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CHAPTER 4. Loan Repayment, Interest, and Renegotiation

In the first part[1] of this chapter the most commonly used loan repayment schedules and interest calculation techniques are described, while in the second part issues related to loan renegotiation and restructuring are dealt with.

Since it is very important to have a loan repayment schedule that fits the operating cash flows of the financed real estate project, the described loan repayment schedules are the most typical scheme, but any kind of variation is possible depending on the financing agreement.[2]

4.1 BULLET PAYMENTS

Loans providing for bullet payments, also called zero amortizing (interest only) constant payment loans, require the payment of the entire principal of the loan (and in rare cases also all of the interest[3]) upon maturity of the loan. As the name easily brings to mind, the periodical payment will simply be in the form of an interest payment. Thus, the outstanding loan balances at the beginning of each period (BoP) will be a constant value equalling the loan value.

4.2 PRE-AMORTIZING (SEMI-BULLET)

Pre-amortizing (or semi-bullet) is an interest-only repayment plan that stipulates the payment of interest only for a certain period of time. The period is referred to as the interest- only period, as against the subsequent repayment period during which interest is paid regularly and the principal loaned is repaid. They are common in development projects to fund construction costs: only after the property has been built and/or marketed is the principal repaid.

EXAMPLE 4.1

In the example in Figure 4.1 only interest is paid during the life of the loan and the principal is repaid only at the maturity date.

Repayment of a loan with bullet payments

FIGURE 4.1 Repayment of a loan with bullet payments

  • [1] Also with the contribution of Andrea Artegiani, MSc Bocconi University.
  • [2] For further details on financial calculation see also Kolbe et al. (2003).
  • [3] Please see paragraph 4.5.1 for further details.
 
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