FINC 381 Exam 2

Promissory Note

A promise and legal obligation by the borrower to repay the loan and it includes details regarding loan amount, loan term, interest rate, payment, balance at maturity.

What is refinance?

The borrower is getting a new loan and paying off their original loan (used when interest rates decrease)

What is a loan with recourse?

The borrower takes on all personal liability for the borrowed money

What is a loan without recourse?

The lender can only get control of the asset that is pledges as collateral for the loan.

What is due on sale clause

When a borrower sells their house the due on sale clause makes the outstanding loan balance fully payable at closing.

What affects interest rates at time of loan origination?

State of economy, inflation rate, Federal reserve policy, overall supply and demand of money.

What is spread in loan rates?

It is the difference in the default risk associated with individual borrowers compared to the default risk-free treasury.

What is the loan-to-value ratio?

Indicator of risk that the bank faces in making loans → higher ratio = riskier loan.

LTV = Loan Amount / Real Estate Value

When is a borrower required to have private mortgage insurance?

For single family homes when the LTV is above 80%

When does PMI automatically go away by law?

78%

How do you calculate equity in a home?

Real Estate Value - Loan Amount

How do you calculate equity percentage?

Equity / Value

Equity % + LTV = 100%

What is Home Equity Line of Credit?

Revolving line of credit where you can borrow up to a limit, but don’t have to use it if you don’t want.

How do you solve for HELOC?

Find max loans by taking LTV*current value of home then subtract your outstanding loan and that is your MAX HELOC

What is Index rate

Market-based rate (determined by market forces)

What is margin in ARM’s

The spread over the index rate and stays constant throughout the life of the loan.

What is the composite rate in ARM’s

The rate that determines the required payments until the next adjustment is made.

What is an interest rate floor

The interest rate is prohibited from going below this level

What is an interest rate cap

Restriction on how high the composite rate may go.

What is an ARM

Adjustable-rate Mortgage - First few years of the loan are fixed interest rate, then interest rates start to adjust

What is a hybrid ARM

Fixed rates for a period of time, then have annual adjustments for the remaining term of the loan (3/1 ARM is fixed for 3 years then adjusts annually for 27 years)

What is a 7/6 ARM

Loan has a fixed interest rate for the first 7 years and then adjusts every 6 months based on the index rate at the time of adjustment

In an ARM what is the rate you use in calculation?

SOFR rate + Margin Rate = Composite Rate

What is Front End Ratio

how much your monthly housing expense is compared to your monthly income (cost should not exceed 28% of your monthly income)

Housing Cost/Income

What is back end ratio?

How much you are paying in total each month in housing, credit cards, student loans, car loans, etc. (should not exceed 36% most lenders won’t let you go over 40%)

Total Debt/Income

In an agreement, who is the lessor?

The one giving the property

In an agreement, who is the lesse?

You, the one acquiring the property

What is pro rate share

The tenant’s rented area divided by the total rentable area of the property

What is term of the lease?

The beginning and end date of the lease

How is base rent generally talked about?

$ per square foot per year basis

What is an escalation?

Increases in rent throughout commercial lease life to protect owners of real estate from inflation risk

What is fixed amount increase

Rent increases each year by a amount such as $1/sf.

What is Fixed percent increase?

Rent increases by a constant percentage rate each year of the lease term

What is CPI increase?

An increase in rent based on the change in CPI index measured each year (inflation)

What is a performance adjustment

Special clause in the lease that allows for additional rent to be paid by the tenant

How do you solve for the natural breakpoint?

Rent per square foot / % of sales over …

Who pays for everything in a gross lease?

The Landlord pays everything

Who pays for expenses in a modified gross lease?

Tenant pays for specific line items such as taxes and insurance, the landlord pays for everything else.

Who pays for expenses in a NNN lease

Tenant pays everything landlord pays nothing

• Taxes

• Insurance

• Maitenance

What is an inducement

When a landlord offers an incentive to a tenant in order for them to commit to a lease.

What are tenant improvements?

Money contributed by the landlord to improve the tenant’s premises and to help make it more suitable for the tenant’s use

What is effective rent

The cash flows from the tenant’s lease into a single payment, expressed on a per square foot basis that would recur each year over the life of the lease.

How do you calculate effective rent?

List out the amount of $ per square foot you would receive each year and then use NPV function in excel to calculate the NPV

What is HELOC?

Borrowing against your home equity.

Base Year Stop

Tenant only pays increases over a base year

What is a renewal lease?

Extend your current lease

What is a termination lease

End your lease early

What is an expansion lease

Add more space to your lease

What is right of first refusal

You get the first chance at a space when it opens up

What is sublease

Original tenant still in charge of lease but not living there

What is Assignment

New tenant takes over completely

What are class A properties?

Newest in the market and most appealing

What are class B properties?

10-20 years old, still in a good location, may not be the most up to dateW

What are class C properties

Older and functionally obsolete, may have no amenities and visible wear and tear.

What is occupancy rate

Percentage of the building’s rentable sq. feet that is occupied by a tenant.

Occupied/Total

What is vacancy rate

100% minus occupancy rate

What is market rent?

Rental rate that balances the supply and demand for a space

What is the gross square feet?

Totality of all enclosed area within a building

What are common areas

spaces that are shared among tenants in a building

What is usable square feet

Space that is available to tenants to conduct their buisness

What is rentable square feet

The sum of usable square feet and the total square feet in common areas

What is flex space

Hybrid space that could include an office component, retail showroom, and storage space

What is cross-docking

No storage, just transfer of goods

What is clear height

The height of the lowest hanging object to the floor

What is inline

Smaller stores in a line

What are outparcel stores

Seperate buildings such as starbuck

What are anchor tenants?

Major retailer that draws traffic to the center

super regional malls

exceptionally large malls that have tourist attraction feel about them

regional malls

malls in metro areas

power center

collection of very large retailers located together

community shopping center

anchored by grocery stores and include a variety of other in-line stores

free standing retail

individual buildings that house a single tenant

Garden style apartment building

two-three story buildings scattered among landscaped grounds

midrise apartment buildings

single-apartment building that is tall enough to require an elevator

High-rise apartment building

dense urban areas, 20-50 stories

What is average daily rate

Average room rate paid by guests over a period

room revenue / rooms sold

What is revenue per available room

key performance metric that captures both pricing and occupancy performance

ADR * occupancy rate

Revenue/total rooms

Market vs Submarket

Market is a large area, submarket is a smaller section of the main market

Gross absorption

measure of market activity - total square feet of all leases

Net absoprtion

New leases signed - vacated space - new construction

Occupancy rate

Percent of how much of a building is occupied

Construction pipeline

If a community is “attracting” investment the amount of construction will be high

Quoted rent

The rate at which properties are being marketed or hope to be rented for

Market rental rate

the rental rate at which deals are being closed (real)