搜索
1 Show Me The Money: A Study of Real Estate Development Returns by Matthew S. Flowers B.S., Mathematics, 2002 University of Florida M.S., Management, 2004 University of Florida Master of Business Administration, 2005 University of Florida Submitted to the Department of Urban Studies and Planning in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development at the Massachusetts Institute of Technology September, 2008 ©2008 Matthew S. Flowers. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author: _____________________________________________________________ Department of Urban Studies and Planning July31, 2008 Certified by: ____________________________________________________________________ David M. Geltner Professor of Real Estate Finance Department of Urban Studies and Planning Thesis Supervisor Accepted by: ___________________________________________________________________ Brian A. Ciochetti Chairman, Interdepartmental Degree Program in Real Estate Development 2 Show Me The Money: A Study of Real Estate Development Returns by Matthew S. Flowers Submitted to the Department of Urban Studies and Planning on July 31, 2008 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development ABSTRACT This paper introduces three new tools for the analysis and replication of real estate development returns. In particular, this paper discusses advanced sensitivity analysis, real estate development return indexes and synthetic real estate development investments. The advanced sensitivity analysis allows us to produce subjective ex ante return distributions. This analysis will allow developers and investors to “see” the shape of their investments return distribution. The benefits of knowing the shape of the subjective ex ante return distributions is that it may help developers and investors make better decisions and negotiate specific terms with each contributor in the capital structure. The ex post analysis allows us to produce development return indexes useful in the benchmarking of real estate development performance and in the creation of synthetic development investments by way of the new real estate derivatives. The development return indexes are created by transforming MIT’s Transaction Based Index (TBI), which tracks stabilized property returns, into development return indexes through the use of a stylized mathematical model. Thesis Supervisor: David M. Geltner Title: Professor of Real Estate Finance 3 ACKNOWLEDGEMENTS I would like to thank my advisor David Geltner for pushing me to dig deeper and for making the thesis process fun. David is a great advisor and professor because he teaches students how to think, not just how to solve problems. I would also like to thank Peter Roth for being patient and helping me explore several ideas along the way. Also, I would like to thank Larry Ellman for taking the time to speak with me and keeping me up‐to‐date on current business practices. Additionally, I would like to thank my family for sticking by me and putting up with me for all of these years. Finally, I would like to thank Monica for giving me the confidence to apply to MIT in the first place, and for being my best friend (this should count for 10 sappy birthday/anniversary cards). Love ya Fatty! 4 TABLE OF CONTENTS ABSTRACT........................................................................................................................................2 ACKNOWLEDGEMENTS...................................................................................................................3 TABLE OF FIGURES...........................................................................................................................5 1 INTRODUCTION............................................................................................................................6 2 REAL ESTATE DEVELOPMENT INVESTMENTS & RETURNS...........................................................7 2.1 Net Present Value of a Real Estate Development Investment.............................................7 2.2 Leveraged Forward Commitment.........................................................................................8 2.3 Leverage & Leverage Ratios..................................................................................................8 2.31 Financial Leverage..........................................................................................................8 2.32 Leverage Ratio (LR).........................................................................................................9 2.33 Operational Leverage...................................................................................