Glossary
of Real Estate Terms
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AAA Tenant. A tenant with a top credit
rating. This type of tenant is often critical
to the developer’s ability to arrange both construction and permanent
financing for a major commercial project, such as a shopping center
or office building.
Abandonment.
The voluntary relinquishment of rights of ownership or another interest
(such as an easement) by failure to use the property, coupled with an
intent to abandon (give up the interest).
Abatement.
A reduction or decrease. Usually applies to a decrease of assessed valuation
of ad valorem taxes after the assessment, and levy.
Absorption
Rate.
The rate (speed) at which vacant space is either leased or sold
to users in the marketplace. This rate is usually expressed in square feet per year or in the
case of multi-family housing, in the number of units per year.
Abstract
of Judgment. A summary of money judgment obtained
in court. (When this summary or abstract is recorded in the county recorder's
office, in some states the judgment becomes a lien on the debtor's property,
both presently owned or after-acquired.)
Abstract
of Title. A summary prepared by a licensed abstractor
of all documents recorded in the public records of the political subdivision
where the land is located. An abstract in some states or areas is reviewed
by an attorney or other experienced title examiner to determine the
status of title. Virtually every abstractor today provides actual copies
of the records rather than an abstract of each document
Acceleration
Clause.
A cause
in a deed of trust or mortgage, which "accelerates," or hastens,
the time when the indebtedness becomes due. For example, some deeds
of trust contain a provision (an acceleration clause) stating that the
note shall become due immediately upon the sale of the land or upon
failure to pay interest or an installment of principal and interest
Accommodation
Recording. Recording
of instruments with the county recorder by a title company merely as
a convenience to a customer and without assumption of responsibility
for correctness or validity.
Ackowledgment.
A formal declaration before a duly authorized officer (such as a notary
public) by a person who has executed an instrument that such execution
is his own act and deed. An acknowledgment is necessary to entitle an
instrument (with certain specific exceptions) to be recorded, to impart
constructive notice of its contents and to entitle the instrument to
be used as evidence without further proof. The certificate of acknowledgment
is attached to the instrument or incorporated therein.
Acquisition
and Development Loan (A&D Loan).
A loan for the purchase and preparation
of raw land for development. Usually a construction loan or land
sale is the source of repayment.
Acre.
A measure of land equal to 43,560 square feet
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Adjustable
Rate Mortgage (ARM). A
type of real estate loan in which either the interest rate charged or
the length of the loan, or both, can change. This type of loan forces
the Borrower to absorb the uncertainty of changes in interest rates
during the life of the loan. ARM
loans are normally tied to some index such as government securities. Also called “variable rate
mortgages”.
Administrator.
A person appointed by the probate court to carry out the administration
of a decedent's estate when the decedent has left no will. If a woman
is appointed, she is called an administratrix.
Adverse
Possession. A process of acquiring title to real property
by possession for a certain (statutory) period of time, in addition
to fulfilling other conditions.
Affidavit.
A written statement or declaration, sworn to before an officer who has
authority to administer an oath.
Agent.
One who has authorization, either expressed or implied, to act for or
represent another party, usually in business matters, such as issuing
title insurance policies on behalf of a title insurer for a portion
of the premium.
Agreement
of Sale. A written contract entered into between the
seller (vendor) and buyer (vendee) for sale of real property (land)
on an installment or deferred payment plan. It is also known as an agreement
to convey, a long form Security Agreement or a real estate installment
contract.
Amendment.
A change either to alter, add to, or correct part of an agreement without
changing the principal idea or essence.
American
Land Title Association (ALTA).
An
association representing more than 2,100 title abstractors, title insurance
companies, title insurance agents, and associate members that was founded
in 1907. Members of the association use standardized title insurance
forms developed by ALTA to provide uniformity within the industry. ALTA’s
national headquarters is located at 1828 L Street, N.W., Suite 303,
Washington, D.C. 20036; (202) 296-3671.
Amortization. The
repayment of a mortgage debt over a period of time in a series of periodic
installments. It should be noted that a portion of each payment consists
of a blend of interest and amortization of principal.
Specifically, this is the payback of the principal portion of
the loan owed to the lender. The effect of amortization is to build
up the paper value of the owner's equity while reducing the debt obligation.
Anchor
Tenant. A
well-known commercial retail business such as a national chain store
or regional department store (AAA
Tenant) strategically placed in a shopping center so as to generate
the most customers for all of the stores located in the shopping center.
Anchored Centers.
A shopping center
with an anchor tenant.
Annual
Loan Constant. The ratio
of the annual debt payment on a loan to the original amount borrowed.
The loan constant is also referred to as a mortgage constant.
Annual
Percentage Rate (APR). The
yearly interest percentage of a loan, as expressed by the actual rate
of interest paid. For example: 6% add-on interest would be much more
than 6% simple interest, even though both would say 6%. The A.P.R. is
disclosed as a requirement of federal truth in lending statutes.
