MBAF-H-625_Manning_SP11 by fanzhongqing

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       REAL ESTATE INVESTMENT AND ENTREPRENEURSHIP (MBAF/H 625)

                   Course Syllabus – Spring, 2011 (4:25 - 7:05 pm Mondays)


Chris Manning, M.B.A., Ph.D.                       Office Hours:
Professor of Finance                                  Mondays: 3:00 - 3:45 pm; 7:15 - 7:30 pm
Office: Hilton Bldg. #217                             Tuesdays: 3:15 - 5:00 pm; 6:15 – 6:45 pm
Office Phone: (310) 338-5164                          Thursdays: 3:15 – 6:30 pm
E-mail: chris.manning@lmu.edu                                       (or by appointment)
Secretary: Kathe Segall: Ph# (310) 338-4566        Classroom: Hilton 107

Course Description: An entrepreneurial approach to real estate investment built around financial
modeling, market area supply and demand analysis, risk analysis, financing and ownership
alternatives, and taxation impacts looked at within a real world context.

Prerequisites: MBAA 608 (Financial Management), MBAA 602 (Financial and Managerial
Accounting), MBAA 603 (Business Statistics) and MBAA 604 (Business Economics).

Required Texts: MBAF/MBAH 625, Real Estate Investment and Entrepreneurship, Cases
Solutions and Supplemental Readings, Chris Manning, Ph.D., (ST) and Investment Analysis
For Real Estate Decisions, 7th Edition by Phil Kolbe and Gaylon Greer, Dearborn Financial
Publishing, Inc., 2009, (K&G).

Course Objective: (1) To increase student knowledge of finance theory and tools, (2) to provide
practice in application of finance principles and models, (3) to acquire an understanding of
market forces contributing to the value of real property, (4) to develop skills in financially
creating and evaluating alternative real estate investment opportunities, and (5) to be able to
prepare (and evaluate) a “private placement memorandum” for a real estate investment
opportunity. By the end of the course, students should understand the following:

   1. What is meant by the real estate “bundle of rights” and how do these relate to real estate
      investment?
   2. What determines an individual real estate property’s “investment value”?
   3. What are the steps and characteristics of successful real estate investment?
   4. How are real estate investments financially modeled to determine their intrinsic value?
   5. How do private real estate investments compare to NYSE common stock investments?
   6. What are the categories of competition for land use and how do they affect each other?
   7. What supply and demand factors for different types of real property “space over time”
      (e.g. residential, office, retail, industrial, etc.) affect individual property market values?
   8. How has the history of urbanization depended upon technological advances over the past
      4000 years?
   9. Why, when, and how much market research do real estate investors need to do?



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   10. How real estate market research should be approached and what analytic tools to use.
   11. What are the advantages and risks of using mortgage debt financing (i.e. financial
       leverage) when investing in real estate?
   12. What mortgage financing fundamentals, ratios, and sources of capital are important to
       real estate investors and why?
   13. Why does the balance owed on an amortizing real estate mortgage loan decrease faster as
       a loan nears its maturity?
   14. What is “real estate investment feasibility analysis” and the “Basic Financial Feasibility
       Model”?
   15. What is the “Modified Internal Rate of Return” (MIRR), how is it calculated, and why is
       it popular with real estate investors?
   16. What are the major income tax considerations that affect property values and real estate
       investment?
   17. How do current trends and other factors influence investment values of individual
       residential, office, retail, and industrial properties?
   18. What are the different types of real estate investment risk and how can they be both
       measured and managed to improve real estate investment performance?
   19. What is a “risk-adjusted cost of capital”, how can it be estimated, and how does it
       influence property investment values?
   20. How can technology (e.g. computers and internet) be effectively used to improve real
       estate investment analysis and decision-making?
   21. What are the different forms of real estate investment ownership (e.g. partnerships,
       corporations, REITs, etc.) and what are the advantages and disadvantages of each?
   22. Will ethical behavior assist or impede a real estate investor achieve substantial wealth?
   23. What is real estate “syndication” and how can it be useful to real estate investors?
   24. What factors cause the observed differences in home prices among different cities?
   25. Which real estate related cycles impact real estate investment performance and why?
   26. What is “corporate real estate” and how is it different from “investment real estate”?

