FLOAT

Definition

FLOAT has several meanings in real estate and finance:

Time Interval Post-Transaction: The interval of time after a deposit or withdrawal is made and before the transaction is credited or deducted from the account. During this time, the transaction is recorded as pending.
- Example: Abel writes a check to pay a debt to Baker. Baker deposits the check in a bank different from Abel’s. Abel’s bank may experience a float of 2 or 3 days before Baker’s bank collects the money.
Difference in Interest Rates: The difference between a variable interest rate and the index to which it is pegged.
- Example: A bank makes construction loans at 3% over the prime rate. The 3% difference is known as the float.
Incurring Debt: To incur a debt by securing a loan or issuing a bond.
- Example: To fund a project, Atlas Company may float a loan or issue a bond.

Examples

Check Clearing: If you deposit a check from another bank into your account, the funds might not be available for a couple of days. This waiting period is referred to as float time.
Loan Agreements: When a construction company takes a loan with an interest rate defined as the Prime Rate plus X%, the difference (X%) is the float.
Bond Issue: A corporation may float bonds to raise capital for expansions or new projects, meaning they issue debt to be paid back with interest.

Frequently Asked Questions

Q: What is bank float? A: Bank float refers to the time period between when a check is deposited and when the funds become available.

Q: How does float impact interest rates? A: Float represents the difference between the variable interest rate charged on a loan and the index to which it is pegged, such as the Prime Rate.

Q: Why is float important in real estate transactions? A: Float affects the availability of funds during transactions and can influence the interest rate and cost of loans in financing real estate projects.

Q: Can float affect cash flow management? A: Yes, businesses must manage float effectively to ensure they have sufficient liquidity to cover outstanding checks and payments during the float period.

Q: How do companies use bond float? A: Companies float bonds to raise capital for large expenditures by issuing debt securities which investors purchase, thus lending money to the company in return for periodic interest payments and return of principal at maturity.

Variable Interest Rate: An interest rate that changes over time based on a specific benchmark or index.
Prime Rate: The interest rate that commercial banks charge their most creditworthy customers.
Clearing Period: The time taken for financial instruments (such as checks) to be settled and funds to be transferred between institutions.
Debt Financing: Raising funds by borrowing through loans or issuing bonds, as opposed to equity financing, which involves selling company shares.

Online Resources

References

“Principles of Real Estate Practice” by William E. Gaddy
“Investing in Floating-Rate Loans” by Frank J. Fabozzi
“Finance and Economics Discussion Series” by The Federal Reserve System

Suggested Books for Further Studies

“Real Estate Principles: A Value Approach” by David Ling and Wayne Archer
“The Book on Rental Property Investing” by Brandon Turner
“Finance for Real Estate Development” by Charles Long
“Floating-Rate Securities” by Frank J. Fabozzi

Real Estate Basics: FLOAT Fundamentals Quiz

### Which of the following best defines FLOAT in financial terms? - [ ] The profit margin on a real estate transaction. - [ ] The time between placing an order and receiving a product. - [x] The interval of time after a deposit or withdrawal before the transaction is credited or deducted. - [ ] The amount of money borrowed in a loan. > **Explanation:** FLOAT refers to the time interval between when a deposit or withdrawal is made and when the transaction is actually posted to an account. ### What is the common float time for check deposits between different banks? - [ ] 1-2 hours - [ ] Same day - [x] 2-3 days - [ ] One month > **Explanation:** Typically, the float time for check deposits between different banks is around 2 to 3 days before the funds are available. ### The 'float' in a variable interest rate loan refers to: - [ ] The total loan amount. - [x] The difference between the variable interest rate and the pegged index. - [ ] The fixed part of the interest rate. - [ ] The early payment penalty. > **Explanation:** Float in this context is the difference between the variable interest rate of the loan and the index rate it is pegged to, such as the Prime Rate. ### In terms of real estate financing, why is managing float important? - [x] To ensure liquidity and availability of funds during transactions. - [ ] To decrease the mortgage interest rate. - [ ] To increase property value. - [ ] To avoid tax liabilities. > **Explanation:** Managing float is crucial for ensuring liquidity and the availability of funds, necessary to cover commitments during the float period in real estate transactions. ### What does a company do when it 'floats a bond'? - [ ] It calls back bonds from the market. - [ ] It reduces the interest rates on existing bonds. - [x] It issues new bonds to raise capital. - [ ] It converts bonds to stocks. > **Explanation:** When a company 'floats a bond,' it issues new bonds to raise capital, which can then be used for projects or other financial needs. ### Float time is the period taken by: - [x] Financial instruments to be settled and funds transferred. - [ ] Real estate properties to increase in value. - [ ] Key stakeholders to come to an agreement. - [ ] Construction projects to complete. > **Explanation:** Float time is the period taken for financial instruments, like checks, to be settled and for actual fund transfer to occur between the banks involved. ### How does the float affect business cash flow? - [ ] It has no impact. - [ ] It increases immediate cash availability. - [x] It requires careful management to ensure liquidity. - [ ] It decreases due to immediate fund transfers. > **Explanation:** Float affects business cash flow by creating a period where funds are not yet accessible, requiring careful management to ensure liquidity. ### Which index is commonly associated with the float in variable-rate loans? - [x] Prime Rate - [ ] Consumer Price Index (CPI) - [ ] Standard and Poor's 500 (S&P 500) - [ ] Dow Jones Index > **Explanation:** The Prime Rate is a common index associated with the float in variable-rate loans, indicating the rate at which banks lend to their most creditworthy customers. ### Which of the following is a result of effectively managing float for a business? - [ ] Lower property tax rates - [x] Improved cash flow and financial health - [ ] Increased property value - [ ] Enhanced employee satisfaction > **Explanation:** Effectively managing float helps improve cash flow and the overall financial health of a business by ensuring funds are available as needed. ### What crucial role does float play in construction loans? - [x] It defines the additional percentage over the index rate. - [ ] It determines the duration of the loan. - [ ] It guarantees loan approval. - [ ] It fixes the loan repayment schedule. > **Explanation:** In construction loans, float defines the additional interest percentage charged over the index rate, helping calculate the effective interest rate for the borrower.