Chapter 2

Question 1

Define the types of ownership, including: REITs, joint ventures, master limited partnerships, pension funds, C-corporations, sub-chapter S corporations, limited liability companies, Canadian corporations, syndications, and TICs.

Answer 1

REIT- (Real Estate Investment Trust)-instruments used for collective investments in real estate.

Joint Venture-partnership between two or more parties for the development and/or ownership of real estate.

Master Limited Partnerships-(MLP)Joint venture with a GP (General Partner) and one or more limited partners.

Pension Fund-a trust formed for the purpose of providing a more or less fixed retirement income for its participants. Subject to ERISA (Employment Retirement Income Security Act).

C-Corp-standard corporation

Sub-chapter S Corp-100 or fewer shareholders. taxed as partnership with limited liability benefits of a corporation.

Limited Liability Companies-similar to sub-chapter S corp but distribution of income does not have to follow share ownership.

Syndication-a collection of many small investors to accumulate a critical sum of funds to acquire investments.

TIC (Tenant In Common)-co-ownership of real estate by two or more investors. Investors possess undivided interests in the property or designated interests of different sizes.

Question 2

Why do investors and their advisers look at demographics before making an investment decision?

Answer 2

Demographic data can tell them information regarding possible need for certain types of property.

Question 3

Why do companies choose to make real estate investments in socially sensitive areas?

Answer 3

Create growth
Provide housing for disadvantaged groups
Improve environmentally unsafe areas

Question 4

Why do companies choose to have a specialty investment focus in real estate?

Answer 4

They allow the investor to become knowledgeable in the various in a short period of time.

Question 5

An investment approach focused on market dominance serves what purpose?

Answer 5

Market dominance can offer economies of scale by reducing staff and obtaining better contract rates.

Question 6

Discuss diversification factors that are reviewed when considering an investment’s impact on an existing portfolio mix.

Answer 6

product type-office, retail industrial
geographical distribution
tenant industry
lease terms
investment type

Question 7

What motivates owners to pursue a pride of ownership investment strategy?

Answer 7

corporate HQ

satisfaction

Question 8

What does an asset manager need to do to determine how to best utilize organizational resources?

Answer 8

He must develop an asset plan.

Question 9

Why is an effective communication plan with owners critical for an asset manager?

Answer 9

Because owners want to know what is going on and to feel in control of their properties but are typically very busy and are not available for long discussions about operations or properties.

Question 10

What type of authority does and asset manager have in terms of decisions related to tenants and vendors?

Answer 10

He has the authority to make recommendations. Decision authority is the owner’s.

Question 11

Define AUM.

Answer 11

AUM-assets under management-the market value of the assets an investment company manages on behalf of the investors.

Question 12

How are asset managers compensated?

Answer 12

By a percentage of the AUM
By fees from buying and selling assets
By incentives

Question 13

What government agencies and regulations impact an asset manager in meeting ethical and fiduciary responsibilities?

Answer 13

ERISA
Sarbanes-Oxley
ADA
Patriot Act
Building codes
American Society of HVAC engineers

Question 14

How does an asset manager address ambiguity in certain actions and decisions from an ethical perspective?

Answer 14

Full disclosure

Question 15

What are the advantages and disadvantages associated with a company operating as a REIT versus a joint venture?

Answer 15

REIT Advantages

• tax advantages-if 90% of income is distributed no taxes paid by REIT
• depreciation
• REIT shareholders see capital gains

REIT Disadvantages

• must generate 75% of income from real estate
• unrelated income can only be 5% of revenue
• Double taxation can occur if either of the first two are violated

Joint Venture Advantages

• developers lock in financing without using their own funds
• institutions benefit from equity appreciation

Joint Venture Disadvantages

• fighting between partners
• requires detailed contract to ensure fairness

Question 16

How is a Master Limited Partnership similar to a REIT?

Answer 16

Both allow properties to be secularized.

securitization-the process whereby financial markets convert real estate into a security that can be bought and sold on a secondary market.

Question 17

What role have pension funds played in investment real estate?

Answer 17

Pension funds have served as lenders, joint venture partners, owners, and shareholders of REITs, limited partnerships, and Master Limited Partnerships. These funds have invested directly but have also placed funds in pooled accounts.

Question 18

What are three objectives asset managers may consider to maximize the value of properties for owners?

Answer 18

long term appreciation-focuses on how a property will increase in value

protection against currency changes-value of money impacts the attractiveness of market to investors

hedge against inflation-protects investors because leases may be indexed to consumer prices or experience other periodic adjustments.

Question 19

How do government and private business regulations impact real estate investments?

Answer 19

Banks and insurance companies must sell properties within five years of foreclosure.

Private companies can upgrade or downgrade bonds which impact a companies ability to operate it’s real estate.

Question 20

What are some factors that influence owners as they seek to acquire and dispose of real estate?

Answer 20

• Diversification
• Demographics
• Market Dominance
• Contrarian-Investment Theory
• Specialty Investments-mobile home parks, triple net leases
• Social and Environmental Responsibility
• Pride of Ownership

Question 21

What strategies can an asset manager employ to be effective in communication with owners?

Answer 21

A combination of in-person visits, video and phone conferencing, emails, written documents, and regular reporting schedules.

Question 22

How can an asset manager facilitate the decision making process for his or her organization?

Answer 22

By researching, documenting, and thoroughly understanding a proposed strategy prior to recommending a solution. It is important that the asset manager clearly states that it is just a recommendation.

Question 23

Review two government regulatory programs that asset managers should be familiar with in terms of principles related to ethics and fiduciary responsibility.

Answer 23

ERISA-(Employee Retirement Income Security Act)-avoiding conflicts of interest

ADA (Americans with Disabilities Act)-not discriminating against the disabled.

SOX (Sarbanes-Oxley Act)-established new or enhanced standards for all US public company boards, management, and public accounting firms to protect investors.