Real Estate Finance and Development Syllabus Course Description This course will provide participants with a general understanding of real estate finance and development with an emphasis on housing development generally and affordable housing development in particular. The course uses case studies to help illustrate concepts and their applications. Participants will become familiar with the tools and the language of real estate finance and affordable housing development. By the end of the course students will be able to conduct feasibility analyses of potential real estate projects that measure both the economic and social benefits of the project. The first half of the course is focused on providing participants with a basic understanding of the terms and techniques used to finance real estate projects and evaluate their economic benefits. The remainder of the course is focused on developing a working knowledge of the development process. Course Materials The first half of the course requires that you have a working knowledge of Excel applications. If you have not previously used Excel, help is available through Tisch Library; I am also happy to schedule a nuts and bolts session for students who still feel they need help after taking advantage of the library resources. You should plan to bring a laptop to class so that you can manipulate data as we work through concepts. Course Projects The course has three major projects. The first is the Angus Cartwright III case study. This will show how effectively you have learned the basic concepts of real estate finance. The second, the mid-term project, is the Silver Lane Apartments affordable housing application. This will require you to apply the basic concepts of real estate finance in preparing portions of a real world application for public financing. The final project is to write a case study of a real estate development project. The study will include a description of the project including photos, detailed development and operating cash flows, interviews with project team members and occupants, a description of the benefits of the project, and your analysis of the effectiveness of the development process and how improvements could have benefited the final product (in terms of finances, affordability, amenities, community benefits, etc.). You must hand in a preliminary In addition, there are three ungraded assignments in the early weeks of the semester. The first two ungraded assignments preparing a 10-year operating pro forma and a development pro forma will help prepare you for your work on the mid-term project.
Course Grading There are eight assignments, as outlined below. The first three (ungraded) assignments are intended to give you practice in real estate finance calculations and prepare you for the later, graded assignments. Twenty percent of your grade will be based on class participation. Assignment Description Prepare a 10-year operating pro forma for Silver Lane Apartments utilizing specific assumptions provided Prepare a development pro forma for Silver Lane Apartments, utilizing specific assumptions provided Prepare a chart showing monthly debt service required on a $100,000 loan with different interest rates and amortization Using methods and formulae in HBS case study Introduction to Accumulated Value, Net Present Value and Internal Rate of Return, calculate accumulated value, net present value and internal rate of return for investment with initial outlay of $50,000, expected returns over 3 years of $10,000 at the end of year 1, $20,000 at the end of year 2 and $30,000 at the end of year 3, and investor opportunity rate of 10% Date Due 1/28 0% 2/4 0% 2/11 0% 2/18 0% % of Grade Complete assigned portions of the HBS Case Angus Cartwright III 2/25 15% Introduce affordability to Silver Lane Apartments development and operating pro formas. Prepare assigned portions of One Stop Application based on the pro formas. 3/11 15% Preliminary description of final project (2-5 pp.) 3/18 5% Final project 5/6 45%
1 Jan. 21 2 Jan. 28 3 Feb. 4 4 Feb. 11 Overview and Intro to Real Estate Finance (Part 1) Objective To clarify syllabus, materials required, and class assignments and projects. To demystify real estate finance and provide participants with the basic vocabulary necessary to discuss real estate. In- Activity Review syllabus and assignments; review materials required for class; discuss how to hand them in; discuss grading; begin real estate finance terms; begin developing operating pro forma Intro to Real Estate Finance (Part 2) Readings Harvard Business School (HBS) Case: Silver Lane Apartments. Hecht, Ch. 5, Determining Project Income and Expenses. Activity Assignment Prepare a 10-year operating pro forma for Silver Lane Apartments utilizing specific assumptions provided Objective To understand basic concepts including loan amortization, depreciation, and relationship between income, expenses and value. In- Activity Review the HBS case Silver Lane Apartments. Discuss cash flow analysis for rental property and the importance of the operating pro forma as it relates to value. Intro to Real Estate Finance (Part 3) Readings Review Silver Lane Apartments; Hecht, Ch. 4, Project Feasibility and TDC. Activity Assignment Prepare a development pro forma for Silver Lane Apartments utilizing specific assumptions provided. Objective To understand the information required to calculate project feasibility such as total development cost and property valuation. In- Activity Discuss interplay between capital costs and NOI in calculating project feasibility, methods of calculating project value, TDC Debt and Equity (Part 1) Readings Hecht, Ch. 6, Raising Capital Activity Assignment Prepare a chart showing monthly debt service payments on a $100,000 loan at different interest rates (3%, 5%, 7% & 10%) under four scenarios: (a) interest only, (b) loan amortizing over 10 years, (c) loan amortizing over 20 years, and (d) loan amortizing over 30 years. Objective Provide participants an understanding of how to calculate debt capacity and equity requirements. In- Activity Utilizing the cash flow analysis from previous class, determine debt capacity based on loan-to-value ratio and debt service coverage ratio. Discuss relationship between debt, cash flow and up-front equity requirements.
