Wednesday, March 30, 2011

Chapter 8

1) The process of obtaining the necessary gobernment permits to begin and sustain a construction project is called permitting.

True / False

2) Marketability study is an analysis which aims to estimate how much of the toal demand in a competitive market can be captured by a particular property.

True / False

3) A long-term loan issued to a developer to fund the construction stage of a project is called construction laon.

True / False

4) A bridge loan is also known as a gab loan.

True / False

5) While previous stages were about executing a plan, stage 5 is about creating a plan.

True / False

6) Which schedule helps managing lender inspections and draws.

a) Construction save schedule

b) Construction cost schedule

c) Construction loan disbursement schedule

d) Both b) and c)

7) Manage an asset in stage 6 is a task by the

a) Developer

b) Constructor

c) Management team

d) None of the above.

8) All of the following are lender’s investments except

a) Construction loan

b) Permanent loan

c) Bridge loan

d) House loan


True, True, False, True, False, d), c), d)

FHA insured mortgages, a disaster for the country?

Fin 180
Erica Mendoza

FHA Insured Mortgages, a disaster for the Country?
When you ask someone what the “American Dream” is to them, most people will respond that owning a home is the “American Dream”. That is precisely what FHA insured mortgages have enabled many Americans to do. I myself included have been given the opportunity to fulfill one of my wishes of owning a home through this program. With the recent real estate market crash many have placed the blame on this program. So is FHA insured Mortgages, a disaster for the country?
After the Market crash of 1929 Congress looked for a way to boost the economy by encouraging hesitant banks to write mortgages. This is how the Federal Housing Administration (FHA) came into play; it was authorized to provide insurance for mortgage loans back by full faith and credit of the Unites States. As well, as becoming the key to the American dream by helping lower income families get into a home that they would have otherwise been unable to afford. Since then, it has become the largest insurer of mortgages in the world. In fact, since its start in 1934 it has insured more than 34 million properties (Jurow, 2010). FHA also became a huge stimulate to the country in the form of home and community development, which like a domino effect brings that down to local communities in the form of building contractors, schools, tax bases, and most importantly jobs. FHA has proved to be one of the best government agency operations. As a matter of fact, it’s the only government agency that operates entirely from its self-generated income, costing the tax payers nothing (2006). The way that it functions is that the money that is collected from the mortgage insurance charged to the homeowners is then set into an account that is used solely to operate the program. This mortgage insurance is what FHA requires in order to provide lenders with the protection against losses, because FHA will pay a claim to the lender in the event of a homeowner’s default.
In the more than 60 years since FHA was created much has changed, with that it’s lending practices. Unlike conventional loans that stick to strict underwriting guidelines, FHA insured loans involve little cash and therefore are considered more lenient. A key component in the economy is the housing market; FHA is a big player in the housing market. That is why many have placed the blame on it for having such lax lending practices and causing the collapse of the real estate market. Could FHA really be the one to blame? Looking at the whole picture it did play a part in the collapse but, it wasn’t the sole reason. What the government is looking to do now is mend the situation by changing some the FHA guidelines. In August of 2010 President Obama signed a bill that would give HUD the flexibility to increase Annual Mortgage Insurance Premiums. “This would allow HUD to increase the amount of Annual Mortgage Insurance Premiums from .5% to 1.5% on loans with a down payment of 5% or more. On loans with less than 5% down payment increase could be from .55% to 1.55%” (2010). What this means to future FHA homebuyers is simply that if they don’t want to have to pay a higher mortgage insurance premium they will need to come in with larger cash down payment. With these new guidelines the government is looking to try to prevent more purchases that could potentially default.

In conclusion, FHA has helped spark the production of many homes that have given some the opportunity to own a home that otherwise would never have been able to through traditional conventional lending. With that opportunity comes the feeling of ownership and that is something so strong and difficult to explain until you have your own home and grasp your set of keys you wouldn’t understand. It’s the feeling of comfort, family, stability and accomplishment. That feeling is something you can’t put a price on. To say that FHA was the sole reason behind the real estate market crash would be foolish. I do think that it played a role in it but, it’s working to mend the situation and prevent that from reoccurring in the future.