Arbitrage.
The simultaneous buying and selling of any securities,
including mortgages, mortgage backed securities or futures contracts
in different market places, for the purpose of realizing a profit from
different prices.
Assumption.
The
act of conveying real property; taking title to a property with the
Buyer assuming liability for paying an existing note secured by a deed
of trust against the property.
Attornment.
A tenant’s formal agreement to be a tenant of a
new landlord.
Average
Daily Rate (ADR).
The average rate charged by a hotel for one (1) room
for one (1) day; arrived at by dividing the total room revenue by the
actual rooms occupied.
Average Life. It is a way to look at the term of a loan or bond
that accounts for principal paydowns.
If a loan is interest only with a full balloon at the end, the
average life will equal the maturity. If there is amortization, principal
is being paid over the life of the loan, decreasing the balloon payment
and the average life. This number is then used to find
the treasury that has the closest remaining term, but is not shorter.
For example, a 10/25 loan has an average life of 9 years.
9 years from today is October 2008.
The current list of outstanding, non-callable US treasury securities
with maturities in 2008 includes March 2008, June 2008, September 2008
and a December 2008. The lender would choose the December 2008 because it is longer
than the actual due date.
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Basis Points. One-100th
of 1 percent. Used primarily
to describe changes in yield or price on debt instruments including
mortgages and mortgage-backed securities.
Bankruptcy.
A
special proceeding under federal, or in some instances state, laws by
which the property of a debtor is protected by the court and may be
divided among the debtor's creditors and the debtor.
Bridge
Loan. A loan which
enables a buyer to purchase a property, then allow for time to rehab
and/or increase NOI prior to placement of permanent financing or enables
buyer to get financing to make a down payment and pay closing costs
before selling the present property. Also called “gap” financing.
Building
Owners & Managers Association (BOMA). An organization of practitioners
who own and manage buildings, most often office space. Sets the basis
by which most regional expense standards are established.
Address: Building Owners and Managers Association 1221 Massachusetts
Avenue NW Washington, DC 20005.
Capital
(Reserves) Expenditure (CAP-X). A
major improvement that will have a life of more than one year. Capital
expenditures are generally depreciated over their useful life, as distinguished
from operational repairs, which are subtracted from income during the
year in which they were expended.
Capitalization.
The conversion of a future net income stream into present value
by using a specified desired rate of earnings as a discount rate. This
capitalization rate is divided into the expected periodic income to
derive a capital value for the expected income.
Capitalization
Rate.
The
rate of return on net operating income considered acceptable for an
investor. A rate of return used to derive
the capital value of an income stream. The formula is Value = annual
income divided by the capitalization rate.
Also known as “cap rate”.
Carve-outs. Specific
items that a Lender will require the Borrower to personally guarantee
for the life of the loan. Typically
include (but are not limited to) environmental, fraud, misappropriation
of funds, and theft.
Closing Costs. Various fees and expenses
payable by the seller and buyer at the time of a real estate closing,
(also termed transaction costs). Includes brokerage commissions,
lender fees, title insurance, recording fees, prepayment penalty, inspection
and appraisal fees, and attorney’s fees.
Commercial
Bank. A financial institution authorized to provide a variety of financial
services, including consumer and business loans (generally short-term
with full recourse to the Borrower). Commercial banks may be members
of the Federal Reserve System.
Commitment
Fee. A charge required by a lender
to lock in specific terms on a loan at the time of Commitment.
Commitment
Letter. An
official notification from a Lender to a Borrower indicating that the
Borrower's loan application has been approved.
It will state in detail the terms and conditions of the prospective
loan.
Common
Area Maintenance (CAM). Operational expenses
related to the maintenance of retail and office properties. Under a Triple-Net lease the Tenant is required to reimburse
the Landlord for their proportionate amount (based on square footage)
of this expense.
Conduit.
An entity which issues mortgage- backed securities backed by
mortgages which were originated by other lenders.
Constant. Percentage
of the original loan paid in equal annual payments that provides principal
reduction and interest payments over the life of the loan.
Construction
Loan. A short-term, interim loan for financing
the cost of construction. The lender advances funds to the
builder at periodic intervals as work progresses.
Typically a recourse loan to the borrower.
Consumer
Price Index. The most widely known measures of price levels and inflation
that are reported to the U.S. government. It measures and compares,
on a monthly basis, the total cost of a statistically determined "typical
market basket" of goods and services consumed by U.S. households.
Correspondent.
A specialized type of mortgage banker whose function is limited
to the origination of mortgage loans which are sold to other mortgage
bankers or investment bankers under a specific commitment.
Cost
Approach. A method of appraising property based on the depreciated
reproduction or replacement cost (new) of improvements, plus the market
value of the site.
