Pre-requisite: Students will benefit from a working knowledge of the theory and application of the three approaches to value, in particular the income approach. Recommend BUSI 331 / CPD 131 or equivalent (e.g., Trading Services / real estate sales course).
Anyone involved in real estate will occasionally come across deals that just don’t seem to make sense: Some real estate deals don’t seem to make sense to appraisers:
- A private investor buys an apartment building for an exceptionally high price.
- A REIT buys several run-down retail plazas in a suburban neighbourhood. A Pension Fund sells a well-performing office building in the downtown core, with little exposure to the market.
- A Limited Partnership buys a largely vacant office building after a tenant with 80% of the space did not renew their lease.
You follow the market quite closely, you have as good a grasp of the fundamentals as anyone, and yet you are at a loss to explain why these deals happened and at the prices they commanded. You know these are sophisticated market players and they are anything but stupid – so what do they know that you don’t? If these sales are brought up as potential comparables in an appraisal, the easiest solution might to ignore them as non-market transactions. However, in doing so you may be losing valuable market insight – the optimal solution is to dig a little deeper and try to better understand the motivation of the parties involved.
Any given commercial real estate investor will typically follow a consistent decision model. They develop a game plan for how to out-compete the market, such as a niche where they can generate value above that of their competitors … and once they have this successful strategy, they tend to stick to it. To the outsider, their actions may appear to generate reported sale prices and overall cap rates out of sync with general market trends. But what appear to be anomalies may in fact be a decision model that differs from the market. Peeling apart these deals is the key to understanding the behavior and motivation of buyers and sellers of commercial real estate. That’s the basis for this course - unlocking the decision model puzzle within these investment actions.
This course will explore how each investor’s investment objectives are linked to a defined approach to balancing risks and rewards. Using examples of recent transactions, we will progress to uncover elements of an acquisition decision model: identifying investment opportunities and filtering out options with a combination of investment metrics, market analysis, and experience. We also touch on the nuances in drafting contracts of purchase and sale and the due diligence process.
The primary focus in the course will be the various investment metrics and tools used by investors to measure the benefits of a potential acquisition project. Of particular interest are the metrics commonly used by institutional investors, such as REITs and large private and public real estate investment corporations. We will also discuss the impact of financing on investment viability and the importance of the spread between loan rates and return on equity.
At the conclusion of this course, students should have a greater appreciation for the investment decision process and the approach that large investment entities often take in adding or pruning properties from their portfolios.
Foreword: Introduction to Professional Development Courses
Lesson 1: Commercial Property Acquisition
- Instructor's Comments
- Investment Goals
- Stable Annual Income
- Growth in Annual or Periodic Income
- Equity (Value) Appreciation
- Combined Investment Goals
- Investment Time Horizon
Publicly Accountable Entities
- Constraints: Property Type, Market, and Regulation
- Limited Market for Institutional Grade Real Estate
- Regulatory Environment
- Strategies for Real Estate Investment Entities
- Case Study: Hillside Shopping Centre Victoria, BC
- Controlling Investment Risk
- Real Estate Acquisition Strategies
- Limited Partnerships
- Case Study: Ottawa Limited Partnership Project
- Origin of Investment Opportunities
- Financing Property Acquisition
- Loan Underwriting
- The Property Investment Model
- Macro Analysis
- Identification of Investment Options
- Purchase and Sale Negotiations
- The Due Diligence Process
- Building Review
- Environmental Review
- Legal Review
- Financial Review
- Preliminary Investigations
- Financial Metrics
- Case Study: Evergreen Shopping Centre, Sooke, BC
- Directed Case Study – Commercial Property Acquisition
- Lesson Summary
- Review and Discussion Questions