FHA Mortgages Insurance for FHA Loans (2010). Retrieved March 20, 2010.

HUD-The Federal Housing Administration. (September 2006). U.S. Department of Housing and Urban Development Retrieved March 19, 2011

Jurow, Keith (August 9, 2010). World Property Channel. FHA insured mortgages, a disaster in the making? Retrieved March 20, 2010

Quam, Mike (June 6, 2010).Real Estate News. HR 5072 Good or Bad? Retrieved March 18, 2010.

Chapter 8


1.) Preleasing is an effective risk-mitigation strategy since it increases the probability of success early in the project. T

2.) When developers put their philosophy into operation they divide the development process into four sets of activities. F-2 sets; precommitment and postcommitment p202

3.) During the construction phase a major challenge that construction lenders face is making sure that the money released for construction doesn’t run ahead of the actual construction. T p216

4.) The usual cost of a performance bond is around 10% of the total construction cost. F 1% p214

5.) A written document signifying that the constructed buildings meets all requirements of ordinances and codes is called:

a) Certificate of occupancy

b) Codes and ordinances

c) California ordinances

d) None of the above


6.) Ordinances that regulate the construction, design, materials, and occupancy of all buildings within a jurisdiction are called:

a) Building restrictions

b) Administrative ordinances

c) Enforceable requirements

d) None of the above

d- building codes p219

7.) During what stage of the precommitment process does the developer form a team which ensures that the cash flows and financial returns envisioned are delivered:

a) Stage1

b) Stage4

c) Stage6

d) All of the above


8.) Developers favor increasing tenant improvements over free rent because:

a) It could potentially add value

b) It saves them a lot of money

c) It could get rid of bad tenants

d) All of the above


Monday, March 28, 2011

Chpt. 9 Multiple Choice & True/False Questions

Multiple Choice

1) Which of these isn't a major category of real estate risk?
a) Management risk
b) Investing risk
c) Liquidity risk
d) Inflation risk

2) Which of these isn't a benefit of investing in real estate?
a) Opportunity cost
b) Tax shelter
c) Psychic perks
d) Leverage

3) Which of these is not a requirement for a 1031 exchange?
a) Identify the property for exchange before closing
b) Identify replacement property within 45 days of closing
c) Acquire the replacement property within 190 days of closing
d) Use a qualified intermediary to facilitate the transaction


1) Investing is the pursuit of a future return by delaying consumption and taking an anticipated, desired level of risk. T/F

2) The buyers' costs associated with real estate include opportunity and transportation costs. T/F

3) On the risk continuum scale, a new development would be associated with a low level of risk. T/F

4) A tax shelter is a good way to reduce the amount of taxable income a person has. T/F

5) When depreciating property, you must depreciate both the land value and the improvement value. T/F

1) b
2) a
3) c - 180 days

1) T
2) T
3) F
4) T
5) F

Friday, March 25, 2011

This Monday's Class: Special Annoucement

We will be having a guest speaker this Monday and we will meet in room 194 PB.  Room 194 is in the University Business Center (UBC) wing of the Peters Building.  The topic will be commercial real estate in Fresno.  Please be on-time.

Also, if you missed class last week, you need to contact a fellow student ASAP.  We covered a lot of material and you need to be practicing the Investment Problem this week.  Just a heads-up.

Wednesday, March 23, 2011

Reclamation is the Way to Go!