Credit
Rating (Report). An evaluation of a person's capacity
(or history) of debt repayment. Generally available for individuals
from a local retail credit association; for publicly held companies
by such firms as Dunn & Bradstreet; and for bonds by such firms
as Moody's, Standard & Poor’s, and Fitch's.
Cross-Collateralization. Net income shortfalls on one property
are offset by excess cash flow from other properties in a pool of “crossed”
loans. Significantly enhances a transaction from the viewpoint of investors
and rating agencies.
Current Yield. A measurement of investment
returns based on the percentage relationship of annual cash income to
the investment cost.
Debenture (Bond).
A long-term bond or note issued by governments and/or
corporations and not secured by a mortgage or lien on any specific property.
Since there is no specific property securing the debenture, the ability
to repay the debt is based solely on the financial strength of the issuer.
Debt
Service Coverage Ratio (DSCR).
The relationship between the annual
net operating income (NOI) of a property and the annual debt service
of the mortgage loan on the property. Both Lenders and Investors calculate
this ratio to assist them in determining the likelihood of the property
generating enough income to pay the mortgage payments. From the lender's
viewpoint, the higher the ratio, the better.
Debt
Service. The periodic payment (monthly,
quarterly, or annually) necessary to pay the interest and principal
on a loan which is being amortized over a longer term (usually 25-30
years).
Deed of Trust. The deed to real property which serves
the same purpose as a mortgage but instead of two parties, three parties
are involved. The third party holds title for the benefit of the Lender.
The Lender is called the “Beneficiary”. The Borrower is called
the “Trustor”. When a loan is made, the Borrower conveys title
to a third party called the “Trustee” who holds the title
for the benefit of the Lender although the instrument itself may remain
in the Lender's possession.
Delegated
Underwriting and Servicing (DUS).
Fannie Mae's principal line for purchasing individual multifamily
loans. We delegate the processing and approval of the loans to our DUS
Lenders, and they take a percentage of the risk.
Defeasance.
In
defeasance, the lender replaces the cash flows of the original loan
with actual Treasury Securities. The borrower pays the lender enough
money to buy these securities and the lender goes out in the bond market
and buys the right combination of bonds.
After this is done, and the lender has a security interest in
the treasuries, the property is released as collateral for the loan
and the treasuries become the new loan collateral.
Demand
Note.
A note having no date for repayment, but due on demand of the
lender.
Discount
Rate. The rate of interest charged to
banks who buy money from the Federal Reserve System. An increase in
the rate not only discourages the banks from borrowing, but it also
serves as a signal that interest rates are probably going to increase.
Also, a compound interest
rate used to convert expected future income into a present value income.
Effective
Gross Income (EGI).
Term
used for an income-producing property, derived from the potential gross
income, less a vacancy factor and a collection loss amount.
Equity
Participation.
The right of a Lender to a share in the
gross profits, net profits or net proceeds in the event of a sale or
refinance of a property on which the Lender has made a loan.
Also known as an “equity kicker.”
Eminent
Domain. The
right of a government to take privately owned property for public purposes
under condemnation proceedings upon payment of its reasonable value.
See Condemnation.
Encroachment.
The presence of an improvement such as a building, a
wall, a fence or other fixture which overlaps onto the property of an
adjoining owner.
Encumbrance.
A right or claim upon real property (land) held by one
other than the property owner. Encumbrances are divided into two classes,
as follows:
a)
Liens (mortgages, deeds of trust, mechanics' liens, local taxes,
assessments, judgments, attachments, etc.).
b)
Encumbrances other than liens which are limitations on the ownership
of the land (such as conditions, restrictions, reservations, easements,
etc.).
Endorsement.
Addition to or modification of a title insurance policy which
expands or changes coverage of the policy, fulfilling specific requirements
of the insured.
Equity.
(1) A legal doctrine based on fairness, rather than strict interpretation
of the letter of the law. (2) The market value of real property, less
the amount of existing liens. (3) Any ownership investment (stocks,
real estate, etc.) as opposed to investing as a lender (bonds, mortgages,
etc.).
Estoppel
Certificate. A document by which a tenant certifies
to a Lender that all rental amounts due and owing are current, and that
the Landlord is in compliance with all terms and conditions of the Lease.
Also, a document by which the mortgagor (borrower) certifies
that the mortgage debt is a lien for the amount stated. The debtor is
thereafter prevented from claiming that the balance due differs from
the amount stated.
Expense Ratio. A comparison of the operating expenses
to potential gross income. This ratio can be compared over time and
with that of other properties to determine the relative operating efficiency
of the property considered.
Fair
Market Value (FMV). An economic concept designating
the price at which a willing seller and willing buyer will agree when
both parties are acting prudently, knowledgeably, and under no compulsion
to sell or buy.
Federal
National Mortgage Association (FNMA). Commonly known as "Fannie Mae",
the FNMA is the largest buyer of existing mortgages. The Federal National
Mortgage Association was originally organized by the federal government
in 1938 to purchase FHA-insured mortgages. The association was reorganized
in 1968 as a quasi-private corporation whose entire ownership is private.
