MBAF real estate bubble by alicejenny




 Course Syllabus – Fall, 2007; 7:15 - 10:00 pm; Tuesday Evening Class (15 Class Meetings)

Chris Manning, M.B.A., Ph.D.                    Office Hours:
Professor of Finance                                 Tuesdays: 1:00 - 3:00; 3:15 - 5:15 pm
Office: Hilton Bldg. #217                                          and 6:16 – 6:45 pm
Office Phone: (310) 338-5164                         Thursdays: 1:30 – 3:30 pm
E-mail:                                                    (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 604 (Business Economics), MBAA
603 (Business Statistics), MBAA 602 (Financial and Managerial Acct.); MBAF 611 (Financial
Mkts.), MBAF 612 (Financial Institutions), or MBAF 614 (Financial Analy.) is also recommended.

Required Texts: MBAF/MBAH 625, Real Estate Investment and Entrepreneurship, Cases
and Supplemental Readings, Chris Manning, Ph.D., (ST) and Investment Analysis For Real
Estate Decisions, 6th Edition by Gaylon Greer and Phil Kolbe, Dearborn Financial Publishing,
Inc., 2006, (G&K).

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
   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 the 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?
   10. How should real estate market research be approached and what analytic tools are useful?
   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
   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
   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 Greer and
Kolbe 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 the 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.


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

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

                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 [])

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 (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).


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 <>
for additional information.

                        CLASS SCHEDULE FOR SEMESTER


August 28, 2007:
Topics: (1) Overview of Course and Real Estate Investment, (2) The Two Markets of Real
Property Space (Users) and R/E Investment, (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 September 11th): G&K: Chapters 1 & 2; ST: “Exhibit 4-3: A
Model of the Ten Step Investment Analysis and Financial Structuring Process,” “The
Strategic Real Estate Framework: Processes, . . . , ” “American Real Estate Society – Jobs for
Students” & articles: “States Acting to Protect Private Property,” “Businesses Pinched as
Commercial Rents Soar in Southland,” “Commercial Real Estate Peak Seen,” “Southland
Home Sales Tumble,” “Foreclosures May Spur Price Drops,” “Southland Feels the Pressure
of the Housing Crunch,” “Money Can Buy Happiness” and “Fitness – Meditation.” (Optional:
"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 Suppl. text.
August 31, 2007: (Last day for late registration and program change.)


September 4, 2007:
Topics: (1) What Makes Real Property Valuable? and (2) Estimating Market Rents From Market
Area Supply and Demand Analysis of Building Space.
Readings: G&K: Chapters 3, 4 (&4A), and 13 (pp. 225-228); Suppl.Text: Learn: “Investment
Value – Depends upon two marketplaces,” “What Determines a Property’s Investment
Value?” “Von Thunen Model,” “Market Analysis,” “Marketability Analysis,” Also, Articles:
“The Continuing Decentralization of People and Jobs in the United States,” “U.S.
Population reaches 300,000,000 People,” “Seeing Factories as Essential Parts,” “Bursting
Tech Bubble, Higher Costs Send People Packing,” “Inland Empire: Where the LA Dream
Landed,” “Fewer Leave State When They Move,” “Firms Fleeing High Costs in California,”
“Tenants May Gain Clout . . . ,” and “New Term for Rural Towns: Micropolis.”
Assignment: ST: Do Problems 1 - 3, 8, and 11, of Problem Set #1 (pp. 2-3 of Suppl. text).
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.