By: Aljehani, Mohammad
Reclamation is a treasure key on the water surface that attracts a lot of land developers. I would like to touch on this subject specifically in Dubai; how does reclamation affect the supply and demand model of market equilibrium in Dubai, how does it satisfy the market for space over there, and does it change the notion of cycle, fluctuation, and production lags in real estate market? However, before I proceed into these points I would like to give a brief background about Dubai and what the word reclamation means.
Dubai is one of the seven emirates of the United Arab Emirates (UAE) country in the Middle East. It has been one of the fastest growing cities in the past ten years. Dubai has arose as a global city and a business hub; even though Dubai’s economy was initially built on the oil industry, nowadays its revenues are mostly from tourism, real estate, and financial services. Dubai has recently appealed world attention through many advanced large construction projects and sports events. Dubai adopted the idea of reclamation when they have seen that there is an increase in the demand of real estate property, and increase in the population as well. The word reclamation is defined as the process to create new land from sea or riverbeds.
As a response to the high price of real estate property in Dubai, Government and land developers decided to head to the direction of reclamation to increase supply. In 2007 One of Dubai’s leading private property developers has predicted that demand for homes and offices in Dubai will continue to exceed supply for the next few years (Mehdi, 2007), but Dubai's property market experienced a major fall in 2008 and 2009 as a result of the worldwide economic downturn following the Financial crisis 2007-2010. However, it was predicted that the release of the new reclamation space would lead to a decrease in demand, but after the first release of units, which it was 25,000 units, they were all delivered and absorbed into the market without any affect on demand (Mehdi). Moreover, the leader of UAE mentioned “The government is building a city for five million people whereas today we have fewer than two.” Of course that led to oversupply, which limited mortgage availability and rising interest rate (Property News).
Action should be taken and improvement should be made, otherwise ‘it is unlikely that developers will deleverage quickly enough to repay the upcoming 2011/2012 maturities from internal resources (Property News). Therefore, Dubai’s leader is trying to find the solution to achieve a balance between supply and demand. The Dubai government is doing all it can to meet the demand. It is making more land available for development and it is controlling the cost of raw materials such as cement. It’s attracting new developers and new construction companies whilst also providing facilities and the necessary legislation to protect investors, developers, and home buyers (Property News). As we seen that Dubai did not only meet the demand, but also it oversupplied, so they are now in the process and hope that demand will continue outweigh supply.
In creating a market for space, you have to meet highest and best use, situs, and economic fundamentals before even start thinking about the reclamation project; Dubi's leaders have definitely thought about these important points. “The palm Island”, the name of the reclamation project, is a major commercial and residential foundations being constructed. It is constructed of three islands, each of which is topped with a crescent, and will have a large number of residential, leisure and entertainment centers. The Palm Island will add 520 Km of beaches to the city of Dubai. Two of the Islands are about 100 million cubic meters of rocks and sands; the third Island is about one billion cubic meters. Among the three islands there will be over 100 luxury hotels, exclusive residential beach side villas and apartments, marinas, water theme parks, restaurants, shopping malls, sports facilities and health spas. With all these pre-planned and even most of them pre-leased projects, the Palm Island will satisfy the need of market for space.
Despite all the planning and predictions of this new project, I still believe that the notion of any real estate market is fluctuation. It is a really smart move to oversupply at the meantime when there is almost a guarantee of population growth in the future, as A Dubai’s spokesman argues that with the expected doubling of Dubai’s population in five to eight years, massive demand for property will continue (Mehdi). However that does not change the fact the real estate market is always unpredictable.
In conclusion, Real estate is a risky business, but it would pay off as big as its risk. When I first read about Reclamation, I was amazed how developers and entrepreneurs have reached to the level of thinking not to only create and find a new space, but actually building one in the sea. Of course it will require larger capital, more planning and studies, and more risk, but at the end it would produce a beautiful outcome and achievement.
Work Cited

Amjad, Mehdi. "Demand for Dubai Real Estate to Continue to Exceed Supply for a Few Years, Says Leading Dubai Developer, Industries, Press Release - Maktoob News." Middle East Business, Politics, Society, Markets and Sports News - Maktoob News. Aug.-Sept. 2007. Web. 23 Mar. 2011. .
"Real Estate Market in Dubai Likely to Be under Pressure until 2012/2013, Ratings Agency Predicts | Middle East | News." Property News | Real Estate News | Property Wire. June-July 2010. Web. 23 Mar. 2011. .

Individual (Private) Rights in Real Property

By: Jon Hardamon

Three of the most common private rights in real property are surface rights, air rights, and subsurface rights. Though these rights are rarely discussed in everyday conversations, they surround and dictate what we can and can’t due in relation to real property. What are surface, air, and subsurface rights? What are the differences between these rights? Is one more important than the others? Does the ability that these rights give us, affect us in other ways? The answers to these questions and how they pertain to us will be explained in depth, as well as their impact on specific types of individuals.