Fannie Mae raises capital by issuing corporate stock which is actively
traded on the New York Stock Exchange and by selling mortgages out of
its portfolio to various investors.
Fee
Simple.
An estate under which the owner is entitled to unrestricted
powers to dispose of the property, and which can be left by will or
inherited. Commonly, a synonym for ownership.
First Mortgage. A lien on property in
which the lender’s claims are superior to the rights of subsequent
lenders. Certain lenders only make first mortgages due to regulatory
requirements; others limit mortgages to these senior instruments due
to company policy.
Fixed Expenses. Expenditures such as property taxes,
license fees, and property insurance that are not directly affected,
by the occupancy of the property. Fixed expenses along with operating
expenses are subtracted from effective gross income to determine the
net operating income of property.
Forward
Commitment. An
agreement between a permanent lender and an interim (typically construction)
lender wherein the permanent lender issues a conditional commitment
that will replace the construction loan once a given set of terms and
conditions have been achieved.
Fully
Amortized Mortgage (Loan). A loan that is fully repaid at maturity
by periodic (monthly) reductions of the principal. The first part of
each monthly payment covers interest on the outstanding debt as of the
payment due date and the remainder of the payment goes to reduce the
outstanding debt.
Gross Lease. A lease of a commercial property
whereby the landlord (lessor) is responsible for paying all property
expenses, such as taxes, insurance, utilities, and repairs.
Hedging.
The purchase or sale of mortgage
future contracts by a mortgage banker or lender for the purpose of
protecting cash transactions made at a future date.
Income
Approach. A method of appraising property
based on the property’s anticipated future income.
Once the net income is established, it is then divided by the
estimated capitalization rate to arrive at a fair market value.
Interim Financing. A loan, including a construction loan,
used when the property owner is unable or unwilling to arrange permanent
financing. Generally arranged for less than 3 years, used to gain time
for operations and or market conditions to improve.
Index. A
published interest rate, such as prime rate, LIBOR, T-Bill rate or the
11th District COF.
Lenders use indexes to establish interest rates charged o mortgages
or to compare investment returns.
Ingress
and Egress. Applied to easements, meaning the right to go in and
out over a piece of property but not the right to park on it.
Internal
Rate of Return. (IRR) The true annual rate of earnings
on an investment. Equates the value of cash invested with cash returns.
Considers the application of compound interest factors. Requires a trial-and-error
method for solution.
Joint
Venture (JV). An agreement by two or more individuals
or entities to engage in a single project or undertaking.
Joint ventures are used in real estate development as a means
of raising capital and spreading risk. For all practical purposes a
joint venture is similar to a general partnership. However, once the
purpose of the joint venture has been accomplished, the entity ceases
to exist.
Land
Acquisition Loan.
A loan made for the purpose
of purchasing land only not improvements on or to the land.
Also called an “acquisition loan.”
Lease
Abstract. A detailed
recap of office and retail leases including tenant name, suite #, square
footage, current rental rate including increases, lease start date,
term, CAM requirements, extension options and rates.
Leasing
Commission (Reserve) Escrow. The
annual cost related to the leasing and releasing of commercial office
and retail space. The amount deducted from the Net
Operating Income prior to determining the net cash flow available for
debt service coverage.
Legal
Description.
A description of land recognized by law, based on government
surveys, spelling out the exact boundaries of the entire piece of land.
It should so thoroughly identify a parcel of land that it cannot be
confused with any other.
Lessee.
An individual or entity to whom property is rented under a lease.
A tenant.
Lessor.
An individual or other entity - one who rents property to
another under a lease. A landlord.
Letter
of Credit. An arrangement, with specified
conditions, whereby a bank agrees to substitute its credit for a customer's.
Leveraged
Buy-out. The acquisition of a company, financed primarily
with borrowed money, using the acquired company’s assets to collateralize
the loan.
LIBOR
(London Interbank Offered Rate). The rate that international banks
dealing in Eurodollars charge each other for large loans. Some domestic
banks and other lenders use this rate as an index for adjustable rate
mortgages. The LIBOR rate quoted in the Wall Street Journal is an average
of rate quotes from five major banks. Bank of America, Barclays, Bank
of Tokyo, Deutsche Bank and Swiss Bank.
Limited
Partnership. Arrangement in which there
is at least one partner whose liability extends beyond monetary investment
and at least one partner who is passive and limits liability to the
amount invested.
Loan
Application Fee. A charge required by a lender or
loan originator to be paid by the borrower to cover the credit report,
property appraisal and other incidental expenses associated with underwriting
the loan. The fee is generally not refundable.
Loan-To-Value
Ratio (LTV). The amount of money borrowed compared
to the cost or value (appraised or sale price) of the real property
purchased.
Lock-Box. Rental income is delivered to a trustee
(or servicer), who then pays expenses and makes the loan payment, before
excess cash is released to the borrower.
