David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Finance Theory and Real Estate...
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Transcript of David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Finance Theory and Real Estate...
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Finance Theory and Real Estate
Goal –
Asset Valuation:
Risk vs. Uncertainty
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David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Determinants of Value
1. Amount of after-tax CFs
2. Timing of CFs
3. Risk of CFs
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Risk in the Context of Real Estate
Commercial Property – Real Estate Limited Partnership – Real Estate Investment Trust (REIT) – Residential Mortgage – Mortgage-Backed Security – Collateralized Mortgage Obligations (CMOs) – IO’s and PO’s – Servicing Rights -
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Leverage and Capital Structure
Leverage Defined –
Debt increases shareholder returns…
Irrelevance of Capital Structure…
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Options in Real Estate Markets
Call –
Put –
Intrinsic Value Market Value
Valuation considerations:
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Real Estate Options
Residential Mortgages Prepayment – Default –
Commercial Mortgage Ruthless Default – Protections –
Explicit/Real Options –
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Key Concepts
Financial Intermediation
Portfolio Theory Asset Class Diversification Diversification Within Real Estate
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Market Efficiency
Efficient Market Hypothesis
Levels of Market Efficiency
Conclusions?
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Agency Theory
Agency Relationship
Agency Problem:
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Agency Examples in Real Estate
Property Management -
Loan Officers –
Appraisers –
Agents -
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
An Example Agency Problem
Suppose you’re considering undertaking a real estate development project. You plan to finance the construction of ________ with $25M (face value) of debt. Two methods/strategies exist for developing our __________. First, a safe method is available which produces profits (EBIT) of $40M if the economy is slack and $60M if the economy is robust. Alternatively, a risky process is available which produces profits (EBIT) of $0 if the economy is slack and $80M if the economy is robust. Assuming both states of the economy are equally likely to occur, which development strategy should the firm pursue?
Societal Perspective »
Creditors Perspective »
Owners Perspective »
• Conclusion:
David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University
Mitigating Agency Problems
Threat of Firing
Threat of Takeover
Managerial Labor Markets
Proper Structuring of Managerial Incentives