According to Diaz and Hansz’s “Real Estate Analysis: Environments and Activities”, surface rights are the ownership rights to occupy and use the surface
of real estate. In other words, this is an inalienable ability for individuals to obtain, use, and possess land at their discretion, as long as their activities on the land don’t impede on other individuals’ rights. This is not the same thing as having access to land for use in an economic way (i.e. farming). When a person only has access to land, this limits their financial stability, due to the fact that they face a constant situation of expulsion depending on the choices of the land owner. Globally, land rights have increasingly be
come more important, because they are so vital to various aspects of development.

According to Wickeri and Kalhan, land ownership can be a critical source of capital, financial security, food, water, shelter, and resources. The UN Global Land Tool organization has found that rural landlessness is a strong predictor of poverty and hunger. Surface rights are fundamental in attaining higher standards of living, but certain groups of individuals are consistently left out of land ownership provisions. The law may provide access to land, however, cultural barriers and poverty traps limit minority groups’ ability to own land. In order for these groups to achieve equality, they must obtain adequate land rights that are both legally and socially recognized.

Air rights, according to Diaz and Hansz’s “Real Estate Analysis: Environments and Activities”, is ownership and usage rights to the space above land. Generally speaking, ow
ning or renting a building or land gives a person the right to use and develop the air rights. At first, air rights were unlimited for people who owned real estate. It wasn’t something that was a concern among a lot of people before the 20th century. The first legal limits placed on air rights came about because of the airplane. Eventually, owners only had rights to airspace that they could reasonable use.

In the U.S., the Federal Aviation Administration (FAA) has the sole authority to control all airspace, exclusively determining the rules and requirements for its use. Property owners may waive or be required to waive any notion of air rights near an airport, for convenience in future real estate transactions, and to avoid lawsuits from future owners who might attempt to claim distress from over
flying aircraft. This is referred to as a navigation easement. In the case of United States v. Causby, the U.S. Supreme Court declared
the navigable airspace to be “a public highway” and within the public domain. At the same time, the Supreme Court, recognized that a landowner had property rights in the lower reaches of the airspace above their prop
erty. So there is, in effect, a balancing act between the public interest in using the airspace for air navigation against the landowner’s rights. Thereby establishing that a landowner owns only so much of the airspace above their property as they may reasonably use.

Railroads were the first companies to realize the potential of making money from their air rights. One of the best examples of this is Grand Central Terminal in New York City, where William J. Wilgus, chief engineer of the New York Central and Hudson River Railroad, devised a plan to earn profit from air rights. At first, the railroad simply constructed a platform above the rail yards to allow for the development of buildings overhead. But by 1954, the railroad realized it could sell more air rights and Grand Central Terminal was proposed to be replaced by a 50-story tower. This is how the MetLife Building came to be built next to the station.

Subsurface rights, according to Diaz and Hansz, are the ownership rights associated with the area underneath the earth’s surface. Ownership of subsurface or mineral rights is an
estate in real property. This gives the owner the right to exploit, mine, and/or produce any or all of the minerals lying below the surface of the property. The five elements of subsurface rights are:

1)the right to use as much of the surface as is reasonably necessary to access the minerals,
2)the right to execute any conveyances of subsurface rights,
3)the right to receive bonus consideration,
4)the right to receive delay rentals and
5)the right to receive royalties.

The status of the land is fixed by law and is distinguished as being either a freehold estate or a non-freehold estate. Freehold means ownership without limitations to duration.
Non-freehold means ownership for a specified period of time.

In conclusion, these various private rights in real property give restrictions and guidelines for the use and profit that can be gained from real property.

Works Cited
Adi, D. N. Critical Mass Representation in Uganda. 2009. 1-38. Print.
Hanstad, T. "Secure Land Rights." Rural Development Institute (2010). Web.
Hansz, J. Andrew. "Chapter 7." Real Estate Analysis Environments and Activities. By Julian Diaz. Kendall Hunt Pub, 2010. 176. Print.
"Housing and Property Restitution for Refugees and Displaced Persons." 3-5. Centre on Housing Rights and Evictions. Web.
Wickeri, E., and A. Kalhan. Lands Rights Issues in International Human Rights Laws. 2009. Institute of Human Rights and Business. Web.