The lock-box removes borrower discretion and control over funds.
Locked-in
Interest Rate. The
rate promised by a lender at the time of loan application or commitment.
On income property loans, a lock-in generally requires a commitment
fee or rate lock fee from the loan applicant.
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MAI
(Member, Appraisal Institute) Appraisal.
A demonstrative narrative report of a specific market’s
economic condition and an assessment of property value performed by a member of
the American Institute of Real Estate Appraisers. The property’s value is derived
using three (3) separate methods of valuation including replacement
cost approach, sales comparison approach and income approach.
Management Fee. The amount charged by an independent
company for the day-to-day management of a property.
Typically based upon a percentage of the property’s income.
Market Approach.
A method of appraising property by analyzing sales
prices of similar properties (comparables) recently sold.
Market
and Feasibility Study.
A. detailed analysis of activities in a market in regard
to such influences as location, demand and competition which may or
may not affect the value of property. Includes an analysis of a real estate project to determine the
most profitable use and the likelihood of the proposed use being a financial
success. The study is often used by the promoter or developer to inure
would-be investors to participate in the venture and to assist lenders
in making their decision whether or not to loan the necessary funds.
Market Rent.
The rental income that a property is
likely to command in the under current market conditions. Market rent,
also referred to as economic rent, may be either higher or lower than
what the property is actually renting for under the terms of a lease.
Mechanics
Lien.
A lien created by statute for the purpose of securing priority
of payment for the price or value of work performed and materials furnished
in construction or repair of improvements to land, and which attaches
to the land as well as the improvements.
Mixed-Use
Commercial Project. A
real estate development that contains two or more different uses all
intended to be harmonious and complementary. An example would include
a high-rise building with retail shops on the first two floors, office
space on floors three through ten, apartments on the next ten floors,
and a restaurant on the top floor.
Mortgage.
(1) To hypothecate as security, real property for the payment
of a debt. The borrower (mortgagor) retains possession and use of the
property. (2) The instrument by which real estate is hypothecated as
security for the repayment of a loan.
Mortgage-Backed
Securities. Securities purchased by investors
that are secured by mortgages. Such securities are also known as pass-through
securities since the debt service paid by the borrower is passed through
to the purchaser of the security.
Mortgage
Banker. A financial middleman who, in addition
to bringing borrower and lender together, makes loans, packages them,
and sells the packages to both primary and secondary investors. Usually
the mortgage banker continues to service the loan (collect debt service,
pay property taxes, handle delinquent accounts, etc.) even after the
loan has been packaged and sold. For this management service a small
percentage of the balance paid to the investor goes to the mortgage
banker. Quite often the loan origination fee or finder's fee charged
the borrower is more than offset by a lower interest rate from a lender
not directly accessible to the borrower.
As with mortgage brokers, mortgage bankers are regulated by state
laws.
Mortgage
Bankers Association of America (MBA).
The Mortgage Bankers Association of America is the
primary trade organization of the mortgage bankers and brokers in the
United States. The association provides numerous seminars and publications
for its membership and sponsors the designation CMB (Certified Mortgage
Banker). The headquarters is 1125 15th Street, N.W., Washington, D.C.
20005; (202) 861-6500.
Mortgage
Broker. A person who brings together borrower
and a lender and in return is paid a finder's fee. This finder's fee
is usually equal to one percent or so of the amount borrowed
is normally paid by the borrower. Certain sources of funds, particularly
insurance companies, do not always deal directly with the person looking
for capital; rather, they work through a mortgage broker. Normally,
the mortgage broker is not involved in servicing the loan once it is
made and the transaction is closed.
Mortgage
Constant. The relationship between annual mortgage
loan requirements and the initial mortgage loan principal, expressed
as a decimal or percentage, for level-payment mortgage loans.
Used for converting debt service into mortgage loan value.
Mortgage
Correspondent. A person authorized to represent
a financial institution in a particular geographic area for the purpose
of placing loans.
Mortgage
Securities Pool.
A method by which securities backed by the value of specific
real estate mortgages are issued in the financial market for investment
purposes. Such securities, because they are mortgage-backed, are more
marketable and generally are issued with a lower rate of interest than
if no such backing existed.
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Net Leasable
Area. In a building, the floor space that
may be rented to tenants or the area upon which rental payments are
based. Generally excludes common areas and space devoted to the heating,
cooling, and other equipment of a building.
Net Lease. A lease whereby, in addition to
the rent stipulates that the lessee (tenant) pays such expenses as taxes,
insurance, and maintenance. The landlord's rent receipt is thereby "net"
of those expenses.
Net
Operating Income (NOI). Income
from property after all operating expenses and reserves have been deducted,
except for income taxes and financing expenses (interest and principal
payments).
Nonconforming
Use. A use that violates zoning
regulations or codes but is allowed to continue because it began before
the zoning restriction was enacted.
