The final course of the specialization expands the knowledge of a construction project manager to include an understanding of economics and the mathematics of money, an essential component of every construction project. Topics covered include the time value of money, the definition and calculation of the types of interest rates, and the importance of Cash Flow Diagrams.

From the lesson

Real Estate Finance for Development Projects

Professor Anthony Webster introduces real estate finance providing an overview of the real estate project lifecycle, a discussion on zoning code parameters, and examples of estimating the sales price of a property.

Instructor, Department of Civil Engineering and Engineering Mechanics, Columbia University Director of Research and Founder, Global Leaders in Construction Management

All right, one last thing we've got to look over before we can jump back into

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doing financial plans for development projects from a developer's perspective.

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That's to review a little bit what you've learned with Professor Korda on

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compounding periods, and to expand on that a little bit, okay?

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So far, everything that we have done in this module and

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in the previous module is to use annual compounding.

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So, our percent interest per year, and T was always a real number.

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It didn't have to be an integer, but we always measure time in years.

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Now we need to be, and in the real world we need to be much more flexible.

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We need to consider quarterly, monthly, daily compounding,

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any of biweekly compounding, semiannual compounding.

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The great news as you learned from Professor Odette is

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that everything we have done regarding time value and

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everything you did with Professor Odette can be generalized to longer or

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shorter compounding periods by simply changing time units.

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You'll see what I mean by that,

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so we want to make this change consistently and

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that means r and T, okay?

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So, for example, if we have quarterly compounding periods,

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we're going to say r% interest, compounded quarterly.

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That means r% is paid every quarter, and

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we're also going to say if we're in a quarterly compounding world,

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T = 0 will still mean now as usual, but

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T = 1 will mean one compounding period from now.

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Something like one quarter from now, okay?

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If we're in a quarterly compound world.

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So, let's do an example, let's consider a three quarter mortgage.

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Okay, so it's going to be a really short payback mortgage that happens

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in three quarters.

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Out there in the big bad world, BigShark Lenders offers Mr.

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Small-Net-Worth this mortgage loan, okay?

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They'll loan him $30,000 to help him buy a $50,000 shack today.

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So that means Mr.

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Small-Net-Worth is going to have to, of course, pay 20,000 of his own money.

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He would be what we will call the equity or

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the property manager in this property even though it says on property.

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And here's the deal Mr. Small-Net-Worth would have to agree to pay BigShark back.

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He's going to get this 30,000.

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He has to pay back in Three equal quarterly payments

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with 10% interest compounded quarterly.

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How much?

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We want to know for Mr. Small-Net-Worth, how much is each payment.

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So let's go ahead and check this out.

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What's the situation here?

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We have this $30,000, he's going to get

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10% compounded quarterly.

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So this PV total is going to equal 30 Okay,

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that's going to be equal to his Payment 1 discounted by one quarter

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and this is two quarters here and this is three Q is here.

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So, the first payment going to Payment 1 discounted back and

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1 time period with r measured in.

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Where we compounding.

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Okay, same thing for the second payment and

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its going to be discounted back by what two quarters now.

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So that's why we have two in the exponent and we got to remember we have

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quarterly compounding in our similarly for payment three.

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So we want to know that we said by definition.

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All these payments are equal.

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Okay.

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So we can simplify a little bit.

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We can pull payment out.

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Okay.

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And this is still equal to 30K.

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All right.

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So I've just done a little bit of algebra.

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On this line to simplify.

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And now I've done some more algebra

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down here to isolate that uniform payment he's going to have to make.

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And if you do the algebra on that,

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you find he has to pay Pay $12,060 per quarter.

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All we had to do to do this, exactly the same as everything we've done annually,

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except we've consistently changed all our units to quarters.

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So r is interest per quarter compounded quarterly and

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T is Measured in quarters and that's it.

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It's really that simple.

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All right, so in general, you're going to find in the real big,

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bad world of finance Generally, real estate financing particular,

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projects will be done in monthly time periods, quarterly time periods,

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semi annual time periods, sometimes bi-annual periods, and

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to understand one project compared to another.

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We wanted to put everything in annual compounding periods.

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It just makes it easier for us to understand and

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it's necessary to compare different projects.

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So the way we do that is with what's called the equivalent annual

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interest rate.

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What is the equivalent annual interest rate?

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Define to me The amount of interest generated in a year

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by a pile of money, irrespective of compounding period, okay?

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So here's how it goes.

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The EAIR, that's the amount of interest Generated in a year, okay?