Bill Marcum

Real Estate Investment Trusts (REITs)

In this final chapter, the real estate investment trust (REIT) will be discussed. These special investment vehicles can serve as a portfolio diversification strategy for investors seeking an investment which provides return possibilities in a variety of property types and locations. The REIT, while of relatively recent creation, has roots which trace back to earlier times. Students of real estate finance should be aware of the functioning and the strategy of REITs, as these entities have become increasingly more involved in real estate investment. The chapter concludes with thoughts of international dimensions of real estate.

Real Estate Investment

Preface.- 1 Real Estate Investing After the Fall.- 2 Real Estate Finance: Notes, Mortgages, and Payment Structures.- 3 Finance and Real Estate Valuation.- 4 Real Estate Valuation.- 5 The Anatomy of a Lease.- 6 Risk Analysis.- 7 Taxation in Investment Real Estate.- 8 Investing in Residential Apartment Projects.- 9 Investing in Retail and Office Property.- 10 Investing in Warehouse and Industrial Property.- 11 Securitization of Real Estate Assets.- 12 Real Estate Investment Trusts.- Glossary.

Reducing risk in the emerging markets: Does enhancing corporate governance work?

This study examines emerging market firms that adopt corporate governance standards similar to those in the US. The investigation highlights the impact governance standards may have on corporate risk taking, as measured by stock return volatility, under varying political and socioeconomic regimes. In a cross-sectional time-series setting, the analysis reveals that enhanced governance standards are associated with risk reductions among US domiciled firms, cross-listed American Depository Receipt companies (ADRs) and non-cross listed emerging market (EM) firms. The effect of these governance standards on risk taking, however, does not deviate considerably between cross-listed ADRs that are exposed to Securities and Exchange Commission (SEC) mandated regulations and non-cross-listed EM firms that are not subject to the same regulatory constraints. Also, in some respects, Chinese firms seem to exhibit corporate behavior that is contrary to that of the rest of the world.

Real Estate Investing After the Fall

The topic of real estate investing has made worldwide headlines in recent years in both good and bad ways. During the economic expansion years from 2002 to 2007, real estate investment received much good press from everyone from government officials encouraging real estate ownership, to central banks encouraging bank lending via low interest rates, to various financial institutions offering ever more risky loan options, to investors who were seeking as much of a loan as they could possibly obtain while interest rates were low and while lending appetite was strong. We like to call this period of time the Yes Era of commercial and investment banking. Everyone was a winner, everyone got a trophy, and everyone it seems, got a loan.

The Anatomy of a Lease

The review of commercial leases is a key component of an investor’s (or a lender’s) due diligence prior to purchase (or financing) of an investment real estate property. The length of the lease income, in conjunction with the amount of competing, available space in the market, represents the durability of the income stream in our aforementioned QQD framework. The lease is a contractual obligation between the lessor (owner) and the lessee (tenant). The lease documents how much rent will be paid, for how long it should be paid, and how expenses may be shared. In this section, we will discuss how the price of rent is determined, how rent is calculated, and how expenses can be shared between the lessor and the lessee.

Investing in Residential Apartment Projects

The next three chapters of the book will elaborate on characteristics specific to the “four food groups” of investment property as was defined in Chap. 1. Chap. 8 will discuss multi-family (or residential apartment) projects, Chap. 9 will discuss retail and office properties, and Chap. 10 will discuss the various types of industrial and warehouse properties. Each chapter will conclude with case studies with corresponding answer keys located on the Springer website.

Securitization of Real Estate Assets

One of the most significant financial innovations of the twentieth century was the introduction of securitization. Securitization involves pooling individual, usually illiquid, assets and using the pool as collateral for the issuance of an entirely new set of financial securities. People that invest in the new securities are promised a proportionate share of the cash flows produced by the pool of assets.

Taxation in Investment Real Estate

In this chapter, we will explore the benefits and possible pitfalls of taxation reduction and deferment strategies in investment real estate. We will discuss the effect that interest expense and non-cash expenses can have on investment return, and we will introduce the after tax internal rate of return. We will then discuss the various forms of real estate property ownership, and its effect on taxation at the corporate and personal level. In the final section of the chapter, we will outline like kind exchange in a real estate context. The chapter concludes by returning to our sensitivity analysis mini-case from the last chapter to view the after tax effects.

Finance and Real Estate Valuation

In the aftermath of the “Yes Era”, we believe that investors must return to fundamental analytical tools in order to help ensure that a property has the desired characteristics which allow an investor to achieve their required rate of return. Investing in non-speculative properties will help the investor in obtaining financing at a bank, as lenders are less willing to take risks than they were only a few years ago.

Investing in Warehouse and Industrial Property

In Chap. 10, we complete our analysis of the primary investment property sector considerations with a discussion of industrial and warehouse property. These properties are generally classified as industrial property given that their function relates to manufacturing, production, or storage of industrial products. A relatively new subsection of industrial property is known as self-storage, or alternatively as mini-storage. As will be discussed later in this chapter, self-storage property has widened the scope of demand for storage space to include the general public.