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FINA 320 > PowerPoint Class 2 > Flashcards

PowerPoint Class 2 Flashcards

1
Q

A Quick Tour of Possible Ownership Forms

A

Sole Proprietorships

Partnerships

Limited Liability Companies

Corporations

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2
Q

advantages of sole proprietorship

A

Easiest to start

Least regulated

Single owner keeps all the profits

Taxed once as personal income

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3
Q

disadvantages of a sole proprietership

A

Unlimited liability

Limited to life of owner

Equity capital limited to owner’s personal wealth

Difficult to transfer ownership

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4
Q

General Partnerships (at least TWO GPs)

A

Partners agree to unlimited liability

Any partner may be sued for the entirety of a partnership’s business debts

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5
Q

Limited Partnerships (at least ONE GP & at least ONE LP)

A

General Partner (active partner): unlimited liability

Limited Partner (passive or silence partner): limited liability

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6
Q

Limited Liability Partnerships

A

Each partner is not responsible or liable for another partner’s misconduct or negligence (eg: law firm, accounting firm)

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7
Q

advantages of a partnership

A

Limited Partner (Passive investor & Limited Liability)

Two or more owners

More human and financial capital available

Relatively easy to start

Taxed once as personal income

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8
Q

disadvantages of a partnership

A

General Partner (Active investor & Unlimited Liability)

Partnership dissolves when one partner dies or wishes to sell

Possible disagreements between partners

Difficult to transfer ownership

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9
Q

advantages of corporations

A

Limited liability

Unlimited life

Separation of ownership and management

Easier to raise capital

Transfer of ownership is easy

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10
Q

disadvantages of corporations

A

Agency issues

Double taxation (income is taxed at the corporate rate and then dividends are taxed at the personal rate)

More expensive to establish and maintain

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11
Q

Forms of Co-Ownership in Real Estate

A

Direct Co-Ownership

Indirect Co-Ownership

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12
Q

Direct Co-Ownership types

A
  1. Tenancy in common
  2. Joint tenancy
  3. Tenancy by the entirety
  4. Condominium
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13
Q

Indirect Co-Ownership types

A
  1. Limited Liability Co.
  2. Partnership
  3. Corporation
  4. Real Estate Investment Trust (REIT)
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14
Q

Indirect Co-ownership

A

Entity holds title

Ownership passes through the entity

Undivided interest

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15
Q

Tenancy in Common

A

Buying properties with a friend or business partners

Ownership transferred to estate or third party according to the will (death)

Each owner can sell or mortgage their interest independently

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16
Q

Joint Tenancy

A

Buying properties with a spouse or a partner

“Rights of survivorship”

Ownership transferred to survivor (death)

17
Q

Tenancy by the entirety

A

Joint Tenancy (husband + wife)

18
Q

Condominium

A

Common areas are jointly owned

19
Q

Cooperative

A

in between direct and indirect co-ownership

Corporation owns property

Each owner holds shares and a proprietary lease (no term and no rent)

Cannot mortgage individual interests

Owner’s mutually liable for any specific liens

20
Q

A Mortgage

A

a borrowing arrangement where the
principal amount of the loan borrowed is typically repaid (amortized) over a given period of time making equal and periodic payments

Both principal and interests are retired in each payment. (Blended payment)

basically an annuity

21
Q

As time passes, a greater amount of your PMT goes into principal repayment and a lower amount goes into interest repayment of the mortgage

true or false

A

true

the latter payments become more and mor principal because we own more more equity

22
Q

Amortization period

A

the time that it takes that your loan is fully repaid (i.e., amortized or retired)

Payments are based on amortization period

23
Q

Mortgage term (or loan term)

A

period for which investors can “lock in” at a fixed rate, which might be revised or renegotiated after the term ends

24
Q

Five Key Features of a Mortgage

A

Present Value of the Loan Payments

Payment

Remaining Balance (at any point in time)

Lender’s Yield (internal rate of return – IRR)

Borrower’s Effective Borrowing Cost (EBC)

25
Q

Lender’s Yield (IRR)

A

The actual yield after loan modifications

Implicit interest rate received on a loan

Also lender’s expected IRR on loan

26
Q

What is the Lender’s Yield (IRR) based on?

A
  1. Actual cash loaned out by lender

2. Actual cash payments received by lender

27
Q

Effective Borrowing Cost (EBC)

A

Third-party expenses

up-front expenses incurred by borrower but not paid to lender

28
Q

Types of Effective Borrowing Cost (EBC)

A

Mortgage insurance premium

Lender’s title insurance

Charges to record your mortgage (county)

Appraisal

Survey

29
Q

Any effects of Effective Borrowing Cost (EBC)

A

Borrower net less cash at loan closing than lender’s actual net disbursement to borrower

EBC > Lender’s yield / IRR

Basically, the effects of the Lender’s Yield do not affect the Lender

–> he lends the same amount after his own addition expenses that mess up the borrower

On the other hand, the borrower is getting roasted and gets even lesser mounts of the loan all the while respecting the mortgage payments that were set at the beginning (without any loan expenses being considered)

30
Q

What does a prepayment of the loan cause to the Lender’s yield and the Borrower’s EBC

A

They both dramatically increase compared as to when there is no repayment of the loan

31
Q

Interest-only mortgage

A

Not typically observed with home loans

More common with income property (CRE) loans

32
Q

Partially amortized mortgage

A

Loan maturity/term is shorter than amortization period

Results in balloon payment at the end of term

Very common in CRE lending

FV =/=0

33
Q

Early payment mortgage

A

Most home loans allow borrowers to make unscheduled “extra” payments along with their monthly payment

These extra payments go toward reduction of the principal balance

would not reduce current PMT

34
Q

when we have ARM mortgage payments, what are caps

A

caps are the percentage we add to the initial interest rate in our contract in a certain year for our mortgage payments

35
Q

what are ARM mortgage payments

A

payments that change yearly based on a changing interest rate seton a contract

could be based on a specific addition to the Index (one year treasury security yields) or caps

36
Q

when do we choose caps vs adding a specified percentage to the Index (one year treasury security yields) in ARM mortgage payments?

A

we choose caps when the amount, added to the initial interest rate, is lower than the percentage added to the index

FINA 320 (10 decks)

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