G. Jason Goddard

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.

Islamic Finance: Principles and Practice by Visser, H.

In the wake of the recent financial crisis, international business headlines questioned whether Islamic finance was insulated from the vagaries of interest rate sensitivity that plagues the conventional international banking system (Oakley, 2009; Wigglesworth, 2009). In more recent times, articles in the Financial Times provided further discussion that the soundness of the principles and practice of Islamic finance had helped in weathering the storm of the lending crisis in Dubai, and that predominantly Muslim developing countries were primed for growth given increasing populations and existent and nascent oil wealth (“Future of Islamic Finance,” 2010; “Islamic Finance,” 2011). Many of the articles I have read concerning Islamic finance provide topical coverage but are sparse in the products offered and how they are different from traditional banking and compliant with the Islamic interpretation of what is acceptable. A recent book titled Islamic Finance: Principles and Practice by Hans Visser, Professor Emeritus of Money and Banking and International Economics at Vrije Universiteit (VU) University in Amsterdam thus piqued my interest. It was the Practice part of the title that drew me to review this book. Additionally, because the author was from outside of the faith, this, for me, helped to provide some additional measure of academic distance in the analysis of a topic that blends the spiritual and the economic. What I was hoping to find was an even-handed discussion of the benefits and limitations of this niche contribution by developing countries to international finance. Thus, I review this book as a commercial banker interested in increasing my understanding of Islamic finance, and as instructor of international business and finance courses hoping to introduce students to an interesting alternative to conventional international banking.

Buchanan, B. G. (2017). Securitization and the Global Economy: History and Prospects for the Future. New York, NY: Palgrave Macmillan, 2017, 251 pp.

Securitization has been the recipient of quite the smear campaign in recent years. If one was to google the term sometime in the earlier part of this decade, the adjectives associated with this asset class might not pass the censors. As it turns out securitization is not all that new, nor are its failures. In her new book, Securitization and the Global Economy: History and Prospects for the Future, Seattle University’s Bonnie Buchanan makes the case that when held to an adequate standard, securitization, or the bundling of the rights to future cash flows, has ameliorative impact on the financial statements of banks and provides an adequate return on investment for investors. The book serves its title well and provides a long view of securitization, as well as expands coverage beyond Europe and North America. But first, let’s focus on those acronyms! Various securitized structures come in all shapes and sizes and the nonexpert can be left befuddled with all of the various abbreviations. So we will begin this review essay by playing a game, the alphabet soup of securitization, which may be a first for a book review. Let’s review the following terms below, and determine which of the following are forms of securitization and which are not. An answer key will appear in the appendix.

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.