5 Feb. 18 6 Feb. 25 7 Mar. 4 Debt and Equity (Part 2) Readings HBS Case Study Introduction to Accumulated Value, Net Present Value and Internal Rate of Return; review HBS case Angus Cartwright III in preparation for graded assignment. Activity Assignment Using methods and formulae in case study, calculate accumulated value, net present value and internal rate of return for investment with initial outlay of $50,000, expected returns over 3 years of $10,000 at the end of year 1, $20,000 at the end of year 2 and $30,000 at the end of year 3, and investor opportunity rate of 10%. Objective Provide participants with the tools necessary to perform sensitivity analysis (analysis of an investment s profitability taking into account potential changes to interest rates, costs, and/or other variables and measures how this will affect the return on the investment). Also provide students with an understanding of how real estate is valued including internal rate of return, net present value and capitalization rate. In- Activity Review concepts of accumulated value, net present value and internal rate of return and apply those concepts to cash flow analysis from previous class. Manipulate rental income and operating expenses to determine the effect on projected sales value, debt capacity, and loan to value ratio. Real Estate Finance Redux Graded Assignment Due Complete assigned portion of HBS Case Angus Cartwright III Objective Provide participants the opportunity to solidify their understanding of how real estate finance concepts and calculations are used in practice to evaluate development opportunities, various financing mechanisms, and project feasibility. In- Activity Review Angus Cartwright case and discuss use of financial calculations. Financing Tools Available for the Production and Maintenance of Affordable Housing Readings Alex Schwartz, Housing Policy in the United States. New York, NY: Routledge (2010) pp. 103-124, 202-224, 240-245; skim Commonwealth of Massachusetts 2010 Qualified Allocation Plan, amended as of July 13, 2010, I-XII & XV (pp. 3-44 & 49-55) and Appendix E, Glossary of Terms (pp. 81-84), available on-line at http://www.mass.gov/?pageid=ehedterminal&l=3&l0=home&l1=housing+development&l2 =Affordable+Rental+Development&sid=Ehed&b=terminalcontent&f=dhcd_hd_lihtc_lihtc&csid =Ehed Objective Familiarize participants with the basic tools used to produce affordable housing and to maintain affordability over time while introducing the constraints to the programs. In- Activity Review the application of affordability programs and introduce the various program guidelines. Discuss how these guidelines help increase or decrease the level of affordability for projects.
8 Mar. 11 9 Mar. 18 10 Apr. 1 11 Apr. 8 The Development Process Readings Mike E. Miles et al., Real Estate Development Principles and Process, 3d Ed., Eight Stage Model of Development ; Hecht, Ch. 2, The Real Estate Development Process for Nonprofits An Overview ; HBS Case Study 503 Cricket Road Graded Assignment Due: Introduce affordability to Silver Lane Apartments Development and Operating pro formas. Prepare One Stop Application based on the pro formas. Objective Provide participants with an overview of the real estate development process and the understanding that the process is neither linear nor predictable. In- Activity Review and discuss the assigned case study in the context of the Eight Stage Model of Development in Mike El Miles et al., Real Estate Development Principles and Process; consider additional development issues facing nonprofits. Project Feasibility Readings HBS Case Jason Bosworth ; additional readings to be announced. Objective Provide participants with the understanding of the different analyses required to determine whether a project is feasible including financial and social benefit. In- Activity Develop an outline for a feasibility study based on the eight stage development process, the financial analysis and any real or perceived social benefits. Develop a predevelopment budget for Silver Lane Apartments and discuss potential sources. No classes March 25 Spring Break Putting the Team Together Readings Hecht Ch. 3, Establishing the Development Team. Graded Assignment Due Draft outline of final project. Objective Provide participants with a general overview of each of the roles of the development team and general criteria for selecting team members. In- Activity Review the team members selected for the affordable Silver Lane Apartments. Discuss potential similarities and differences in teams depending upon the existence of an affordable component. Permitting and Approvals Readings A Citizens Guide to Development Review under Article 80 of the Boston Zoning Code, available on-line at www.bostonredevelopmentauthority.org/.../a%20citizens%20guide%20to%20article%2080.pdf Objective Provide participants with an overview of the permitting process and its relevance to a real estate development process. In- Activity Review the types of permits and approvals frequently required for a real estate development project. Discuss the way in which the permitting process affects feasibility.
12 Apr. 15 13 Apr. 22 14 Apr. 29 May 6 Getting to Yes Readings HBS Case Study, The Nehemiah Strategy: Bringing It to Boston ; Charles G. Field, Building Consensus for Affordable Housing, Housing Policy Debate, Vol. 8, Issue 4 (1997), pp. 801-832. Assigned Film (view before class) Holding Ground (on reserve at Tisch Library; to be made available in digitized format for download) Objective Provide participants with a framework by which to view community process as it relates to real estate development in Boston in general and specifically in relation to affordable housing projects. In- Activity Describe the community approval process in the Boston context and discuss the pros and cons of community process. Site Visits Managing Affordable Housing Readings Hecht, Ch. 19, The Project Completion Phase. Objective Provide participants with the regulations and restrictions other than income that determine who lives in affordable housing and how to address challenges with managing this type of housing. In- Activity Understand the opportunities and challenges involved in managing affordable housing. FINAL PROJECT DUE