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CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd Edition by Hossein Kazemi, Keith H. Black, Donald R. Chambers, Mark J. P. Anson, CAIA Association

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CHAPTER 10

Real Estate Equity Investments

Real estate equity investments are residual claims. In other words, the value of an equity investment in real estate is equal to the value of the underlying real estate property minus the value of mortgage claims against that real estate. The previous chapter provided detailed information about mortgages. This chapter provides details about the valuation and analysis of the equity claims on real estate. The chapter begins with a discussion of real estate development.

10.1 REAL ESTATE DEVELOPMENT

Real estate development projects can include one or more stages of creating or improving a real estate project, including the acquisition of raw land, the construction of improvements, and the renovation of existing facilities. The development phase may terminate with the sale of improved parcels to interested buyers or through the leasing of improved properties. Typically, real estate development entails (1) the acquisition of land or a site, (2) estimation of the marketing potential and profitability of the development project, (3) development of a building program and design, (4) procurement of the necessary public approvals and permitting, (5) raising the necessary financing, (6) building the structure, and (7) leasing, managing, and perhaps eventually selling the property.

10.1.1 Real Estate Development as Real Options

This section focuses on issues related to the initial stages of development. Development is one of the most entrepreneurial ...

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