Description of Assignments: Assignments will consist of outside readings as well as the Kolbe
and Greer text, doing problems and cases assigned (which are to be turned in to instructor at the
time they are due), attending class and taking good class notes, learning real estate investing and
financing concepts, and learning how to financially model real estate investment analysis. Since
your class notes supplement readings, it is important for you to attend class and take good notes.

Calculator Requirement: Students will need a "financial" hand-held calculator with capability of
arithmetic functions, computation of net present values (NPVs) and internal rates of return (IRRs)
with "uneven cash flows", and amortizing a level payment loan (i.e. mortgage loan). The
calculator recommended for this course is the Hewlett-Packard HP 10B II calculator. While
the HP 12C is an even better calculator and does everything needed for this course, the HP 10B II is
significantly less expensive, has an excellent operating manual, and will perform all the financial
and statistical calculations required of a business degree at LMU's College of Business.




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Grading: Student work will be evaluated and weighted as follows:

       Two midterm examinations (each worth 27%)                               54%    (300 points)
       Team Case Project (Course Final Exam - see below)                       27%    (150 points)
       Three-year rent and vacancy forecast                                    13%    ( 72 points)
       Homework turned in on time                                               3%    ( 17 points)
       Class participation                                                      3%    ( 17 points)
                                                               Total           100%   (556 points)

                Class participation credit will be based upon the quality and quantity of student oral
participation in class, the frequency of a student attending class, and a student's level of class
preparedness. Getting involved in class discussions, by asking questions and providing
answers, will never count against your grade; it can only help you. Letter grades will be
awarded according to university standards with the average grade in the class between B and B+.
                Make-up midterm examinations will only be given in cases of verified illness or
death in the immediate family, and then only when arrangements with the Professor have been
made in advance of the scheduled midterm. (You may reach me at home by phone: 310-541-0353)
or by email [chris.manning@lmu.edu])

Team Case Project: In lieu of a final examination, students will divide themselves into teams of
five students to share the field work and analysis required to evaluate investing in (1) a residential
property (e.g. apartment building) of more than 20 units, (2) an office building 3 or more floors and
5 tenants or more, (3) a shopping center having 10 tenants or more, or (4) an industrial property
with 3 tenants or more. Each student team will be responsible for producing both a paper (not more
than 20 to 25 pages type-written and double-spaced) and an oral 20-minute class presentation.
Written papers will present each team's comprehensive analysis of their selected property applying
the analytical skills and tools developed during this course, first with the Park City Duplex Case
and later the Cedar Avenue Apartment Building Case. (No more than 50% of class teams may
select apartment buildings for their final Team project work. The remaining teams must chose
office buildings, shopping centers, or industrial buildings. Team selection of property type is on
a first come, first serve, basis. Thus, the first Teams to have their property selection
approved by the Professor will have greater choice of property type for this assignment.)

       Unfortunately, the limited class time available for oral presentations will only permit each
Team enough time to summarize (1) important property, market area supply and demand, and
investment opportunity facts, (2) important marketability study information, (3) your assumptions
upon which your financial analysis is predicated, (4) determination of RROR, holding period, and
organizational form and (5) the results of your sensitivity analysis on your computed NPVs and
IRRs when key investment assumptions are allowed to vary. (All students are required to make a 3-
4 minute oral presentation as part of their Team's 20-minute class presentation, which will then be
followed by 5 minutes of questions from the audience.) Individual student casework will be
evaluated by both the Professor and other students in the class (both within and outside your Team).




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Special Accommodations: Students with special needs who need reasonable modifications,
special assistance, or accommodations in this course should promptly direct their request to the
Disability Support Services Office. Any student who currently has a documented disability
(physical, learning, or psychological) needing academic accommodations should contact the
Disability Services Office (Daum Hall # 224, x84535) as early in the semester as possible. All
discussions will remain confidential. Please visit www.lmu.edu/dss <http://www.lmu.edu/dss>
for additional information.