September 11, 2007:
Topics: (1) International Real Estate Homeownership and Investment, (2) Three Approaches to
Real Estate Investment, (3) Net Operating Income Statement, and (4) Valuation of Real Property.
Readings: G&K: Chapters 5, 6 and 12; ST: “How Current NOI Can Be Distorted,”
Brochure: “ACRE,” and articles: “Choosing to Buy, Wait, or Leave the State,” “Investing in
Foreclosures,” “With a Few Clicks, Size Up What Uncle Sam has Seized,” “Amid Low Rates,
Home Prices Rise Across the Global Village,” “Slicker Cities,” “Timeline,” “Real Estate
Investors Head Overseas,” and “Behind Zooming Condo Prices: New Demographics or A
Assignment: G&K: Do Part II: Case Problems 1, 2, 3, & 4 (pp. 114-115) and also -
ST: Probs 7, 9, 13, 14a, & 19 of Problems Set #1 (pp. 1-2) & ST: Do Prob. Set #2;
Team Case Assignment #2: Turn in an aggregated two-page 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. (This may not be the same property your Team selects for its Final Team Project, but
it is worth 13% of your overall course grade. Look at this as a "test" to make certain data
is available for the property you select and Team members are "on board".)


September 18, 2007:
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: G&K: 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: : “Wall Street Finds a New Gusher,” “Skyscraper Prices Might
Begin Returning to Earth,” “The New Housing Reality,” “Ditching the Dorm,” “Meet the
Parents-Backed Mortgage,” “Home Equity Is Key to Net Wealth, . . . ,” “Cut Corners on House
and Loan, Not on Location,” and “Park City: Pristine Resort Town . . . .”
Assignment: G&K: Chap. 7: Do Probs. 1-3; Chp. 19: Ques. 8; ST: Park City Duplex-Part I.

September 25, 2007:
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: G&K: Ch. 8, 9, 13 (pp. 229-235), and Ch 14 (pp. 248-255).; ST: “Financial Ratio
Analysis” & “Mortgage Note Problem Handout – Prob. #2” and articles: “Housing
Speculators Relocate to Hotter Spots,” “Investors Retreat From Housing Market,”
“Speculators Push Rents Down,” “New Types of Mortgage Surges in Popularity,”
“Homeowners Start to Feel the Pain of Rising Rates,” “Dubious Options” and “Borrowers
Get New Mortgage Shopping Tools.”
Assignment: G&K: Do Ch. 9: Probs. 1 & 2; Part III - Case Probs. 1-4 (p. 166) and compute
IRR & NPV [at 12% cost of equity] based on calculated cash flows; ST: Do Park City
Duplex - Part II & Mtge Note Problems -- Do Prob. 2 only.
Team Case Assignment #3: Property selections for Team Case Projects are due in writing
to Professor by this date! (By this date, Teams should have confirmed availability of adequate
information on their selected properties and also organized individual efforts of Team members.)

October 2, 2007: First Midterm Examination.



October 9, 2007:
Topics: (1) After-tax Discounted Cash Flow Modeling, (2) Mortgage Financing Decisions, (3)
Overall Financial Leverage, and (4) Entrepreneurship.
Readings: G&K: Chapter 10 (pp. 167-171; 172-177; 181-187) and Chapter 11 (pp. 191-197);
ST: “The [Financial] Leverage Decision,” “Income Tax Act of 2003” and articles: “Tax
Breaks for ‘early’ sellers,” “Entrepreneurs’ Unusual Tactic: Buying Up Homes by Hundreds,”
“Slowdown Causes Condo Conversion Aversion” and optional article: "Zell's Secret: Better to
Be Early than Late in Shopping Depressed Markets."
Assignment: G&K: Do Chapter 10, Probs. 1, 2 and 3; and Part IV Case Problem #3
(Cheetum's Apts.; pp. 208-209 in G&K) using a 15% long-term capital gains tax rate (but a
25% tax rate in order to recapture depreciation as demonstrated on pages 193-194 in G&K
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.

October 16, 2007:
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: G&K: Chapter 22 (pp. 381-388); Chap. 21 (pp. 363-372); and ST: articles:
“Industrial’s New Image,” “Small Firms Eager to Buy Buildings,” “Housing Skid
Beginning to Affect Rents” and “Local Landlords Move Into Faraway Markets.”
Assignment: G&K: Begin Goldblest Case (Part VII - Case Problem – [pp. 405-406]) by
forecasting 7-year cash flows for the industrial and residential property investment
opportunities; and calculate the IRR and NPV (assuming an 11% after-tax risk-adjusted
equity required rate of return). (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.