Non-recourse
Loan. No personal liability of the
Borrower. Upon default, a Lender may take
the property pledged as collateral to satisfy a debt, but have no recourse
to other assets of the borrower.
Occupancy
Rate. The ratio of the space rented to
the total amount of space available for rent. A 50-unit apartment complex
in which 40 units are currently rented has an occupancy rate of 80 percent
(40 divided by 50).
On-The-Run
vs Off-The-Run. The on-the-run treasury is the most recently
issued treasury in a particular sector.
Currently the government issues 2yr, 3yr, 5yr, 10yr, and 30yr
treasuries. These are the only maturities where
there are on-the-runs. 5yr treasuries, for example, are issued at the
end of every month, so every month there is a new on-the-run 5yr. 10yrs
are issued quarterly in February, May, August, and November.
The current on-the-run 10yr is November 2009; in February it
will become the February 2010 and the November will then be off-the-run.
On-the-run treasuries always trade at lower yields because there
is increased demand for them because they are the benchmarks.
Operating
Expenses. Periodic expenses (usually monthly)
of operating income-producing property other than debt service and income
taxes. Operating expenses are those directly related to the level of
occupancy and usage of the building. These can include management fees,
maintenance, ground maintenance, utilities, supplies, legal fees, accounting
fees, and other such costs. These expenses are subtracted from gross
income to equal the net operating income.
Operations
and Maintenance Plan (O&M).
A written plan detailing
the removal of potentially environmental sensitive materials.
Origination
Fee. The amount charged by a lender to
cover the time and expenses incurred in arranging a loan. This fee covers
such expenses as credit checks, and appraisal of the property.
Normally the origination fee is stated as a percentage of the
loan amount; for example, one percent.
Permanent
Financing. A mortgage loan, usually covering development
costs, interim loans, construction loans, financing expenses and marketing,
administration, legal and other costs. This loan differs from the construction
loan in that financing goes into place after the project is constructed
and open for occupancy. It is a long-term obligation, generally
for a period of 10 years or more.
Phase
I Environmental Report. A comprehensive report
required by most Lenders and produced by an independent company that
details the current environmental condition of a property. Typically requires a historical review of the property’s
previous uses and may require a operations and maintenance (O&M)
plan for the future removal of asbestos and other harmful items.
Physical
Condition Report.
A comprehensive report required by most Lenders and produced
by an independent company that details the current physical condition
of a property. Typically includes specific items
that require immediate repair as well as those items that should be
replaced over the life of the loan. Basis used to establish the annual
Replacement Reserve Escrow for the property.
Potential
Gross Income. The
amount of income that could be potentially be produced by a real estate
property assuming there are no vacancies or collection losses. Does
not include miscellaneous or other income.
Power
of Attorney.
A document by which one person (called the "principal")
authorizes another person (called the "attorney-in- fact")
to act for him/her in a specific manner in designated transactions.
"Prelim"
or Preliminary Report.
A
written report issued by a title company, preliminary to issuing title
insurance, which shows the recorded condition of title of the property
in question. See Commitment.
Prime Rate.
The lowest commercial interest rate charged by banks
on short-term loans to their most credit-worthy customers. The prime
rate is not the same as the long-term mortgage rate, though it may influence
long-term rates. Mortgage rates are generally higher than the prime
rate, but exceptions occur at times.
Pro-forma. A financial or accounting statement using
estimates and assumptions to project income and the performance of real
property over a period of time.
Principal
& Interest Payments (P&I).
A periodic payment, usually paid monthly, that includes the interest
charges for the period plus an amount applied to amortization of the
principal balance. Commonly used with amortizing loans.
Public
Domain.
Land owned by the government and belonging to the community
at large.
Quitclaim
Deed. A form of deed which conveys only the present interest
a person or entity may have in a particular property without making
any representations or warranties of title. Such a deed is useful in
clearing up doubtful claims such as possible disputed liens.
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Real Estate. Land and everything more or
less attached to it. Ownership
below to the center of the earth and above to the heavens.
Real
Estate Investment Trust (REIT). A real estate mutual fund, established
by income tax laws to avoid the corporate income tax. It sells shares of ownership and must invest in real estate
or mortgages. It must meet certain other requirements, including minimum
number of shareholders, widely dispersed ownership, and certain asset
and income tests.
Real Estate
Market. The
potential buyers and sellers of real property at the current time.
It includes markets for various property types, such as office
market, housing market, land market and condominium market.
Real
Property (immovable).
Land, from the center of the earth and extending above the surface
indefinitely, including all inherent natural attributes and any man-made
improvements of a permanent nature place thereon. For example: minerals,
trees, buildings, and appurtenant rights.
Reconveyance.
An instrument used to transfer title from a trustee to the equitable
owner of real estate, when title is held as collateral security for
a debt. Most commonly used upon payment in full of a trust deed. Also
called a deed of reconveyance or release.