                        CLASS SCHEDULE FOR SEMESTER


BLOCK I: (1) FUNDAMENTALS OF REAL ESTATE INVESTMENT DECISION
MAKING, (2) FACTORS CONTRIBUTING TO REAL PROPERTY VALUE, AND (3)
FINANCIAL LEVERAGE AND MORTGAGE FINANCING

January 10, 2011:
Topics: (1) Overview of Course and Real Estate Investment, (2) The Two Markets that Impact
Real Property Investment Values, (3) Investment in Real Estate Compared to Common Stock, (4)
Steps for Successful Real Estate Investment, and (5) Discounted Cash Flow Analysis.
Readings: (To be completed by February 15th): K&G: Chap. 1 & 2; ST: “Exhibit 4-3: A
Model of the Ten Step Investment Analysis and Financial Structuring Process,” “The
Strategic Real Estate Framework: Processes, Linkages, and Decisions, ” “American Real
Estate Society – Jobs for Students” & Articles: “States Acting to Protect Private Property,”
“Key to Real-Estate Rebound: Solid Economic Growth,” “Commercial Property
Rebounding,” “Housing: Stuck and Staying Stuck,” “Don’t Bank on the Home as an ATM,”
“Albert Einstein Never Tweeted,” “Money Can Buy Happiness” and “Fitness – Meditation.”
(Optional: "Millionaires Have Big Houses and Fancy Cars, Right? Wrong!” “How To Make
More Good Decisions" and "Wealth is Much More than Money.")
Assignment: Obtain a hand-held calculator by next class as discussed earlier! Note: “HP-
10B II ‘Fast Track Sheet’ for Solving Financial Problems” is first page in your Supl. text.


January 14, 2011 (Friday): (Last day for late registration and program change.)


January 17, 2011: Martin Luther King Holiday!! Class does not meet!
                  Work in teams on Three-Year Rent/Vacancy Forecast due Jan. 24th.




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January 24, 2011:
Topics: (1) What Makes Real Property Valuable? and (2) Estimating Market Rents From Market
Area Supply and Demand Analysis of Building Space.
Readings: K&G: Chap. 3, 4 (&4A), and 13 (pp. 245-248); Suppl.Text: Learn: “Investment
Value – Depends upon two marketplaces,” “What Determines a Property’s Investment
Value?” “Von Thunen Model,” Also, articles: “The Continuing Decentralization of People
& Jobs in the United States,” “Cities Grow as Housing Bust Slows Movement to Suburbs,”
“Seeing Factories as Essential Parts,” “Factories Fading, Hospitals Step In,” “Southland
Sees A Rise in Population,”“In the Exurbs, The American Dream is Up for Rent,” “New Term
for Rural Towns: Micropolis” and “U.S. Population Reaches 300,000,000 People.” [Teams
should review “Market Analysis” and “Marketability Analysis” in Suppl. Text to prepare to do
their Dr. Robert’s Final Team Reports.]
Assignment: ST: Do Problems 1, 2, 4, 8 and 11 of Problem Set #1 (pp. 4-5 of Suppl. text)
(See Appendices A and B in K&G [pp. 455-483] for review of time value of money theory.)
Team Case Assignment #1: Organize yourselves into Teams of five students each. Read
Final Team Project Assignment: "Dr. Roberts Income Property Investment Case" and
“Team Project Written Feasibility Report Outline.” Also, select an apartment building of
more than 20 units that qualifies for Final Project. Each Team should submit an 8 1/2" X
11" sheet of paper with (1) the name of your selected property, its address, and a very brief
description; along with (2) a listing of each student on your Team, student phone numbers,
and "inspirational" or "humorous" name for your Team. (Once you have done this, begin
working on Team Case Assignment #2 below due for next class.)


