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© CFA Institute. For candidate use only. Not for distribution. ALTERNATIVE INVESTMENTS AND PORTFOLIO MANAGEMENT CFA® Program Curriculum 2020 • LEVEL II • VOLUME 6 © CFA Institute. For candidate use only. Not for distribution. © 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006 by CFA Institute. All rights reserved. This copyright covers material written expressly for this volume by the editor/s as well as the compilation itself. It does not cover the individual selections herein that first appeared elsewhere. Permission to reprint these has been obtained by CFA Institute for this edition only. Further reproductions by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval systems, must be arranged with the individual copyright holders noted. CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. All trademarks, service marks, registered trademarks, and registered service marks are the property of their respective owners and are used herein for identification purposes only. ISBN 978-1-946442-87-1 (paper) ISBN 978-1-950157-11-2 (ebk) 10 9 8 7 6 5 4 3 2 1 © CFA Institute. For candidate use only. Not for distribution. CONTENTS How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program Feedback vii vii viii viii x xi Alternative Investments Study Session 15 Alternative Investments Reading 39 Private Real Estate Investments Introduction Real Estate Investment: Basic Forms Real Estate: Characteristics and Classifications Characteristics Classifications Private Market Real Estate Equity Investments Risk Factors Real Estate Risk and Return Relative to Stocks and Bonds Commercial Real Estate Overview of the Valuation of Commercial Real Estate Appraisals Introduction to Valuation Approaches The Income Approach to Valuation General Approach and Net Operating Income The Direct Capitalization Method The Discounted Cash Flow (DCF) Method Advanced DCF: Lease-by-Lease Analysis Advantages and Disadvantages of the Income Approach Common Errors The Cost and Sales Comparison Approaches to Valuation The Cost Approach The Sales Comparison Approach Advantages and Disadvantages of the Cost and Sales Comparison Approaches Reconciliation Due Diligence Valuation in an International Context Indexes Appraisal-Based Indexes Transaction-Based Indexes Advantages and Disadvantages of Appraisal-Based and TransactionBased Indexes Private Market Real Estate Debt indicates an optional segment 3 5 6 7 9 9 11 13 15 17 19 22 22 25 27 28 29 33 41 45 45 46 46 51 53 53 54 56 57 58 59 60 61 © CFA Institute. For candidate use only. Not for distribution. ii Contents Summary Practice Problems Solutions Reading 40 Reading 41 64 67 74 Publicly Traded Real Estate Securities Introduction Types of Publicly Traded Real Estate Securities Publicly Traded Equity REITs Market Background REIT Structure Investment Characteristics Considerations in Analysis and Due Diligence Equity REITs: Property Subtypes Economic Drivers Real Estate Operating Companies Valuation: Net Asset Value Approach Accounting for Investm