Private Real Estate Investment

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 San Francisco Singapore Sydney Tokyo Elsevier Academic Press 200 Wheeler Road, 6th Floor, Burlington, MA 01803, USA 525 B Street, Suite 1900, San Diego, California 92101-4495, USA 84 Theobald’s Road, London WC1X 8RR, UK This book is printed on acid-free paper. Copyright ß 2005, Elsevier Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from the publisher. Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone: (þ44) 1865 843830, fax: (þ44) 1865 853333, e-mail: permissions@else-vier.com.uk. You may also complete your request on-line via the Elsevier homepage (http:// elsevier.com), by selecting ‘‘Customer Support’’ and then ‘‘Obtaining Permissions.’’ Library of Congress Cataloging-in-Publication Data British Library Cataloguing in Publication Data ISBN: 0-12-137751-2 ISBN: 0-12-088532-8 (CD-ROM) For all information on all Academic Press publications visit our Web site at www.academicpress.com Printed in the United States of America 04 05 06 07 08 09 9 8 7 6 5 4 3 2 1 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 Users in the Same Industry 3 Example #2—Several Competing Users in Different 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 Shall Decide—The Problem of Externalities 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 Conclusion References Appendix: Comparative Statics for Chapter 2 Contents 36 37 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 Not to Do 44 What Should be Done 45 Capitalization Rate (CR) 49 The Three Bad Assumptions 49 Capitalization Rate and Discounted Cash Flow Analysis 50 Monotonic Growth 52 The Expense Ratio and the ‘‘Honest’’ Capitalization Rate 54 The Normal Approach to Data 56 Questioning the Assumption of Normality 60 The Stable Approach to Data 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 The Role of 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 and Subjective 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 Where Does it Fit? 119 The Continuous Stable Case 121 Producing a Stable pdf 123 Still More Distributions? 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 are Less Certain for Real Estate Investors 158 Variable Definitions 160 The Structure of the 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 The Value of Tax Deferral 173 The Sale-and-Repurchase Strategy: Tax Deferral as a Risk Modifier 176 The Sale-and-Better-Repurchase Strategy: The Cost of Exchanging 178 ... - tailieumienphi.vn