January 31, 2011:
Topics: (1) International Real Estate Homeownership and Investment, (2) Three Approaches to
Real Estate Investment, (3) Net Operating Income Statement, (4) Valuation of Real Property.
Readings: K&G: Chapters 5, 6 and 12; ST: “How Current NOI Can Be Distorted,”
Brochure: “ACRE,” and Articles: “Renters Lose Edge on Homeowners,” “With a Few
Clicks, Size Up What Uncle Sam has Seized,” “Slicker Cities,” “Timeline” and “Real Estate
Investors Head Overseas.”
Assignment: K&G: Do Part II: Case Problems 1, 2, 3, & 4 (pp. 127-128) and also -
ST: Problems 7, 9 and 14a of Problems Set #1 (pp. 4-5) & ST: Do Prob. Set #2;
Team Case Assignment #2: Turn in an aggregated three-year rent and vacancy “Gross
Effective Rental Income” forecast for the property your Team selected last week supported
by your Team's reasons for any annual increase in rent based upon past as well as future
expected supply and demand conditions. Organize your research, data collection (on
comparables as well as your selected apartment building), analysis, and three-year forecast
around the three “sheets” immediately before Dr. Robert’s Case in your Suppl. Text.
Supporting reasons, etc. for each Team’s 3-year forecasts must be limited to three-pages
typewritten and double-spaced [maximum].
(Assignment for January 31, 2011, continued on the next page):




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(Assignment for January 31, 2011, continued from the prior page.)
For most team’s the property you select for this 3-year forecast assignment will not be the
same property your Team selects for its Final Team Project, but it is worth 13% of your
overall course grade. The purpose of this assignment is to familiarize you with gathering
primary data from “the field” and to make certain your Team members are "on board".

February 7, 2011:
Topics: (1) Basic Financial Feasibility Model, (2) Capital Sources, Mortgage Financing, and
Financial Leverage, (3) Additional Measures of Real Estate Investment Risk and Return and (4)
MBA Student Strategies for Buying and Owning A Home (e.g. house or condominium).
Readings: K&G: Chapters 7 and 19; ST: “Exhibit 2-1 – Overview of the Investment Analysis
Concept,” “Basic Financial Feasibility Model” and “Real Estate Investment Capital
Sources”; and articles: “New Evidence on the Foreclosure Crisis,” “1 in 4 Borrowers Is
Under Water,” “The Other Real Estate Crisis,” “To Fix Sour Property Deals, Lenders
‘Extend and Pretend’,” “Falling Prices Prompt Some Firms to Give Up on Properties,”
“Seller Financing Regains Favor,” “Hedge Funds Help Fill a Gap,” “CMBS Market Rises
From Ashes of Collapse,” “Capital Markets Conundrum,” “Meet the Parents-Backed
Mortgage,” “Cut Corners . . . ” and “Park City: Pristine Resort Town . . . .”
Assignment: K&G: Ch. 7: Do Probs. 2 - 5 and ST: Park City Duplex-Part I.


February 14, 2011:
Topics: (1) Discounted Cash Flow Analysis, (2) Ratio Analysis, (3) Financial Leverage,
Mortgage Financing, and Mortgage Markets, and (4) Modified Internal Rate of Return (MIRR).
Readings: K&G: Ch. 8, 9, 13 (pp. 249-251), and Ch 14 (pp. 268-276).; ST: “Financial Ratio
Analysis” and “Mortgage Note Problem Handout – Prob. #2” and articles: “The Global
Economic Crisis,” “Uncle Sam Bets the House on Mortgages,” “Housing Gloom Deepens,”
“A Fraying Lifeline for Homeowners” “Reverse Mortgages Get Popular,” “Shop Around for
Lowest Rate in Today’s Tough Market” & “Borrowers Get New Mortgage Shopping Tools.”
Assignment: K&G: Do Ch. 9: Probs. 1a&b (with probs. 1c & 2 optional); Part III - Case
Probs 1-4 (p. 184) & compute IRR & NPV [at 12% cost of equity] based on calculated cash
flows; ST: Do Park City Duplex - Part II and Prob. 2 on the Mortgage Note Problems page.
Team Case Assignment #3: Property selections for Team Case Projects are due in writing
to Professor by this date! (Information required from all teams to obtain Professor’s
approval of selected property: (1) property type, (2) address, (3) number of floors, (4)
approximate sq. footage of building (if known), (5) approximate number of tenants, (6) name
and position of your Team's "contact" that will be providing your Team with tenant and
historical operating information on the property, and (7) your assurance that someone on your
Team has already talked with your “contact” and they have agreed to assist your Team do
this project. By this date, Teams should also have organized individual efforts of Team
members.)

