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Real Estate Private Equity Funds Created in the late 1980s to meet a pressing need for real estate equity capital, these funds have raised more than $100 billion in equity from pension funds and other investors, invested in every form of income-producing property and equity and debt as well as com-panies in homebuilding, construction and development, real estate technology and other specialties, and expanded into global markets. Now funds and their sponsors are under pressure from investors and their consultants to provide greater transparency and standard-ization in reporting information and to meet yet-to-be-defined performance standards.
Defaults in Securitized Real Estate Loans The commercial mortgage-backed securities market has changed the legal structure of commercial real estate finance in the United States. By transforming the market from whole loan participation to participation based on subordinated securities, the economic and legal goals and limitations in the event of borrower default are likewise transformed. Not only have the holders of real estate debt changed, but the documents underlying the transaction have also evolved. This article analyzes how these changes may affect the rights and obligations of the parties in the event of a real estate downturn. The new structure uncouples traditional debt-oriented rights from risk of investment loss. Several methods to minimize such a disjunction are suggested.
Opportunistic Investing and Real Estate Private Equity Funds Opportunistic real estate private equity funds, also known as "value-added" funds and "opportunity" funds, are increasingly popular. This paper discusses the results of an Ernst & Young survey of 48 funds representing $72.3 billion of equity, raised in 145 separate funds, between 1988 and 2001. The survey revealed that a relatively small percentage of general partners control a large percentage of the capital. The majority of the larger fund general partners are real estate investing arms of larger private equity groups, whether the merchant banking arms of investment banks or stand-alone private equity firms. The sur-vey demonstrates current industry attitudes towards financial and performance reporting, tax issues, income allocations and distributions, and business transformation issues. General partners are facing increased pressure to standardize performance reporting, cre-ate greater transparency in financial reporting, and develop consistent valuation method-ologies for investments.
Real Estate: Past, Present, and Future Sam Zell reflects on the continuing evolution of the real estate industry, of which he is an icon. He describes the arbitrage potential of an average 6 percent interest rate relative to an inflation rate of 9 percent, the birth of opportunity funds, the development of the con-cept of the "real estate elitist," and the existence of a market - composed of relatively small players who could borrow money because they had connections with local banks - transformed to an industry offering an astonishing opportunity for marketing. He pre-dicts that the CEOs of the industry leaders of the future will be much more operations-oriented and may have no real estate experience.
Why Does Anybody Still Live Here? Most of America’s largest cities in 1950 declined in population in the intervening period. In 1990, nearly 60 percent of all owner-occupied single-unit residences in Midwest cen-tral cities were valued at less than the cost of construction. Nevertheless, these declining cities appear to persist because of the durability of housing. We present a durable housing model that explains a number of facts about urban dynamics. Housing durability explains why city growth rates are skewed, and why cities grow more quickly than they decline. Housing durability can explain the striking persistence of city growth rates among declin-ing cities. Housing durability explains why positive shocks to cities appear to increase pop-ulation more than prices and why negative shocks appear to reduce price more than pop-ulation. Finally, and most important, durable housing may explain why declining cities appear to attract individuals with low levels of human capital.
The Crash and Rebound of Canary Wharf After its 1992 bankruptcy, Canary Wharf was politically controversial and widely regard-ed as a planning and development disaster. It failed as a result of six factors: a recession in the London property market; competition from the City of London; poor transport links; few British tenants; complicated finances; and developer overconfidence. Canary Wharf ’s original developer assembled a new consortium and took the project out of bankruptcy in 1995. Improved performance on the six factors led to a successful IPO in 1999. Ten pre-leased office buildings are under construction in 2002, which should complete the origi-nal project. Canary Wharf ’s 14 million square feet will be an impressive rebound from a spectacular crash. The project is now the central business district of the London Docklands and the third office node of Greater London.
The Activities and Benefits of Smart Growth Smart growth is characterized by five main activities: control of outward movement; inner-area revitalization and growth in more central places; design innovations; land and natu-ral resource preservation; and transportation reorientation. Compared with traditional sprawl development, smart growth shows significant public- and private-sector cost advan-tages over a 25-year period. Nevertheless, its implementation remains a main challenge because suburbs and cities alike lack both an agenda and strategies to invoke smart growth. Various responses to foster smart growth are proposed to support and complement current efforts.
Measuring Sprawl The simplest measure of how much a metropolitan area sprawls is its population density - that is, the number of inhabitants per square mile. However, this can be misleading since metropolitan areas include land that has not been developed and may, in fact, not be developable, such as steep slopes, nature preserves, or land banks. This paper discusses dif-ferent measures of density, including urbanized density, centralization of employment, and densification of metropolitan areas over time. It suggests that many popular preconcep-tions about sprawl are inaccurate - that is, Western and Southern metropolitan areas do not necessarily sprawl more than areas in the Northeast. Indeed, Los Angeles and Phoenix actually have higher population densities than older metro areas such as Chicago and Boston, and older metropolitan areas in the Northeast are not necessarily denser than newer areas. Philadelphia and Detroit rank as extreme examples of low-density develop-ment according to several measures.
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