Private Real Estate Investment: Data Analysis and Decision Making (Academic Press Advanced Finance Series)

306 Pages·2005·2.07 MB·English

by  Roger J. Brown

Private
Real Estate
Investment
Data Analysis and Decision Making
Roger J. Brown, PhD
Director of Research
Real Estate and Land Use Institute
San Diego State University
San Diego, California
Amsterdam Boston Heidelberg London New York Oxford
Paris San Diego SanFrancisco Singapore Sydney Tokyo
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Private
Real Estate Investment
Data Analysis and Decision Making
ElsevierAcademicPress
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‘‘Is life mathematics or is it poetry?’’
Roger Mague´re`s
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CONTENTS
Preface xiii
Acknowledgements xix
1. Why Location Matters: The Bid Rent Surface and
Theory of Rent Determination
Introduction 1
Classical Location Theory 2
Notation Guide 2
The Model 3
Example #1—Two Competing Usersin theSame Industry 3
Example #2—Several Competing Users inDifferent Industries 5
Is the Bid Rent Curve Linear? 7
Empirical Verification 8
An Economic Topographical Map 12
Relaxing the Assumptions 13
A Window to the Future 16
References 17
2. Land Use Regulation
Introduction 19
Who ShallDecide—The Problem ofExternalities 20
The Idea of Utility 23
The Model 24
Optimization and Comparative Statics 27
A Graphic Illustration 28
Implications 32
A Case Study in Aesthetic Regulation 32
vii
viii Contents
Conclusion 36
References 37
Appendix: Comparative Statics for Chapter 2 37
3. The ‘‘Rules of Thumb’’: Threshold Performance Measures
for Real Estate Investment
Introduction 39
Threshold Performance Measures 40
A General Caution 42
The Gross Rent Multiplier (GRM) 43
What NottoDo 44
What Shouldbe Done 45
Capitalization Rate (CR) 49
TheThreeBadAssumptions 49
Capitalization Rateand Discounted CashFlow Analysis 50
Monotonic Growth 52
TheExpenseRatio and the‘‘Honest’’ Capitalization Rate 54
TheNormal Approach toData 56
Questioning theAssumption ofNormality 60
TheStableApproach toData 62
Linear Relationships 62
Linear Transformations 64
Spurious Relationships 64
Cash-on-Cash Return (C/C) 67
Price Per Unit (PPU) 67
Other Data Issues 71
References 72
4. Fundamental Real Estate Analysis
Introduction 73
TheRoleof Computational Aids 73
Deterministic Variables of Discounted Cash Flow Analysis 75
Single Year Relationships and Project Data 76
Multi-Year Relationships 78
Sale Variables Relationships 79
The Net Present Value 81
Insight into the Analysis 82
An Illustration of Bargaining 87
Another Growth Function 90
Data Issues 93
Conclusion 98
References 98
Contents ix
5. Chance: Risk in General
Introduction 99
Objective andSubjective Risk 100
Games of Chance and Risk Bearing 101
The Utility Function Revisited 104
The ‘‘Certainty Equivalent’’ Approach 107
Multiple (More than Two) Outcomes 111
The Continuous Normal Case 112
Conclusion 116
References 117
6. Uncertainty: Risk in Real Estate
Introduction 119
Non-normality—How and WhereDoes it Fit? 119
The Continuous Stable Case 121
Producing aStable pdf 123
StillMoreDistributions? 126
Enter Real Estate 127
Determinism 128
Determinism and House Prices 131
Determinism and Real Estate Investment 135
Risk and Uncertainty 138
Rolling the Dice 141
Real Estate—The ‘‘Have it Your Way’’ Game 145
The Payoff 147
Data Issues 150
Conclusion 152
References 153
7. The Tax Deferred Exchange
Introduction 157
Taxes areLess Certain forReal Estate Investors 158
Variable Definitions 160
TheStructureofthe Examples 161
The Base Case: Purchase–Hold–Sell 162
Example 1—Modifying the Growth Projection 163
Example 2—The Tax Deferred Exchange Strategy 167
Exchange Variable Definitions 168
TheValueofTax Deferral 173
TheSale-and-RepurchaseStrategy:Tax Deferralas aRisk Modifier 176
TheSale-and-Better-Repurchase Strategy:TheCostofExchanging 178
x Contents
Example 3—Exchanging and The Plodder 182
Data Issues 185
Conclusion 186
References 188
8. The Management Problem
Introduction 189
TheUnavoidableManagement Issue 189
The Property Manager’s Dilemma 190
IsBuilding SizeReallyImportant? 193
The Property Owner’s Dilemma 195
The‘‘NoVacancy Rate’’ Approach 195
EntertheVacancy Rate 197
Reconciling the Two Problems 198
Data Issues 201
Conclusion 202
References 203
Appendix: A Caution On the Use of Data to Construct Theories 204
Making Vacancy andRental Rates Reasonable 204
TheModel toEnd allModels 205
9. The Lender’s Dilemma
Introduction 209
Lenders andtheirRules 209
Appraisal Techniques 210
TheCapitalization RateApproach Versusthe Mortgage Equity
Approach 210
TheLender’sPerspective 212
TheBorrower’sPerspective 212
Irrational Exuberance and the Madness of Crowds 213
Bubble Theory—How High is Up? 217
PositiveLeverage 217
TheLender asGovernor 221
Resolving theConflict 222
ThreeTwo-Dimensional (2D) Illustrations 224
Endgame 227
Data Issues 231
Conclusion 235
References 235