February 21, 2011: First Midterm Examination.



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February 28th – March 4th, 2011: Spring Semester Break!


BLOCK II: (1) AFTER TAX REAL ESTATE INVESTMENT MODEL, (2) DIFFERENT
INCOME PROPERTY TYPES, (3) RISK ANALYSIS, AND (4) OWNERSHIP FORMS
AND SYNDICATION


March 7, 2011:
Topics: (1) After-tax Discounted Cash Flow Modeling, (2) Mortgage Financing Decisions, (3)
Overall Financial Leverage, and (4) Entrepreneurship.
Readings: K&G: Chapter 10 (pp. 185-189; 190-196; 200-206) and Chapter 11 (pp. 211-217);
ST: “The [Financial] Leverage Decision,” and articles: “Tax Breaks for ‘early’ sellers,”
“Investors Pounce on Distressed Homes,” “Professionals Moving into House Flipping,” “A
Landlord in the Making” and “Can You Still Make Money In Real Estate?”
Assignment: K&G: Do Chapter 10, Probs. 2 and 3; and Part IV Case Problem #3
(Cheetum's Apts.; pp. 229-230 in K&G) using a 15% long-term capital gains tax rate (but a
25% tax rate in order to recapture depreciation as demonstrated on pages 212-214 in K&G
text). Also, calculate an MIRR (at a 6% reinvestment rate). In addition, you will need to
also calculate your IRR on Total Capital and determine whether or not Overall Financial
Leverage is positive or negative. See your Supplemental Text for case details before you
work on Cheetum’s Apts.


March 14, 2011:
Topics: (1) Additional Income Tax considerations, (2) Industrial Property Investments,
(3) Different Property Types, (4) Residential Property Investments (Apartment Buildings), (5)
Development and Rehabilitation, and (6) Land Investments.
Readings: K&G: Chapter 22 (pp. 409-416); Chap. 21 (pp. 389-399); and ST: articles:
“Industrial Vacancy Rises,” Self-Storage Opportunities,” “Industrial’s New Image,”
“Assembling Success in the U.S.,” “Rents Rise, Vacancy Rates Fall in Wake of Foreclosure
Crisis” and “Multifamily Sales Defy the Slump.”
Assignment: K&G: Begin Goldblest Case (Part VII - Case Problem – [pp. 436-438]) by
forecasting 7-year cash flows for the residential property investment opportunity; and
calculate the IRR and NPV (assuming an 11% after-tax risk-adjusted equity required rate
of return). (You may also do the industrial property investment opportunity of the Goldblest
Case as optional additional practice if desired.)(Note: residential properties are depreciated over
27.5 years and non-residential income properties over 39 years.)
Team Case Assignment #4: Using “Team Project Written Feasibility Report Outline”
found immediately following “Dr. Robert's Income Property Investment Case” in your
supplemental text, further organize your Team's efforts in accordance with this outline.

March 18, 2011: Last day to withdraw from class or apply for “credit/no credit” grade.



