Lecture 1: Real Estate Process Overview - Dr. James R. DeLisle
Lecture 1: Real Estate Process Overview - Dr. James R. DeLisle
Lecture 1: Real Estate Process Overview - Dr. James R. DeLisle
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© JR <strong>DeLisle</strong>, Ph. D.<br />
<strong>Lecture</strong> 1: <strong>Real</strong> <strong>Estate</strong> <strong>Process</strong> <strong>Overview</strong><br />
by<br />
<strong>James</strong> R. <strong>DeLisle</strong>, Ph.D.<br />
September 30, 2009<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
<strong>Lecture</strong> <strong>Overview</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Course <strong>Overview</strong><br />
• The <strong>Real</strong> <strong>Estate</strong> <strong>Process</strong><br />
• The Nature of Value<br />
• Decision-making in <strong>Real</strong> <strong>Estate</strong><br />
• Introduction to Risk Management<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Course Objectives<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Develop a conceptual understanding of:<br />
– <strong>Real</strong> estate market at the macro and micro levels,<br />
– Linkages between the spatial and capital markets,<br />
– Integration of property, asset and portfolio management, and<br />
– Roles, drivers, and decision-making processes of major classes of space users,<br />
producers, and investors.<br />
• Cultivate an appreciation for:<br />
– Sustainable development, operation, transaction and investment, and<br />
– Integrate related disciplines to support real estate decision-making with the<br />
appropriate breadth and depth of inquiry.<br />
• Be able to make decisions drawing on:<br />
– Industry best practices, academic and theoretical concepts, and an<br />
– Understanding of basic technical and analytical tools.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Course Organization: Grading Policy<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Grading Philosophy<br />
– Basis: curved<br />
– Emphasis: achievement vs. process/speed<br />
• Grading Components<br />
– Participation/Peer Review 10%<br />
– Quizzes 50%<br />
– Final Exam 10%<br />
– Research Project 30%<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Course Components<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Textbook<br />
– <strong>Real</strong> <strong>Estate</strong> Principles<br />
• <strong>Lecture</strong>s<br />
– In PowerPoint format<br />
– Access via Moodle<br />
• Cases & Tutorials<br />
– In Word/PDF<br />
– Access via http://jrdelisle.com<br />
• Quizzes<br />
– In Moodle<br />
– Grade: Average of 2; best of calculated questions unlimited<br />
attempts<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Textbook<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• <strong>Real</strong> <strong>Estate</strong> Principles: A Value Approach, 2/e<br />
– David C. Ling, University of Florida<br />
– Wayne R. Archer, University of Florida<br />
• Student Learning Center: On-line<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
The Wheel of Thought<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Point of<br />
View<br />
Purpose,<br />
Goal<br />
Implications,<br />
Consequences<br />
Assumptions<br />
Question<br />
At Issue<br />
Information,<br />
Data, Facts<br />
Concepts,<br />
Theories<br />
Inferences,<br />
Conclusions<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Critical Thinking<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• The <strong>Real</strong>ity<br />
– Everyone thinks<br />
– Not everyone thinks critically<br />
• The Problem<br />
– Much thinking is biased, distorted, partial, uninformed<br />
– It affects the quality of our lives & what we produce, make, or<br />
build<br />
• The Goal<br />
– The ability to think critically and objectively<br />
– The ability to achieve excellence in thought<br />
• Achieving the Goal<br />
– A systematic thought process must be cultivated<br />
– A holistic approach must be applied ensuring breadth<br />
<strong>Real</strong><br />
and<br />
<strong>Estate</strong><br />
depth<br />
<strong>Process</strong><br />
of<br />
inquiry
© JR <strong>DeLisle</strong>, Ph. D.<br />
What is Critical Thinking and How Does it Work?<br />
• Definition of “Thinking”<br />
– Critical thinking is the art of analyzing and evaluating thinking to improve it<br />
– Effective critical thinking is purposeful, focused and action-oriented<br />
• What it Involves<br />
– Raises vital questions and problems, formulating them clearly and precisely<br />
– Gathers and assesses relevant information, using abstract ideas to interpret it<br />
– Comes to well-reasoned conclusions and solutions<br />
– Tests them against relevant criteria and standards<br />
– Thinks open mindedly within alternative systems of thought, recognizing<br />
– Assesses their assumptions, implications, and practical consequences<br />
– Communicates effectively with others in solving complex problems.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
The Definition of <strong>Real</strong> <strong>Estate</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Artificially delineated space over time<br />
