Class notes/September 9

Topics
Risks
Rewards
Good Development
Participants
Process

Tangent--Fannie Mae and Freddy Mac Buy Out

Together Fannie Mae and Freddy Mac who are in control of 1.4 trillion dollars. They buy mortgages from banks and sell the bonds to other investors. They provide liquidity to the mortgage market for single family homes. Your local bank makes a commitment to originate a mortgage loan at certain rates and then Fannie Mae (Federal National Mortgage Association 1938) and Freddie Mac (Federal Home Loan Mortgage Corporation 1970). When Fannie Mae was started in the 1940s most people lived in the east but the movement was happening west and banks couldn't operate across states. There was a geographic

Buy the mortgages from banks, chop them up and convert them into bonds and securities and sells it to an investor. The key to the FM and FRMac is that the government will back these mortgages. The system works well as long as a small number of people are defaulting (less than one percent, actually) but now 3,4,5% are defaulting. Shit.

If you went for a mortgage and FM and FRMac defaulted, no one could get a mortgage because no one would ever buy the bonds again. Asians are the second largest, pension funds are first. That's our parent's retirement.

Quasi governmental (a minority of their board is named by the president of the congress, the are oversaught by the congress, the office of federal enterprise regulates them) but the rest is private. GSE (Government Sponsored Enterprise).

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The world needs (?) risky expensive things like shopping centers.

Fie types of risks:
1. Development risk
2. Interest rate risk
3. Market risk
4. Construction risk
5. Tenant risk

Rewards
Work for a fee
Cash Flows (rents-expenses-debts service= hopefully a positive number)
Appreciation (increased value on land - capital gains tax)
Tax Shelter (if you have other forms of income, real estate investments become your tax shelter, before paying taxes you get to deduct your mortgage payments?) principally for non-profits.
Cash out at Take out (http://carolinahomerates.com/mortgage-refinance/)--> when you go take out your loan you build it for less than you take out. You use the income from your tenants to pay off that loan.


Good Development
Development that adds a lot of financial value to a location over a long period (five or more years). The benefactors of this statement are not specific--just someone/some group.

Simple equation: Market Value > Total Development Costs (TDC)

We hire people to figure out the market values (appraisers who use a method called comparables). Without an appraiser, how do you come up with market value? Come up with a projection of all future cash flows which includes rent, operating costs, debt service, on a yearly bases which equals the net operating income (NOI-->indicates commercial property). Discounted net operating income. So, you do a ten year forecast and discount it.



Participants

Process