Real Property and Freehold Estates

Real Property and Freehold Estates

By: Kellie Nation

Individuals who own real estate completely and indefinitely hold many interests in their property, known as a freehold owner’s bundle of rights. Freehold estates include the fee simple, qualified fee, and life estates (Diaz/Hansz). Whether an entity occupies a piece of property as a freehold or leasehold estate can be easily determined because freehold estates only concern those who own their property out right, and leasehold estates are identified by those who use or have the right to possess by someone else who actually has ownership. This particular focus represents an environmental, real estate legality. It insists that the holder possesses ownership of a piece of immobile property during the present period in time (Lectlaw). As well, these estates can be given or received as inheritances.

The first type of freehold estate is known as a fee simple absolute. This is the upmost, hierarchical form of ownership in real property that an entity may hold; therefore, it includes every possible stick in the bundle of rights in private, real property ownership (Diaz/Hansz). Use of the property as a fee simple owner constitutes unlimited use of the property. Moreover, this estate has the ability to be transferred while the fee simple owner is alive, or may be given to an heir of the owner upon his or her death. The graph below depicts the number of Californians who hold free simple interests in their property.

(drhousingbubble, 2010).

Another freehold interest is called a qualified fee. Under this circumstance, the estate holder must meet a certain qualification in order to maintain his or her interest in the property. This means that the possessor may only occupy the property in the manner in which specifically stipulated by the grantee, and in doing so, owns the property completely (Diaz/Hansz). However, if the property is ever used for any reason not acknowledged by the grantee, then a reversion occurs and ownership is automatically transferred back to the grantee (ThisMatter). In some cases, the grantee has prepared for this potential occurrence by naming another individual as the remainderman, who will take possession of the property upon the previous owner’s misuse of the land (Diaz/Hansz).

Finally, the third kind of freehold is known as a life estate. With a title that defines its terms, a life estate is one in which the life tenant has the right to occupy the estate for the duration of his or her life. The tenant has a duty to properly maintain the land and a right to sell, lease, or mortgage his or her interest to another person. Once the possessor dies, the interest either reverts back to the grantee or passes to a designated individual or entity that holds a future interest in the life estate (ThisMatter).

There are many interests, as well as avenues to obtaining interest in real property. Freehold interests are attractive because as long as all criteria and obligations are met, the possessor obtains complete ownership. These are legal issues within the real estate environment that are set aside for absolute owners, or to individuals designated specifically by the owner. Simply, freehold interests are just some of the many perks to being a homeowner, remainderman, or a future-interest holder.

Diaz III, Julian. Hansz, Andrew. Estate Analysis: Environments and Activities. Kendal Hunt, 2010. Pg. 177-78.

The Electric Law Library. Freehold. 2011. Estates In Land. 2011. ownership.png.

Markets and Environments

The “American Dream” affects the German Market

By Roman Schilzow

“From Wall street to Main Street” is a German book by Michael Bloss,Dietmar Ernst, Joachim Häcker, and Nadine Eil. As well as the book, this research paper tries to explain how the Financial Crisis 2008, after significantly affecting the American market, could spill over its borders and affect economies all over the world, in particular the German economy. What started with the “American Dream” of affordable houses for everyone, led to one of the most significant financial crisis in history. But how did it affect other economies, especially the German market?

This research paper will answer these questions by taking a closer look at the securitization model, and explaining which factors changed a local issue to a global one. Also, by presenting data and facts about the German economy during the financial crisis,and looking at companies that suffered, show how the German market got affected.

The following graph shall help to visual the relationship and connection between each participant in the securitization model.

