1. Overview of Real Estate Financing Ashesi University Lecture
Kofi Duodu Asomaning
MBA: Real Estate & Finance, Wharton School
Associate, Ghana Institute of Architects
Certified Project Management Professional (PMP), PMI

2. Overview of Real Estate Finance by K. D. Asomaning
Agenda
Introductions
Real Estate Categories
Market Forces of Real Estate
Major Players in Real Estate
Types of Financing
Investment Options
Real Estate Risks
Investment Cycle
Questions
Overview of Real Estate Finance by K. D. Asomaning

3. Real Estate Categories
Real estate is a term that encompasses land and any improvements to the land.
Land  - Greenfields, In-fills & Brownfields
Improvements:
Commercial Real Estate : Office, Retail establishments, Industrial facilities, Hospitality & Health care properties
Residential real estate: Single Family (Detached or Semi-detached), Multi-family (High-Rise, Mid-Rise, Garden Apartments)
Special purpose real estate :Schools, Public buildings (federal, state, and local) , Airports, Amusement parks , Golf courses etc
Overview of Real Estate Finance by K. D. Asomaning

4. Overview of Real Estate Finance by K. D. Asomaning
Market Forces - I
Real estate is cyclical!
Capital Markets. In the capital market two things happen - debt and equity funds are raised for investment and financing; and claims on this debt and equity are traded
Competitive Environment: Globally, the real estate industry remains diverse and fragmented. Key players in the industry include property owners (REITs and opportunity funds),developers, real estate management & operating companies, investors, and commercial/investment banks.
Capital Investment: Real estate is capital-intensive. Capital is invested in the development and construction stage, and also upon completion, when real estate assets tend to trade hands.
Overview of Real Estate Finance by K. D. Asomaning

5. Overview of Real Estate Finance by K. D. Asomaning
Market Forces - II
Interest Rates and Lending Environment: Interest rate movement has an impact on real estate supply, pricing, investment, lending, and demand.
Demographics, Employment and Job Growth: The real estate market tends to lag the economy, and it responds to broad demographic trends, such as population growth, income
Regulators. Real estate transactions are governed by a wide body of federal and state statutes and common law. These laws address numerous legal issues related to acquiring, financing, developing, managing, constructing, leasing, and selling commercial and residential real property
Overview of Real Estate Finance by K. D. Asomaning

6. Overview of Real Estate Finance by K. D. Asomaning
Major Players
Owners, operators, and developers: Owners of real estate in a commercial real estate sense are owners of the building or property and the cash flows generated from it. Owners may operate and develop their properties, or they may outsource these functions.
End users: A tenant is a party with the right to occupy real estate for an agreed-upon time period and an agreed-upon rental rate, both generally stated in the lease. The lease also specifies the terms and conditions for renewal and allowable expenses
Consultants : Because of the complexity of the real estate industry, there are numerous types of consultants who may well be involved in any given real estate deal. The types of consultants you might encounter include: Brokers/leasing agents, Real estate advisors and consultants, Architects and planners, Engineers, and Lawyers.
Capital players - Financing
Overview of Real Estate Finance by K. D. Asomaning

7. Capital Players - Four Quadrant Model
Real estate has various capital sources and investment options. The most traditional capital sources are private debt from commercial banks (essentially whole loans and mortgages) and private equity investing in direct ownership of properties
Equity
Debt
Private Equity Direct Property and Preferred Equity
Private Debt Whole Mortgages and Mezzanine Debt
Public Equity Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOC)
Public Debt CMBS
Private
Public
Overview of Real Estate Finance by K. D. Asomaning

8. Overview of Real Estate Finance by K. D. Asomaning
Investment Options
Overview of Real Estate Finance by K. D. Asomaning

9. Real Estate Risks - Financial Risks
Leverage risk – The use of debt financing magnifies business risk. The financial risk increases with the amount of debt and the cost and structure of the debt.
Liquidity risk – The more difficult it will be to dispose of an investment, the greater the liquidity risk. This risk increases with decreases in the volume of transactions.
Inflation risk – Unexpected inflation can reduce an investor’s rate of return if the income from the investment cannot offset the impact of increased inflation
Interest rate risk – Real estate tends to be highly leveraged, thus changes in interest rate affect the cost of capital and the price of real estate securities and investments.
Overview of Real Estate Finance by K. D. Asomaning

10. Real Estate Risks - Business Risks
Economic risk – Real estate investors and owners lease buildings and space within buildings to end users. In this way, investors are subject to risk resulting from changes in macro- and microeconomic conditions that would affect the predictability of income flow from the property.
Management risk – Many real estate investments need property managers to keep the space leased and preserve the value of the investment. The investor’s Internal Rate of Return (IRR) depends on the competence, efficiency, and competitiveness of the property manager
Regulatory and legislative risks – Real estate is subject to numerous laws and regulations such as tax laws, rent control, zoning, and other restrictions imposed by the government.
Environmental risk – Real estate is subject to physical risks, including environmental risks. The value of real estate is affected by the presence or absence of environmental contaminants
Overview of Real Estate Finance by K. D. Asomaning

11. Overview of Real Estate Finance by K. D. Asomaning
Return on Investment
Overview of Real Estate Finance by K. D. Asomaning

12. Overview of Real Estate Finance by K. D. Asomaning
Real Estate Fund Cycle
Overview of Real Estate Finance by K. D. Asomaning

13. Overview of Real Estate Finance by K. D. Asomaning
Real Estate Fund Cycle
Fundraising – The first phase is raising capital, which can take an average of 12–18 months. This is initially accomplished through visiting various investors and discussing the historical performance of past funds and the plans for the new fund.
Investment Underwriting – The second phase is underwriting, which is the process of identifying, researching, and acquiring real estate investments.
Asset Repositioning, Financing Optimization, and Value Enhancement – In the third phase, the goal is to enhance the revenue-generating capacity of the assets. For example, a fund may buy a property that is only 50 percent leased. The fund would then reposition the asset by upgrading the building, leasing it up to close to 100 percent and then selling it.
Monetization and Exit – The fourth phase is monetization and exit. In general, the exit strategy for most funds is to lease the property and then sell the assets and distribute proceeds to investors
Overview of Real Estate Finance by K. D. Asomaning

14. Thanks!