each tier.
   4. Case: a joint venture dealEvaluates a joint venture acquisition from both sides, computing project IRR, investor IRR and sponsor IRR, on a combined timeline and a bar chart comparing the three.