October 23, 2007:
Topics: (1) Office Buildings and (2) Retail Shopping Centers.
Readings: G&K: Chapter 22 (pp. 388-402); ST: articles: “Soaring Rents Pinch Businesses
Across the U.S.,” “Offices Go Up in Earnest as Long Space Glut Ends,” “L.A. Office
Ownership Shifts to Funds, REITs,” “Abandoning the Mall,” “Making ‘Sick’ Mall Better,”
“Making Malls (Gasp!) Convenient,” “New Ideas for Malls Include Fewer Roofs, More Open
Spaces,” “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
Assignment: G&K: Complete Goldblest Case by forecasting office bldg. alternative cash
flows, calculate IRR & NPV; Which property (industrial, office, or retail) would you
recommend that Gary Goldblest (Part VII Case Problem) invest? Why?
ST: Do Park City Duplex Case - Part III.
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.

October 19, 2007: Last day to withdraw from class with grade of “W” or apply for C/NC.

October 30, 2007:
Topics: (1) Real Estate Investment Risk Analysis and Management and
        (2) Corporate Real Property Ownership and Use.
Readings: G&K: Chap. 15, 16, and 17; ST: Familiarize yourself with “Classification of Risk,”
“Levels of Risk Analysis”; and article: “The Economics of Real Estate Decisions.”
Assignments: ST: Park City Duplex Case - Part IV; and work on Final Team Projects.

November 6, 2007:
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: G&K: Chap. 14 (pp. 243-245 - Know Summation Technique [Table 14.1 - p.
244]) and Chap. 21 (pp. 363-372); ST: articles: “2007 Outlook: When the Going Gets Tough”
and “Slipshod Business Ethics a Poor Example for Youth.”
Assignment: G&K: Do Part IV Case Probs. #1 & #2 (Sated Satyr; p. 208 in G&K) and Part
V Case Problem #2 (Sated Satyr; p. 260 G&K); also calculate MIRR on this case (use a 6%
reinvestment rate) as part of review of calculating after-tax DCF cash flows, NPV, IRR,
etc.; Working in teams, begin work on Cedar Avenue Apartment Building Case;
(Questions 10 and 11 at end of Chapter 14 are optional discounted cash flow practice);
(Note: Team Projects are due in four weeks and 2nd Midterm Exam is in two weeks.)


November 13, 2007:
Topics: (1) Real Estate Investment Vehicles (Ownership Forms), (2) Syndication Offerings, and
(3) Auditing the Assumptions Underlying Investor Cash Flows.
Readings: G&K: Introduction to Part VIII (page 407); Chapters 23 and 10 (pp. 177-181);
ST: Sheet: “Real Estate Organizational Forms,” and articles: “REITs Emerging as Key
Catalyst In R.E. Ownership Consolidations,” “Have REITs Lost Their Footing?” “Foreign
Real-Estate Funds Boom,” “Sick of Being at the Market’s Mercy?” and “Correct `Bottom
Line' Analysis of Syndication Offerings.” (Optional: “Mutual Funds: Does Your Portfolio
Need an Addition? Think Real Estate Funds”).
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 Suppl. Text.

November 20, 2007: Second Midterm Examination.

November 22, 2007: Thanksgiving Holiday.

November 27, 2007:
Topics: Real Property Investment Related Cycles and Team Oral Presentations Begin.
Readings: ST: Paper: Dividend Capital’s Cycle Monitor - Real Estate Market Cycles and
Sheet: “Real Estate Cycles Research and Classification Model” and article: “Minor Markets,
Major Gains.”
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.

December 4, 2007: Team’s oral presentation continue; also real estate guest speaker likely.

December 11, 2007: 7:15 pm - 10:00 pm -- Team oral presentations will be completed
                                      during the time of the scheduled final examination.


To top