The Non-Textbook, Textbook

There are two dead giveaways that a book is a textbook – the length of it’s title and the thickness of its bindings. Based on those metrics – a long title and thick bindings – this book passes the textbook test. But in terms of content and readability, this book is no ordinary textbook.

It’s actually an interesting read, full of practitioner-minded lessons applicable to the real world together with supplementary tools to help internalize the material. In my view, a comprehensive text such as Real Estate Finance and Investments is a must-read for young real estate professionals, and an important reference tool for seasoned pros.

Full Title: “Real Estate Finance and Investments – Risk and Opportunities”

Authors: Peter Linneman, PhD; Bruce Kirsch


An Atypical Book Review for An Atypical Textbook

I struggled with how to review this textbook. I felt like the form we’ve followed for our previous book reviews doesn’t quite work here. A textbook isn’t a book in the traditional sense. You don’t just sit down with Real Estate Finance and Investments and casually read. And textbooks require active, purpose-driven reading. You commit to a textbook because you have concepts you need to learn or teach.

Thus, from a textbook review, you the reader or the professor don’t want to know if the book is an interesting read. You want to know whether the textbook presents the right material in the right way. You want to know whether the concepts covered are applicable beyond the classroom and can be used in the real world.

So I decided the best way to review Real Estate Finance and Investments, wasn’t to tell you my opinion of what was good and what was bad. Instead, I’ve decided to provide more of an overview of what the book covers. Share a few interesting concepts you’ll find in the book. And discuss the tools used to teach those concepts.

What You’ll Learn from Real Estate Finance and Investments

Across 26 chapters, three prerequisite sections, and various supplemental sections, you’ll learn the foundation of investing in income-producing commercial real estate. While real estate professionals working with for-sale product (e.g. for-sale single-family and condo) will find some value in this book, Real Estate Finance and Investments is more for professionals working with real estate as an income-producing asset.

The book covers everything from property-level pro forma analysis and financial modeling to market analysis and real estate cycles. It is comprehensive in nature, while leaving the deep dive into any particular subject for another day.

Chapters

Chapter 1 – Introduction: Risks and Opportunities

Chapter 2 – What is Real Estate and Who Owns It?

Chapter 3 – International Real Estate Investing

Chapter 4 – The Fundamentals of Commercial Leases

Chapter 5 – Property-Level Pro Forma Analysis

Chapter 6 – Financial Modeling

Chapter 7 – Real Estate Due Diligence Analysis

Chapter 8 – Analyzing Metropolitan Long-Term Growth Patterns

Chapter 9 – The Use and Selection of Cap Rates

Chapter 10 – Development Pro Forma Analysis

Chapter 11 – Development Feasibility Analysis

Chapter 12 – Real Estate Company Analysis

Chapter 13 – Distressed Real Estate Loan and Bankruptcy Basics

Chapter 14 – Should You Borrow?

Chapter 15 – The Use of Debt and Mortgages

Chapter 16 – Sources of Long- and Short-Term Debt

Chapter 17 – Ground Leases as a Source of Finance

Chapter 18 – Real Estate Owner Exit Strategies

Chapter 19 – Real Estate Private Equity Funds

Chapter 20 – Investment Return Profiles

Chapter 21 – REITs and Liquid Real Estate

Chapter 22 – The Forces Changing the Real Estate Industry Forever

Chapter 23 – Corporate Real Estate Decision Making

Chapter 24 – Some Observations on Real Estate Entrepreneurship

Chapter 25 – Real Estate Cycles

Chapter 26 – There are a Lot of Right Ways to Do It


Supplemental Material

Supplemental I – The Return Characteristics of Commercial Real Estate

Supplemental II – CMBS Case Study

Supplemental III – Careers in Real Estate

Supplemental IV – ARGUS Enterprise by ARGUS Software

Supplemental V – Cases

Prerequisite I – The Basics of Discounted Cash Flow and Net Present Value Analyses

Prerequisite II – Internal Rate of Return

Prerequisite III – Amortization Fundamentals


A Clear Explanation of Cap Rates

If you’ve spent much time on Adventures in CRE, you’ve likely heard me gripe about how little many real estate professionals understand about cap rates. The reason for this, is that real estate has traditionally been self-taught – formal education in real estate is only a few decades old.

As a result, too many in real estate conflate cap rates with other metrics (e.g. cash-on-cash return, return on investment), failing to understand the real estate industry’s historic linkage to the bond market. I appreciate how this book offers a clear explanation of what a cap rate is, and how to use it.

“The real estate industry’s usage of cap rates reflects its historic linkage to the bond market, as real estate derives its income from future promissory income streams in the form of leases. So just as the bond market commonly quotes yield, as opposed to multiple, when valuing bonds, the real estate industry generally quotes cap rates.” – Chapter 9, page 120,

In addition to a lengthy chapter on cap rates, the textbook also offers four supplements on the subject – papers written by Dr. Linneman – as well as an online resource with follow up questions, audio interviews, and definitions of key terms.

Effective Use of Case Studies

In my view, real estate is best learned through doing. Most of us learn more in our first month on the job, than in an entire year of real estate studies. This is partly just the nature of learning, but also that unlike other asset classes, in real estate no two properties are the same. The more live deals you look at, the more seasoned you become. And a deal-seasoned individual, is an individual worth a lot to employers and investors.

Case studies are the academic proxy for live deals, and Real Estate Finance and Investments does an excellent job of using case studies to teach the material. You’ll find that virtually every chapter includes a case to reinforce and augment the concepts being taught.

For example, in the Development Pro Forma Analysis chapter, the authors use a case study – Celina Gardens – together with online companion materials and an Excel file, to teach you how to model development cash flows. It’s an effective and important tool, that the authors use well to help you internalize the concepts.

Prerequisites to Set the Base

Not all real estate professionals have backgrounds in finance or business. In fact, individuals with legal, design, and planning degrees are as valuable – if not more – in the eyes of real estate employers as those with degrees in finance. Thus, many students who pick up this textbook won’t have a sound understanding of basic finance concepts such as the time value of money.

The authors have included a handful of prerequisite sections to help bridge the knowledge gap for those with less of a footing in finance. I think this is really important, and should assuage the concerns of the less quantitative-footed colleagues among us.

The book includes three such prerequisite sections: The Basics of Discounted Cash Flow and Net Present Value Analyses, Internal Rate of Return, and Amortization Fundamentals. When you first pick up the textbook, I highly recommend you start with the prerequisites.

Conclusion on Real Estate Finance and Investments

I’ve been forced to buy and read my fair share of textbooks – and I use the word forced intentionally. This was the first textbook I’ve read because I wanted to, and I can honestly say it was an enjoyable read. Even after 15 years in the industry, after completing a two-year Masters Degree in Real Estate, and after underwriting hundreds of real estate investments myself, I still learned a thing or two from Linneman and Kirsch’s Real Estate Finance and Investments.

So, if your just getting started in real estate – I recommend this textbook as a sound foundation to build on. If you’re an existing professional with holes in your knowledge – I recommend this textbook as a great way to fill the gaps. And if you’re a seasoned pro with seemingly nothing left to learn – I recommend this textbook as a refresher to what you learned many years ago, and may have forgotten in the intervening years.

About the Author: Born and raised in the Northwest United States, Spencer Burton has over 15 years of real estate investment and development experience. In his current position, Spencer assesses new acquisition, development, and debt opportunities for a $45bn real estate fund. He resides in Dallas, TX.