with a fixed reference point to the earth…<br />
Money-time<br />
Space-time<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
<strong>Real</strong> <strong>Estate</strong>: The Dirt Beneath the Deal<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
<strong>Real</strong> <strong>Estate</strong> 101 Quiz<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
l<br />
Who created real estate?<br />
G … o …<br />
G O V E R N M E N T ……<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
<strong>Real</strong> <strong>Estate</strong>: Value Creation in <strong>Real</strong> <strong>Estate</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Dimensionality of <strong>Real</strong> <strong>Estate</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
What are the three key dimensions of <strong>Real</strong> <strong>Estate</strong>?<br />
S…. E…. L….<br />
Static<br />
Linkages<br />
Environment<br />
S…. E….. L ….<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Unique Element: Spatial Anchor<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Market<br />
• Submarket<br />
• Trade Area<br />
• Neighborhood<br />
• Block<br />
Trade Areas: Redmond<br />
Redmond<br />
Town Center<br />
Analytical Tools: GIS & Spatial Analysis<br />
Seattle Tiger<br />
Zoom<br />
Area<br />
Trade Area???<br />
photos courtesy of Aerolistphoto.com.<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Runstad Center for <strong>Real</strong> <strong>Estate</strong> Studies<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Runstad Center for <strong>Real</strong> <strong>Estate</strong> Studies<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Three Major Attributes of <strong>Real</strong> <strong>Estate</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
The old axiom: the three major attributes of real estate:<br />
– L,<br />
– L,<br />
– L.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Three Major Attributes of <strong>Real</strong> <strong>Estate</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
The old axiom: the three major attributes of real estate:<br />
– L,<br />
– L,<br />
– L.<br />
. . . . . . . ulnerable,<br />
. . . . . . . ulnerable,<br />
. . . . . . . ulnerable.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Graaskamp on Social Responsibility<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Man is the only animal that builds his terrarium about him as he<br />
goes and real estate is the business of building that terrarium. So<br />
we have a tremendous ethical content, tremendous social<br />
purpose. The student is looking for a field in which<br />
entrepreneurship and a way of life can be integrated into social<br />
purpose. We like to argue that the entrepreneurship of tomorrow<br />
is going to be the individual who can inventively implement<br />
social policy.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Three Participants in <strong>Real</strong> <strong>Estate</strong><br />
<strong>Process</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Space<br />
Producers<br />
Space<br />
Consumers<br />
Infrastructure<br />
Providers<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
<strong>Real</strong> <strong>Estate</strong> Cycles: Vacancy and Construction<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Technology<br />
Actual<br />
Speculative<br />
Construction<br />
Normative<br />
Construction:<br />
Expanding<br />
Demand<br />
% Occupied Stock<br />
Rising<br />
Rents<br />
Market<br />
Inefficiency<br />
Growth<br />
Maturity<br />
Decline<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
The <strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>: Space-Time<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Property-Type Stratification<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Which Market Segments?<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Anomolous<br />
Lifestyles<br />
Metro Fringes<br />
Affluent Suburbia<br />
Upscale City Singles<br />
Major Market Core<br />
Second City Leaders<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
I 75<br />
Atlanta: A Multi-nucleated Market<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Mount ai n<br />
West North<br />
Ce nt r al<br />
Eas t Nor t h Ce nt r al<br />
Nor t he as t<br />
Pacific<br />
Mi deas t<br />
Sout hwes t<br />
Sout heas t<br />
For syt h<br />
N. FULTO N<br />
Paul di ng<br />
Co b b<br />
N. W EST<br />
I 75<br />
US HWY 19<br />
I 285<br />
CENTRAL<br />
PERI M ETER<br />
I 85<br />
N. EAST<br />
M I DTO W N<br />
BUCK H EAD<br />
Hwy 7 8<br />
Gwi n n e t t<br />
N. LAK E<br />
I 20<br />
CBD<br />
S. ATLANTA<br />
Dougl as<br />
Ful t on<br />
Hwy 166<br />
I 85<br />
I 285<br />
I 20<br />
Cl ayt on<br />
I 75<br />
I 675<br />
He n r y<br />
Rockdal e<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Intra-urban Analysis<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Where in the market?<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Geo-Spatial Analysis<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Market<br />
• Submarket<br />
• Trade Area<br />
• Neighborhood<br />
• Block<br />
Trade Areas: Redmond<br />
