What does each partner bring to the deal in a typical real

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What does each partner bring to the deal in a typical real estate development joint venture arrangement between a local entrepreneur and national capital source? What does each partner expect to get out of the deal?

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Q: (a) Fully explain and clarify the following statement: "There are two types of tax shields available to investors in property equity: deprecation tax shields (DTS) and interest tax shields (ITS), but only one of these types of tax shields generally adds to the investment value of the investment no matter what the investor's marginal tax rate." (b) As part of your answer, quantify the NPV to two different borrowers, from an after-tax investment value perspective, of a perpetual loan of $1,000,000 at 6% interest when the market yield on corporate bonds is 6% and on otherwise identical municipal bonds is 4%, and Borrower A faces a marginal tax rate of 30% while Borrower B faces a marginal tax rate of 35%. (c) Also, compare the NPV to Borrower B to the PV of that borrower's interest tax shields (the PV of the borrower's tax deductions associated with the loan).

Q: Suppose the riskfree (i.e., Government Bond) interest rate is 5%, the current cash yield payout rate on newly built property is 7.5%, and the annual volatility of individual property total returns is 25% for built properties that are leased up and operational. Use the Samuelson-McKean formula to answer the following questions concerning a vacant but developable land parcel. (a) If built property has a 4% risk premium in its expected total return (9% total return), then what is the risk premium and expected total return for the land parcel? (hint: use the elasticity formula 8.11a and the risk premium formula 8.11c) (b) What is the value of the land parcel if a building currently worth $2,500,000 new could be built on the land for a construction cost of $2,200,000? (c) What is the "hurdle benefit/cost ratio" above which the land should be immediately developed? (d) What value of newly built property does this suggest is required before the land should be developed? (e) Under these conditions should the land be developed immediately or is it better to wait?

Q: The "option premium" is: a) The excess of the option value over its immediate exercise value. b) The risk premium in the required investment return to option investment. c) The excess of the option value over the current value of the underlying asset. d) Difficult to quantify using the Samuelson-McKean Formula.

Q: Alex and Kay are two retail property investment managers hired one year ago by two different investors. In both cases the managers were free to use their own judgment regarding geographical allocation between properties in the East versus West of the country. Kay allocated her capital equally between the two regions, while Alex placed 65% of his capital in the Western region. After one year their respective total returns were as depicted in the table below. As you can see, Kay beat Alex by 60 basis-points in her total portfolio performance for the year.Alex & Kay's returns realized for clients:Weights:AlexKayEast35%50%West65%50%Returns:AlexKayTotal Portfolio6.65%7.25%East6.00%6.50%West7.00%8.00%How would you attribute this 60 basis-point differential between pure allocation performance, pure selection performance, and a combined interaction effect, if you wanted to compute an unconditional performance attribution that was independent of the order of computation? (Note: This is equivalent to taking Alex as the benchmark against which Kay's performance is being compared.)

Q: Suppose the riskfree rate is 3% and the market risk premium is 6% and a certain asset has a beta of 0.5. The asset in question is expected to produce a perpetuity of net cash flow to its investors equal to $1,000,000 per year. Suppose the CAPM is "true", and disequilibrium in asset market prices does not endure beyond (i.e., "gets corrected" within) one year. Should you buy this asset if you can get it for a current price of $15,000,000? What would be the NPV of such an acquisition, and what would be the minimum expected return on a one-year investment in this asset at that price, and how much of that return (if any) would be considered "super-normal" (i.e., more than what is warranted by the amount of risk in the investment)?

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