Recourse.
The ability of a lender
to recover money from a borrower in default, in addition to the property
pledged as collateral.
Rehabilitation
Tax Credit. The Tax Reform Act of 1986
provides a 20% tax credit for rehabilitating certified historic structures,
and a 10% credit for other buildings that were placed in service after
1936.
Replacement
Reserve. Various
account(s) maintained (typically by the Lender) to provide funds for
anticipated expenditures required to maintain a building.
A reserve account usually is required by a lender in the form
of an escrow to pay upcoming taxes and insurance costs. A replacement
reserve may be maintained to provide for replacement cost of short-lived
components, such as carpets, heating equipment or roofing. Also, a tenant
improvement and leasing commission account may be required for future
changes in tenancy.
Reinsurance.
A contract which one insurer makes with another to protect the
first insurer, wholly or partially, against loss or liability by reason
of a risk under a separate and distinct contract as insurer of a third
party. Reinsurance differs from coinsurance in that, in the case of
reinsurance, only one insurer has a direct contractual relationship
with the insured, and that insurer (commonly referred to as the "lead
insurer") purchases reinsurance in order to lessen or spread the
risk. The "lead insurer" will assume a risk up to a limit
(the amount of which is referred to as the "retention") and
any loss which exceeds this limit would be borne by the reinsurers.
In the case of coinsurance, each coinsurer has a direct contractual
relationship with the insured, and the risk is shared in agreed-upon
proportions from the first dollar of loss.
Reserve
Agreement. The
Delegated Underwriting and Servicing Reserve Agreement. This is a contractual
agreement among Fannie Mae, the custodian, and the lender, in which
the lender agrees to establish a lender reserve and to pledge collateral
to Fannie Mae to secure the lender's obligations under Delegated Underwriting
and Servicing. The Reserve Agreement also gives Fannie Mae contractual
rights in the pledged reserve and provides Fannie Mae certain contract
remedies to enforce the reserve requirements.
REVPAR (Revenue per Room). Calculation is in underwriting (usually hotels) where
the gross income is divided by the total number of rooms available (both
occupied and unoccupied).
Right
of Way.
(1) The right to pass over property owned by another, usually
based upon an easement. (2) A path or thoroughfare over which passage
is made. (3) A strip of land over which facilities such as highways,
railroads or power lines are built.
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Sale
and Leaseback.
A situation in which the grantor in a deed to a parcel of property
sells it and retains possession by simultaneously leasing it from the
grantee.
Sales
Comparison Approach. A method of estimating the
value of real property by comparing recent sales of comparable properties
to the subject property after making appropriate adjustments for any
differences. The comparable
properties chosen should be substantially similar to the subject property
and should be arms-length transactions.
Secondary
Mortgage Market. The means by which existing first
mortgages are bought and sold. The secondary mortgage market provides
a lender with an opportunity to sell a loan before its maturity date,
thereby providing greater availability of funds for additional mortgage
lending.
Self-Amortizing
Loan. A
mortgage loan that requires level annual payments sufficient to meet
the interest requirements and fully repay the entire principal over
its term.
Separate
Property.
Real property owned by one spouse exclusive of any interest of
the other spouse.
Servicing
Fee. The periodic (monthly or annual)
payment made by the purchaser of a mortgage (Lender) to the mortgage
banker (correspondent)
who originally made the loan for servicing the loan. The fee, which
varies from one-eight to one-half percent of the outstanding loan balance,
covers the administrative costs of servicing such as collection and
payment of property taxes and property insurance premiums. Servicing
rights may be bought and sold along with the loan.
Spread.
The difference between
the rate at which money can be borrowed and the rate at which it is
loaned. Typically the rate (percentage amount) that is added to the
Treasury Bill by a Lender when quoting a rate to a borrower.
Stabilized. Term associated with the
operation of a property wherein the income and expenses have achieved
and maintained a consistent level of performance.
The minimum is usually established when the property has performed
at specific minimum for ninety (90) days.
Subordinated
Ground Lease. A land (ground) lease in which the
rent payment due from the lessee (borrower) to the lessor (land owner)
is subordinated to the debt service owed by the lessee (borrower) to
the mortgagee (lender). Normally, a ground lease contains
a subordination clause because without it, construction of improvements
may be more difficult. A mortgage lender will consider the full value
of the property only with a subordinated ground lease.
Survey.
The
process by which the precise physical boundaries of a parcel of land
are measured. Legal descriptions appear in title
reports, sales contracts, deeds, mortgages, notes, and other instruments
involving rights and interests in real estate. When land is conveyed
from one party to another, the survey provides a visual representation
of the legal description. An
ALTA survey additionally delineates the exact location of all improvements,
encroachments, easements and other matters affecting the title to the
property in question. A survey may be required by a title insurance
company whenever the company is requested to issue an ALTA Extended
Coverage Policy.
Swap
Spread.