Redmond<br />
Town Center<br />
Analytical Tools: GIS & Spatial Analysis<br />
Seattle Tiger<br />
Zoom<br />
Area<br />
Trade Area???<br />
photos courtesy of Aerolistphoto.com.<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Runstad Center for <strong>Real</strong> <strong>Estate</strong> Studies<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Runstad Center for <strong>Real</strong> <strong>Estate</strong> Studies<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Analytical Tools: GIS & Spatial Analysis<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Seattle Tiger<br />
Zoom<br />
Area<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Urban Form: Physical/Spatial Characteristics<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Magnitude/Concentrations<br />
– Size<br />
– Population density<br />
– Density variation in different parts<br />
A steep<br />
urban<br />
form with<br />
a central<br />
focus of<br />
intense<br />
land use<br />
and value<br />
Value<br />
• Patterns<br />
– Locations of different land use<br />
– Locations based on ethnicity, income group and other<br />
classifications of society<br />
A sprawled urban<br />
form with multiple<br />
focus points and<br />
more even land<br />
values.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
The <strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>: Money-Time<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
<strong>Real</strong> <strong>Estate</strong>: The Foundation<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Question: What are we buying when we buy real estate?<br />
Bricks and mortar??????<br />
PV $’s<br />
Gross Rent<br />
Vacancy & Expenses<br />
= Net Operating Income (NOI)<br />
Time<br />
No… A set of assumptions……<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Frontdoor Model: Sequence<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
TRCm<br />
* Wcc<br />
GIr<br />
Land<br />
NIr<br />
/ NIR<br />
Hard & Soft Costs<br />
TRCm<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Backdoor Model: Reverse Engineered<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
Market<br />
TRCj<br />
RCR<br />
* Wcc<br />
NIm<br />
GIm<br />
/ NIR<br />
Land<br />
Hard & Soft Costs<br />
TRCj<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
© JR <strong>DeLisle</strong>, Ph. D.<br />
Interdisciplinary Spectrum: A Life Cycle Approach<br />
$<br />
Operation<br />
Disposition/<br />
Redevelop<br />
Planning<br />
Acquisition<br />
/Production<br />
Feasibility<br />
Marketability<br />
Appraisal<br />
Engineering<br />
Architectural<br />
Environmental<br />
Legal<br />
Cost Estimation<br />
Negotiations<br />
Construction Mgmt.<br />
Quality Controls<br />
Project Mgmt.<br />
Architectural Oversight<br />
Cost Mgmt.<br />
Construction Financing<br />
Inspections<br />
Pre-leasing<br />
Releases<br />
Final Inspection<br />
or<br />
Sourcing if Existing<br />
Portfolio Mgmt.<br />
Asset Mgmt.<br />
Leasing<br />
Tenant Improvements<br />
Tenant Relations<br />
Property Mgmt.<br />
Accounting/Reporting<br />
Engineering<br />
Financial Mgmt.<br />
Time<br />
Hold/Sell Analysis<br />
Marketing<br />
Valuation<br />
Buyer Selection<br />
Broker Management<br />
Negotiations<br />
Closing<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Development Finance Timeline<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Construction Loan<br />
• Interim Loan or Mini-perm<br />
• Permanent Loan<br />
Construction Loan<br />
Permanent Loan<br />
Repayment or<br />
Refinancing<br />
Stabilization & Operation<br />
Interim/Gap<br />
Loan<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Decision-Making <strong>Process</strong> in <strong>Real</strong> <strong>Estate</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Awareness of need<br />
• Problem statement<br />
• Decision model<br />
• Identification of alternatives<br />
• Selection of solution<br />
• Implementation of decision<br />
• Monitoring and feedback<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
Risk Management and <strong>Real</strong> <strong>Estate</strong><br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Risk Scenarios<br />
• Situation: Buying Property<br />
• Case A. Predict rents rise to $30/sf; only hit $20.<br />
• Case B. Predict rents rise to $20/sf; actually, hit $30<br />
• Which is Risk? A, B, A & B, None of above?<br />
• Definition of Risk<br />
potential variation between expectations and realizations<br />
• Causes of Risk<br />
– Inadequate information<br />
– Inaccurate data<br />
– Invalid predictive model<br />
– Unforeseen change in environment<br />
– Other externalities<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
<strong>Lecture</strong> Review<br />
© JR <strong>DeLisle</strong>, Ph. D.<br />
• Course <strong>Overview</strong><br />
• The <strong>Real</strong> <strong>Estate</strong> <strong>Process</strong><br />
• The Nature of Value<br />
• Decision-making in <strong>Real</strong> <strong>Estate</strong><br />
• Risk-Management<br />
<strong>Real</strong> <strong>Estate</strong> <strong>Process</strong>
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