Fin 445 - 3/3/2025 Lecture Notes

Overview of Commercial Real Estate Products

• Different types of real estate properties.

  • Core and Core Plus:

    • Low risk, low return investment properties.

    • Typically well-located but may not be Class A buildings.

    • Opportunity for value addition if properties can be updated.

  • Value Add Properties:

    • Older buildings in great locations that require renovation can still yield financial returns.

    • Historic buildings often fall into this category and can regain market value once renovated.

    • Identifying opportunity in properties that need upgrades for better leasing potential.

Investment Evaluation

• Investors use financial models for analysis.

  • Important metrics:

    • Demographics: Population and economic factors.

    • Market Trends: Current market conditions impact investment decisions.

    • Property Comparables (Comps): Performance of similar properties in the area.

  • Investors lack exclusive data; they rely on known metrics.

Understanding the Market Cycle

• Market cycles typically follow a 20-year period.

• Best phase for acquisitions typically occurs in:

  • Phase Four and Phase One: Favorable buying conditions.

• Core properties tend to be less volatile and offer stability.

Types of Investors

Public Sector

• Invest in public infrastructure: schools, courts, and utilities.

Mission Driven Entities

• Focus on community improvement, such as affordable housing projects.

Development Firms

• Engage in building for holding or selling.

Real Estate Firms

• Focus on investment strategies without heavy involvement in development.

Real Estate Investment Trusts (REITs)

• Allow individuals to invest in real estate markets without large capital outlay.

• Popular among investors looking for passive income generation.

Institutional Investors

• Include pension funds needing stable returns for payout obligations.

• Insurance companies rely on low-risk investments for guaranteed payouts.

Crowdfunding in Real Estate

• Emerging trend allowing individuals to invest small amounts in larger deals.

• Platforms like Fundrise and Yieldstreet democratize access to property investments.

Private Equity Firms

• Pool funds from investors to purchase commercial real estate.

• Typically operate over a 10-year fund cycle, managing purchases and dispositions of assets.

  • Example Companies: Blackstone, Carlyle Group.

Types of Leases

Gross Leases

• Tenant pays a flat rent covering all expenses.

Triple Net Lease (NNN)

• Tenant responsible for property taxes, insurance, and maintenance costs on top of base rent.

• Common in retail spaces.

Double Net Lease (NN)

• Similar to triple net, but the landlord covers maintenance.

Variable Costs vs. Fixed Costs

• Fixed costs remain constant regardless of occupancy, e.g., insurance.

• Variable costs fluctuate based on property performance, e.g., maintenance.

Expense Ratios

• Ratio of expenses to income; monitors efficiency of property management.

• Helps identify properties needing operational improvements.

• Multifamily properties usually have expense ratios between 30% and 40%, influenced by amenities and property condition.