Learn: FINC 381 UTK EXAM 2

Promissory Note (note)

The borrower's signed promise to repay the loan.

Fully Amortizing

Loan is fully paid off by the end of its term. No balloon payment.

Partially Amortizing

Loan is not fully paid off by the end of its term.

Balloon Payment

The large final payment owed at the end of a partially amortizing loan.

Refinance vs. Purchase Mortgage

Purchase = loan to buy a home. Refinance = new loan that replaces an old loan on a home you already own.

Loan Origination Fee

Fee the lender charges to create and process a new loan.

Interest Rate Spread

Lender's profit margin. Loan rate minus the lender's cost of funds.

Interest Rate Floor

The lowest rate an adjustable loan can go.

Interest Rate Cap

The highest rate an adjustable loan can go.

Loan-to-Value (LTV)

Loan Amount / Home Value. Example: $80,000 loan / $100,000 home = 80% LTV.

Equity in a Home

Home Value - Mortgage Balance Owed. Example: $300,000 - $200,000 = $100,000 equity.

Private Mortgage Insurance (PMI)

Insurance that protects the lender if you default. Required if you put less than 20% down.

Home Equity Loan / HELOC

Borrowing against your home equity. A HELOC is a credit line you can draw from, usually with a variable rate.

Hybrid (HELOC)

Part fixed rate and part variable rate.

Index Rate

The benchmark rate used to set a variable loan rate. HELOCs usually use the Prime Rate. Your rate = Index + Spread. Example: P + 1 = Prime + 1%.

Hybrid ARM (3/1, 5/1, 7/1)

Rate is fixed for the first years, then becomes adjustable. Example: 5/1 = fixed for 5 years, then adjusts every 1 year.

7/6 ARM

Rate is fixed for 7 years, then adjusts every 6 months.

PROBLEM: Fixed-Rate Loan Payment

Excel: =PMT(rate/12, years x 12, -loan amount). This gives the monthly payment.

PROBLEM: ARM Payment, Years 2 and 3

Use the new rate, the remaining balance, and the remaining years to calculate a new payment. Repeat each time the rate changes.

PROBLEM: Loan Payoff

The remaining loan balance at that date. Find it on the amortization schedule.

PROBLEM: Equity at a Point in Time

Home Value at that date - Loan Balance at that date.

PROBLEM: Amortization Table (Excel)

Each row: Interest = Balance x Monthly Rate. Principal = Payment - Interest. New Balance = Old Balance - Principal.

Essential Elements of a Lease

Who (landlord and tenant), what space, how long, how much rent, what use, and signatures.

Use

What the tenant is allowed to use the space for.

Tenant Improvement Allowance (TIs)

Money from the landlord to help the tenant build out the space. Usually stated per square foot.

Flat Rent

Rent stays the same for the whole lease.

Rent Escalations

Rent increases during the lease, on a set schedule.

Gross Lease

Tenant pays one rent. Landlord pays all operating expenses.

Adjusted Gross Lease

Tenant pays rent plus some operating expenses.

Base Year

The first year's operating expenses. Tenant pays for any increase above this year in later years.

Net Lease

Tenant pays rent plus some or all operating expenses. Triple Net (NNN) = taxes, insurance, and maintenance.

Concessions

Landlord incentives to get a tenant. Most common: free rent.

Sublease

Tenant rents the space to someone else, but the tenant is still responsible for the original lease.

Assignment

Tenant transfers the whole lease to a new tenant.

Lease Options

Tenant rights in the lease: renewal, cancellation, expansion, and relocation.

Renewal Option

Tenant can extend the lease.

Cancellation Option

Tenant can end the lease early, usually for a fee.

Expansion Option

Tenant can take more space.

Relocation Option

Landlord can move the tenant to a different space in the building.

Effective Rent

The true average rent after free rent and concessions are counted.

Percentage Rent

Extra rent based on sales. Common in retail. Tenant pays a % of sales above a set breakpoint.

PROBLEM: Effective Rent

Total rent paid over the lease, minus free rent and TIs, divided by the number of years.

PROBLEM: Expense Reimbursements

Tenant's share % x (This Year's Expenses - Base Year Expenses).

PROBLEM: Percentage Rent

Percentage Rent = % Rate x (Sales - Breakpoint). Breakpoint = Base Rent / % Rate. If sales are below the breakpoint, percentage rent is $0.

Class A Property

Best quality. Newest, best location, highest rent.

Class B Property

Good quality. Older than Class A, lower rent.

Class C Property

Lowest quality. Oldest, most repairs needed, lowest rent.

Occupancy Rate

Occupied Space / Total Space.

Vacancy Rate

Vacant Space / Total Space. Vacancy = 1 - Occupancy.

Market Rent

The rent the space could get on the open market today.

Rentable Space

Usable space plus the tenant's share of common areas. This is what rent is charged on.

Gross Leasable Area (GLA)

Total space available to lease to tenants. Mainly used for retail.

Common Areas

Shared spaces: lobbies, hallways, parking, and restrooms.

Industrial Lease Type

Mostly Triple Net (NNN). Tenant pays taxes, insurance, and maintenance.

Cross-Docking

Goods come in one side of a warehouse and go straight out the other side. Little storage.

Drivers of Demand for Industrial

E-commerce, trade, population growth, and access to highways, ports, and rail.

Types of Retail Properties

Strip centers, neighborhood centers, power centers, regional malls, lifestyle centers, and outlet centers.

Anchor Tenant

A large, well-known store that brings customers to a shopping center. Example: Target or a grocery store.

Amenities

Extra features that attract tenants. Example: pool, gym, parking, clubhouse.

Types of Apartments

Garden (low-rise), walk-up (no elevator), mid-rise, and high-rise.

Broker

Licensed person or firm that brings buyers, sellers, landlords, and tenants together for a commission.

Agency

When a principal hires an agent to act for them.

Principal

The client who hires the agent.

Agent

The person who acts for the principal.

Fiduciary

A trusted person who must put the principal's interests first.

Obedience

Follow the principal's lawful instructions.

Loyalty

Put the principal's interests above your own.

Diligence

Work hard and act quickly for the principal.

Confidentiality

Keep the principal's private information private.

Accountability

Account for all money and documents you handle for the principal.

Reasonable Care

Use proper skill and care, and share all important facts.

Dual Agency

One broker represents both sides in the same deal. Both sides must agree.

Tenant Representation

A broker who represents only the tenant in finding space and negotiating a lease.

Listing Broker

The broker hired by the owner to market and sell or lease the property.

Opinion of Value

A broker's estimate of what a property is worth. It is not an appraisal.

Letter of Intent (LOI)

A short, non-binding outline of the main deal terms.

Offering Memorandum (OM)

A document that markets a property to buyers. It describes the property, income, and market.

Purchase and Sale Agreement (PSA)

The binding contract to buy and sell a property. It sets the price and closing terms.

Total Lease Value

All rent paid over the full lease term, including increases.

Sales Commission Percentage Range

Usually 3% to 6% of the sale price. It is always negotiable.