Source: Thomas Schmitz-Lippert; Recht der Finanzaufsicht; Vorlesung 6, Finanzkrise II[1]

At the very beginning of the system there are borrowers. This demand for money will be met by commercial banks or thrifts who act as originators of mortgages. To make sure that there is enough liquidity to meet the demand; mortgages are sold by the commercial banks on the secondary mortgage market, usually to big investment banks, such as Lehman Brothers, which need liquidity too. After bundling those ABSs and MBSs into different pools, and receiving a risk grade from rating agencies, those debt securities are being sold withthe help of so called Special Purpose Vehicles (SPVs). These SPVs usually represent a subsidiary of the selling Investment bank.[2]SPVs are created so that investment banks can relieve their equity capital and adjust certain debt obligations by selling them to the SPV.[3]The last step, but probably the most important point in answering the question how this system could affect other economies too, is the disposition of Asset Backed Commercial Papers (ABCP) to investors from all over the world. Such investors, for instance are insurance carriers, or other international investment banks, such as the German Hypo Real Estate.

Nevertheless, this model itself didn’t lead to the crisis, from which we haven’t fully recovered yet. Furthermore, this system was needed to generate liquidity efficiently, the most important driving forcefor every market. But how did it start?

After a period of low interest rates and a steady decrease of lending standards, the demand for houses and also the prices rose significantly. It kept its trend until interest rates started to rise at the end of 2004.[4] At first it didn't get much attention until the first borrowers couldn’t pay back their loans. Like a wave it affected more and more homeowners, which led to significant decreases in property prices. More and more payments defaulted within a short time and like a domino effect it spread in all sectors. Investors who tried to sell their investments were not able to, as there was nobody willing to buy them. Most of those investments were worth almost nothing and everybody investing in such securities had to depreciate their investments. Therefore, everybody who was somehow involved in those complex securities had realized loses. So did the German Hypo Real Estate.

Before taking a closer look at Hypo Real Estate, here are some facts to show how the crisis affected Germany in general. With a negative growth of 6.9% compared to 3.9% in the US within one year, Germany suffered one of the ten biggest losses during the financial crisis. USA was ranked twentieth. One reason why the German economy suffered more than the US economy is due to Germany’s leading position in exports. As demand decreased all over the world, Germany experienced a significant cutback in this sector.[5]
The Hypo Real Estate was the first German bankwhich received financial help by the government. At the end of 2010, financial support amounted to almost 125 billion Euros. Today the Hypo Real Estate is wholly owned by the government with its major task to reorganize its structure and making it public again within the next couple of years. As already mentioned above, as the first bank receiving government help, it plays a very significant role, as from this time more and more banks needed government help. To protect banks from going bankrupt, the government established the SoFFin (Sonderfonds Finanzmarktstabilisierung - Financial Market Stabilization Fund), which helped more than 10 banks with new equity capital and issued guarantees. Thus, the government now held shares of some major German banks.
Nevertheless, even though the German economy was suffering more than the average, itis recovering pretty well. Germany’s economy experienced a real growth of 3.6% in 2010 and is expected to reach the same level in 2011 as it was before the financial crisis in 2008. Also, the amount of employed people is as high as never before, and is expected to rise even more in the near future.[6]

To sum up, many incidents combined led to the fact that the financial crisis not only affected the US economy, but also economies all over the world. Probably the most significant aspect is represented by the securitization system itself. A system which connected participants so close together that only a slight malfunction led to the collapse of the whole. Participants who were only focused on their actions and who always wanted more, kept the risk beside and created a base for the failure of the system. The German Hypo Real Estate, as an example of how such a failure could look like, may raise another question: is it necessary, as John Maynard Keynes called for, to have more government regulations?[7] Regulations which try to protect such systems to get out of hand one more time.


[1] Thomas Schmitz-Lippert; Recht der Finanzaufsicht; Vorlesung 6, Finanzkrise II


[3] Börsen, Banken und Kapitalmärkte by Wolfgang Bessler, October 2006


[5] Deutschland gehört zu den größten Verlierer der Weltby Martin Greive, 06.09.2009 groessten-verlierern-der-Krise.html

[6] Wirtschaftswachstum Deutschlands bei 3,6 Prozentby Focus Money,12.01.2011

[7] Estate Analysis: Environments and Activities by Julian Diaz III and J. Andrew Hansz, Kendall Hunt, 2010, p. 162