The
exchange of one asset or liability for a similiar asset or liability
to lengthen or shorten maturities, also raise or lower coupon rates,
or exchange fixed and variable payment streams.
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Take-out
Commitment. A
written agreement from a Lender to provide permanent financing following
construction of a planned project. The takeout commitment usually contains
specific conditions for occupancy and income, such as a certificate
of occupancy and/or a certain percentage of unit sales or leases in
place and paying rent. Most
construction lenders require takeout financing prior to beginning construction.
Targeted
Affordable Housing.
Properties with rent and occupancy restrictions
which meet or exceed the following requirements: 1) at least 20 percent
of all units have restricted rents affordable to households earning
no more than 50 percent of area median income as adjusted for family
size; or 2) at least 40 percent of all units have restricted rents affordable
to households earning no more than 60 percent of area median income
as adjusted for family size.
Tax
and Insurance (Reserve) Escrow. An account required by a mortgage
lender and established at the time of closing to fund annual property
tax assessments and hazard insurance premiums for the mortgaged property.
Funded through monthly contributions and maintained by the Lender.
Tenant
Improvement (Reserve) Escrow. An account required by a mortgage
lender and established at the time of closing for the purpose of reserving
funds estimated to be necessary to improve retail
and office
space. Funded through monthly contributions and maintained by the Lender.
Third Party
Reports. Reports required by a mortgage
lender prior to funding a loan that include MAI Appraisal, Phase I Environmental
and Physical Condition reports.
Title.
(1) A combination of all the elements that constitute a legal
right to own, possess, use, control, enjoy and dispose of real estate
or a right or interest therein. (2) The rights of ownership recognized
and protected by the law.
Title
Insurance. Insured
statement of the condition of title or ownership of real property. For
a one-time-only premium, the named insured and their heirs are protected
against title defects, liens and encumbrances existing as of the date
of the policy and not specifically excluded from it. In the event of
a claim, the title company provides legal defense from the policyholder
and pays any covered losses incurred as a result of such claim.
Title
Search. A review
of all recorded documents affecting a specific parcel of land to determine
the present condition of title. An experienced title officer or attorney
reviews and analyzes all material relating to the search, then determines
the sufficiency and status of title for insurance of a title insurance
policy.
Triple-Net
Lease. A commercial lease in which
the tenant is required to pay all operating expenses of the property
and the landlord receives a net rent amount each month.
Trust Deed. A conveyance of real estate to a
third party to be held for the benefit of another. Commonly used in
some states in place of mortgages that conditionally convey title to
the lender.
Underwriter.
An employee of a mortgage banking company or
lending institution, who reviews a loan application, verifies all information
is accurate and makes a recommendation to a loan committee as to the
desirability and risk of making the loan. The underwriting process is
an critical part of the overall lending process.
Underwriting
Criteria.
In mortgage banking, the analysis of the risk involved
in making a mortgage loan to determine whether the risk is acceptable
to the lender. Underwriting
involves the evaluation of the property as outlined in the appraisal
report and of the borrower’s ability and willingness to repay the
loan.
U.S. Treasuries.
Only treasuries with
an original term of 30 years are Bonds.
All treasuries with original terms of 2-10 years are Notes.
Everything shorter than two years are Bills.
Vacancy Rate.
The
percentage of all units or space that is unoccupied, not rented or from
which there is no rental income. On a pro-forma income statement a projected
vacancy rate is used to estimate the vacancy allowance (both physical
and economic), which is deducted from potential gross income to derive
effective gross income.
Venue.
Neighborhood; often used to refer to the county or place in which
an acknowledgment is made before a notary; also refers to the county
in which a lawsuit may be filed or tried.
Vesting.
The
names, status and manner in which title of ownership is held with a
fixed or determinable interest in a particular parcel of real property;
also that portion of a title report or policy setting forth the above.
Warehousing. The process by which a mortgage
banker assembles mortgages that they have made and prepares the mortgages
to be sold in the secondary mortgage market.
By selling these mortgages the originator now has additional
capital that can be used to make more mortgages which in turn may also
be sold in the secondary mortgage market.
Wraparound
Mortgage. A method of acquiring additional
financing on real estate by placing the additional funds in a secondary
or junior position to the existing debt. As its name implies, a wraparound
mortgage 'wraps around' an existing first mortgage plus the amount of
the new secondary or junior lien. This method of obtaining additional
capital is often used with commercial property where there is substantial
equity in the property and where the existing first mortgage has an
attractive low interest rate. By obtaining a wraparound, the borrower
receives dollars based on the difference between current market value
of the property and the outstanding balance on the first mortgage. Thus, the borrower reduces the equity and at the same time
obtains an interest rate lower than would be possible through a normal
second mortgage. The lender receives the leverage resulting from an
interest rate on the wraparound greater than the interest paid to the
holder of the first mortgage.
Yield
Maintenance.
The prepayment premium which will e
