CRER Vol. 12 (2014)

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    Boca Bay: The Impact of Insurance Availability on Residential Property Values
    Weeks, H. Shelton; Fraser, Steve P.; Finch, J. Howard (2014-07-01)
    This case study requires students to determine a method for estimating the valuation impact of the changes in access to flood insurance - specifically, changes in the expense associated with the purchase of insurance in the private market. While these expenses have a high degree of certainty, a unique challenge for students in this case is presented by the lack of comparable market transactions involving properties that have been similarly impacted. Quantifying the change in value requires students to adopt the mindset of informed market participants - individuals aware of the differential in insurance expense and who are considering the purchase of the property.
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    New York City’s Annual Income and Expenses: Statement Filing Requirement – a Land Mine for the Unwary Purchaser or Owner of Real Property
    McCaffrey, Ryan A.; Lichy, Albert D. (2014-07-01)
    Since 1986, New York City law has required owners of incomeproducing properties in New York City to file an annual income and expense statement, colloquially referred to as an RPIE statement, with the Department of Finance. The general purpose of an RPIE statement is to assist the Department of Finance in assessing the value of income-producing properties.1 To this end, the owners of income-producing properties are required to submit annually a statement that outlines “all income derived from and all expenses attributable to the operation of such property.”2 Despite the draconian penalties for non-compliance - ranging from 3% to 5% of the assessed value of the property - a systemic failure of the City of New York to enforce non-compliance over the subsequent decades following the regime’s enactment has led to a general unawareness of the RPIE statement filing requirements in New York City. As a result, potential purchasers of real property have failed to adequately protect themselves - in both the due diligence process and the acquisition agreement - from the consequences of a seller’s historic non-compliance with the RPIE requirements.
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    Letter from the Editors
    Bandy, Ryan; Doran, Evan (2014-07-01)
    [Excerpt] We are honored to present the 12th Volume of the Cornell Real Estate Review (CRER), a student edited and managed publication with oversight from faculty in the Baker Program in Real Estate at Cornell University. A continuation of the tradition of thought leadership in real estate, the CRER strives to promote practical learning and to introduce readers to new concepts and practices. As editors, it is our duty to marry scholarly discourse with professional applicability and to create a publication that reflects the values of the Baker Program.
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    Using REITs to Invest in Utility Scale Solar Projects
    McKinley, Brian (2014-07-01)
    [Excerpt] Public policy in the form of Renewable Portfolio Standards, rising electricity costs, and a sharp decline in upfront costs for commercial and utility scale solar power projects in recent years have allowed for the rapid growth of new solar power installations, and with them, a new opportunity for real estate investors. In this article we discuss solutions to one challenge in the growth of this asset class, securing a viable public financing structure through the utilization of Real Estate Investment Trusts (REITs) that will allow large scale investment to take place and the cost of capital to fall.
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    Collaborate or Compete: How Do Landlords Respond to the Rise in Coworking?
    Green, Rebecca (2014-07-01)
    Changes in technology, attitudes toward work, and the new ‘shared economy’ have created an environment in which people have more options for how, when and where to work. Working from home, telecommuting, hoteling, and collaborative workspaces are on the rise nationally. According to 2010 Census data, 4.3% of the 137 million workers in the United States telecommuted compared to 3.7% in 2005.1 Technology has been a major catalyst, helping to disseminate knowledge, increase communication, and allow people more independence and control over their work and life. The ubiquitous ‘coffee shop entrepreneur’ that migrates from their home-based office to the nearest cafe has largely given way to a new group of start-up oriented individuals and businesses that recognize the need for innovative and functional space.
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    Table of Contents
    Editorial Board, Cornell Real Estate Review (2014-07-01)
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    2014 Industry Leader Award: Jorge M. Pérez
    Pérez, Jorge M. (2014-07-01)
    [Excerpt] Jorge M. Pérez is the Founder, Chairman and CEO of The Related Group, the largest multi-family real estate development firm in the United States. Under Pérez’s direction, The Related Group has redefined the South Florida landscape. Since its inception in 1979, the firm has steadily built and managed more than 60,000 apartments and condominium residences, becoming Florida’s top multi-family developer and the largest Hispanic-owned business in the United States.
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    The Value of Flexibility: A Finance Application of Options to Real Estate
    Pezeshkian, Hamid; Lashgari, Sina; Stiller, Duane (2014-07-01)
    Real estate is among the most strategic of businesses. Each property class has both independent and linked economic, demographic, and political constituents. Moreover, there are dozens of parties involved that influence the real estate project’s final outcome. At every stage of a given project, the participants learn new information that affects their plan. Developers learn about the market, local government actions, and tenant decisions, while tenants learn about consumers and competitors. The nature of the business requires and rewards flexibility. This paper focuses on flexibility and its value in real estate dealings. Specifically, it applies the concept of optionality as considered in corporate finance to address the true value of flexible strategies to real estate practitioners. In recent decades, real estate has evolved in terms of complexity. It has adopted concepts related to valuation from the research-rich field of finance. This trend will logically continue as the real estate industry becomes more efficient and institutionalized. This paper explores the mechanics of real estate optionality and applies the discussed concepts to practical examples. The types of option agreements covered include the following: • Option to purchase developable land• Option to renew a commercial lease • Option to terminate a commercial lease Industry examples are used to provide impactful applications of these topics to developers, investors, and tenants. In the first section concerning land options, a seller faces a decision on choosing between two unique offers from independent developers. The optimal choice is determined by recognizing the financial market value of an option embedded in one of the offers. In the second and third sections of this paper, the renewal and termination options are considered from the eyes of commercial retail tenants and landlords. Unique cases are presented, and the value of each option is demonstrated using advanced, yet applicable, option pricing methods. Additionally, the renewal option is covered with respect to its value dependants, as well as its worth across U.S. markets.
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    Between We Buy Houses and We Buy Wholesale
    Harvey, Cori R. (2014-07-01)
    The distressed residential real estate market has always depended upon the innovations of private, micro investors to reorganize the housing market and redistribute distressed properties for the benefit of homeowners, home buyers, and lenders alike. This Article asks whether recent trends in residential distressed real estate investing have created a new niche for operationally-sophisticated, yet small and nimble, private investors.
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    Funk, David L. (2014-07-01)
    [Excerpt] Welcome to the 2014 edition of the Cornell Real Estate Review (CRER), a publication that features practical, applied research interspersed with commercial real estate cases and industry awards relied upon by our readers.