1. Principles of Commercial Real Estate Finance
Module 1:
Risks And Opportunities;
What Is Real Estate?;
Global Real Estate
Associated Readings
Linneman Text:
Ch. 1: Risks And Opportunities
Ch. 2: What Is Real Estate?
Ch. 2 Supplement A: International Real Estate Investing
Model For Success Blog:
How To Be A Great Real Estate Finance Student
New York by Gehry, NYC
Copyright © 2012 by Real Estate Financial Modeling, LLC. All rights reserved.

2. Professor Linneman’s Risks and Opportunities
• What is generally the primary goal?*
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CLICK To acquire or create a source of cash flow, and to
reap value from that cash flow
• What could possibly go wrong?
• It depends…what’s your time horizon?
* Excluding not‐for‐profit projects
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3. Where Do The Primary Risks Lie?
• Acquisition of an existing income‐producing asset
• Operating Costs
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• Lease Terminations/Vacancy
• Tenants go bankrupt (remember the .com’s and
Lehman?)
• Market turns against you and you need to hold
longer than you wanted
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4. Where Do The Primary Risks Lie?
• Development of an income‐producing asset or units for sale
(e.g., housing subdivision or condominiums)
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CLICK Passage of Time! The world is today is not the world
tomorrow
• Construction costs
• Market turns against you
• Pricing
• Absorption (Leasing/Sales)
• Tenant base disappears
• Construction execution
• Land Purchase Price and Closing Timing
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5. What Are The Primary Ways To Realize Value?
• Let Your Tenants Amortize the Property’s Debt
• Streamline Operations to Lower Operating Expenses
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• Ride the Rising Rent Tide
• Renovate and Reposition the Property
• Redevelop the Property to a New Use
• Hold Until Asset Valuations Increase
• “Compression” of Capitalization Rates
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6. Types of Real Estate
Residential Commercial
Detached single family homes Office Industrial
Townhomes Central Business District (generally highrise and midrise) Heavy industrial (manufacturing) facilities
Class A (e.g., The GM Building in NYC) Light assembly
Class B (increasingly lesser in quality and location) Storage and distribution facilities
CLICK TO EDIT MASTER TITLE STYLE Class C
Suburban (generally midrise)
Research and development facilities
Class A Retail
Class B Shopping centers
Class C Super regional centers (e.g., Mall of America)
Medical Office Regional center
Community center
Multifamily (apartments, condominiums and cooperatives) Neighborhood center
Small properties Convenience center
Suburban garden apartments Specialty center
Urban midrise Big box (freestanding) store (e.g., Home Depot)
Urban highrise Strip commercial
Hotels and resorts Other
Limited service Golf courses Land
Full service (e.g., The Ritz Carlton or Marriott) Assisted living Health Care
Extended stay Student housing Institutions
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7. Gross vs. Net Measurement
Building Footprint (building area at grade)
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20,000 SF
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8. Gross vs. Net Measurement
Ground Floor Plan - Rentable SF Other Than Retail: 0 SF!
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Service Corridor
Parking
Ramp
Fire Stairs
Retail
Service Corridor
Trash Lavatories
Public Plaza
Loading
Elevators
Area
Retail Lobby
• What is not shown here that further reduces Rentable SF?
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9. Gross vs. Net Measurement
Typical Single Tenant Plan - Rentable SF at 90% Efficiency
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Fire Stairs
Tenant Tenant Tenant
Office Lavatories Lobby/ Office
Space Reception Space
Elevators
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10. Gross vs. Net Measurement
Typical Multi-Tenant Plan - Rentable SF at 90% Efficiency
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Fire Stairs
Tenant 2 Lavatories Tenant 1 Tenant 1
Tenant 2
Office Lobby/ Lobby/ Office
Reception Elevators
Space Reception Space
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11. Gross vs. Net Measurement
Floor Type Floor Gross SF Efficiency Rentable SF Overall
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Ground Floor 1 20,000 GSF 45% 9,000 RSF
Single Tenant Floors 3 60,000 GSF 90% 54,000 RSF
Multi-Tenant Floors 1 20,000 GSF 90% 18,000 RSF
5 100,000 GSF 81,000 RSF 81%
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12. Floor Area Ratio (FAR)
• Better to think of it as Floor Area to Lot Size Ratio
• Dictated by the zoning of the property; limits the amount of
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above‐grade Gross SF that can be consumed by the building
• Calculated by multiplying the “FAR Ratio” by the Lot Size
• 8.0 FAR * 10,000 SF = 80,000 “FAR” (Gross SF) allowed
above‐grade
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13. Physical vs. Economic Occupancy
• Physically occupied vs. receiving rent
• Expansion space – not occupied but rent being
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paid
• Vacated space – not occupied but rent being paid
• “Free rent” – occupied but no rent being paid
• Bankruptcy – occupied but no rent being paid
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14. International Real Estate Investing
• Up to 60% of investment‐quality real estate lies
outside of the U.S.
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• The world’s tenant base is globalizing
• However:
• Markets are not as liquid as the U.S. market
• Information is scarce and unreliable
• The rules can change rapidly due to the
government
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15. International Real Estate Investing
• Unknowns are magnified
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• Foreigners are no less intelligent than you or I
• Local partners can hold the key, but this can backfire
on you if they renegotiate terms
• Currency risk becomes a variable
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