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March 21, 2011:
Topics: (1) Office Buildings and (2) Retail Shopping Centers.
Readings: K&G: Ch. 22 (pp. 416-433); ST: articles: “Fresh Signs of Life in Office Market,”
“Downtowns Get a Fresh Lease,” “As Rents Fall, More Leases are Signed,” “Global Office
Space Is in the Basement,” “Shopping Centers Struggle, But Hope Seen,” “Southland’s
Retail Recession Spreads,” “Malls Still High on Shoppers’ Lists,” “Big Boxes Leave Big
Vacancies, and Deals,” “Malls Race to Stay Relevant in Downturn,” “Making ‘Sick’ Mall
Better,” “Kill The Main Roof, Add A Big Plaza,” “Strip malls reborn for commercial,
residential mix,” “Category Killers’ Go From Lethal to Lame in the Space of a Decade ”
and “Westside Mall Owners Say Bigger is Better.”
Assignment: ST: Do Park City Duplex Case - Part III; and for additional optional practice,
calculate the IRR & NPV of the Goldblest Case office building investment opportunity (Part VII
Case Problem on pp. 436-438 in K&G).
Team Case Assignment #5: Work on Final Team Projects. By this date, student teams should
be well along in their field research, made any needed modifications in their data collection
system, and have a date reserved with Professor for their Team's oral presentation to the
class at semester end. If not, teams have a week to “catch up” before class meets next.


March 28, 2011 (Class 10A):
Topics: (1) Real Estate Investment Risk Analysis and Management and
        (2) Corporate Real Property Ownership and Use.
Readings: K&G: Chap. 15, 16, and 17; ST: Familiarize yourself with “Classification of Risk,”
“Levels of Risk Analysis”; and optional article: “The Economics of Real Estate Decisions.”
Assignments: ST: Park City Duplex Case - Part IV; and work on Final Team Projects.



April 4, 2011 (Class 10B):
Topics: (1) Estimating Risk-Adjusted Cost of Equity Capital, (2) Undeveloped Raw Land
Investments, Development and Rehabilitation, (3) Inter-City Variation in Home Prices, and (4)
Ethical Considerations Facing Real Estate Investors.
Readings: K&G: Chap. 14 (pp. 263-266 - Know Summation Technique [Table 14.1 - p.
264]) and Chap. 21 (pp. 389-399); ST: articles: “The Road to Recovery” and “When
Workers Don’t Do The Right Thing.”
Assignment: ST: Working in teams, begin work on Cedar Avenue Apartment Building
Case; For optional after-tax discounted cash flow practice: Do Part IV Case Probs. #1 & #2
(Sated Satyr; p. 229 in K&G) and Part V Case Problem #2 (Sated Satyr; p. 281 K&G); also
calculate MIRR on this case (using a 6% reinvestment rate) as part of review of calculating
after-tax DCF cash flows, NPV, IRR, etc.; also Problems 1 and 2 at the end of Chapter 14);
(Note: Team Projects are due in three weeks and 2nd Midterm Exam is in two weeks.)




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April 11, 2011:
Topics: (1) Real Estate Investment Vehicles (Ownership Forms), (2) Syndication Offerings, and
(3) Auditing the Assumptions Underlying Investor Cash Flows.
Readings: K&G: Introduction to Part VIII (page 439); Chapters 23 and 10 (pp. 196-200);
ST: Sheet: “Real Estate Organizational Forms,” and articles: “Real Estate Outruns the
Stock Market Again,” “Foreign Real Estate Funds Boom,” “Sick of Being at the Market’s
Mercy?” and “Correct `Bottom Line' Analysis of Syndication Offerings.”
Assignment: ST: Working in teams, complete work on Cedar Avenue Apartment Building
Case and learn major organizational characteristics of “Real Estate Organizational Forms”
summary sheet in your Supplemental Text.


April 18, 2011: Second Midterm Examination.


April 25, 2011:
Topics: (1) Real Property Investment Related Cycles, (2) Commercial Real Estate Brokerage,
and (3) Team Oral Presentations Begin.
Readings: Suppl. Text: “Real Estate Cycles Research Framework and Classification
Model,” “Dividend Capital’s Cycle Monitor - Real Estate Market Cycles” and article:
“Realtors Abandon A Listing Ship.”
Team Case Assignment #6: Written papers are ALL due at this time. No papers will be
accepted after this date without suffering "grade depreciation." Oral presentations will
begin on this date followed by guest speaker if time permits.


May 2, 2011: 4:25 - 7:05 pm -- Team oral presentations will be completed during this time.




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