Glossary

Acceleration clause

Clause that makes all future payments due upon a single default of a
loan. Prevents lender from having to sue for each payment once a
single payment is late.

Accretion

Growth in size by addition or accumulation of soil to land by

gradual, natural deposits.

Accrued depreciation

In cost appraisal, the identification and measurement of reductions in

the current market value of a property from todays reproduction
cost.

Acknowledgment

Confirmation that a deed reflects the intention and action of the

grantor.

Acre

An important measure of land area (containing 43,560 square feet).

Active income

In U.S. income tax law, taxable income earned from salaries, wages,
commissions, fees, and bonuses.

Actual notice

An assertion of real property interests that is open, continuous, and

apparent to all who examine the property.

Ad valorem taxes

Property taxes that are based on the market value of the property.

Adaptive reuse

A conversion where the remodeling produces a creative reuse of the

structure that is different from its original purpose.

Adjustable rate mortgage Alternative mortgage form where the interest rate is tied to an
(ARM)
indexed rate over the life of the loan, allowing interest rate risk to be
shared by borrowers and lenders.

Adjusted basis

Equal to the original cost basis, plus additional real property or

personal property capital expenditures, minus the cumulative amount
of tax depreciation taken since the property was placed in service.

Adjustment period

The number of initial years in which an ARM remains fixed before

the interest rate is allowed to be adjusted.

Adjustments

Additions or subtractions from a comparable sale price or cost which

are required to make the comparable property more directly
comparable to the subject property.

Adverse possession

Involuntary conveyance of real property rights by an individual

demonstrating a use that is (1) hostile to the interests of the owner,
(2) actual, (3) open and notorious, (4) continuous, and (5) exclusive.

Adverse selection

Similar to an agency problem, occurs when an adviser may have an

incentive to filter the investment opportunities available, keeping the
more promising ones and offering the investor the less promising
ones.

Affordable housing
allocation

A requirement that encourages or mandates a reasonable and fair

component of new housing construction for lower-income families.

Affordable housing loans Loan purchase programs offered to primary mortgage market lenders

by Fannie Mae and Freddie Mac exclusively for low- and moderateincome households.

After-tax cash flow

The residual claim on the propertys cash flow after the mortgage
lender(s) and the state and federal government have collected their
share.

After-tax equity
reversion

The before-tax equity reversion, defined as net selling price minus

the remaining mortgage balance, at the time of sale less taxes due on
sale.

Agency problem

Occurs when an investor (principal) relies in an uninformed manner

on an adviser (agent) for advice when there may be an incentive for
the adviser not to act in the best interest of the investor/principal.

Agency relationship

A relationship that empowers the property manager/agent to serve as

the owners fiduciary; thus, the managers words and actions are
binding on the owner.

Age-to-life method

Method of estimating improvement value that involves estimating

the ratio of the effective age of an improvement to its economic life,
and multiplying the resulting age-to-life ratio by the structures
reproduction cost.

Agglomeration
economies

The emergence of specialized resources in a locality in response to

demand from multiple industries. Generally associated with large
cities.

Alt-A loan

A home loan for borrowers who fall short of qualifying for a

standard (prime) home loan. The use of the term varies. Roughly, it
refers to loans better than subprime, but below prime in borrower
qualifications and loan terms. Most Alt-A loans differ from prime

loans by the absence of complete documentation of borrowers

income assets.

Anchor tenant

The large and generally wellknown retailers who draw the majority
of customers to a shopping center.

Annual percentage rate

An approximation of the mortgage loans annual effective borrowing

cost in the absence of early payoff. This measure includes the effect
of up-front financing costs on the true cost of borrowing.

Appraisal

An unbiased written estimate of the fair market value of a property.

Appraisal report

The document the appraiser submits to the client and contains the
appraisers final estimate of market value, the data upon which the
estimate is based, and the calculations used to arrive at the estimate.

Appraised value

Estimated price or value that the typical investor is likely to pay

for a property.

Arms-length transaction A transaction between two parties that have no relationship with
each other and who are negotiating on behalf of their own best
interests. A fairly negotiated transaction and reasonably
representative of market value.

Assessed value

The value determined as the basis on which an owners property tax

liability is calculated, usually a percentage of market value.

Assessment lien

Lien assessment by local governments to ensure that those who

receive the primary benefit of neighborhood improvements will be
charged their fair share. (See Special assessments.)

Asset manager

The representative of property owners responsible for overseeing

property managers and advising owners on important strategic
decisions involving properties.

Assignment

The transfer of the original lessees rights under the lease contract to
another tenant. The original lessee and the new tenant may be coliable if rent payments are not made.

Assumable loan

An existing loan that can be preserved by a buyer instead of being

repaid by the seller when title to the mortgaged property changes
hands.

Assume liability

To become legally responsible for an obligation. This occurs by

signing a contract, such as a financial note.

Attach

To place a lien on real property.

Automated underwriting A loan underwriting approach that exploits the combination of

cyber-technology and the vast lending experience imbedded in the
giant loan portfolios of Freddie Mac, Fannie Mae, and other large
mortgage lenders.

Automated valuation
models

Long-distance, electronic appraisal substitutes used to reduce the

cost and time associated with loan underwriting, particularly with
refinancing an existing loan. Estimate values are based on statistical
techniques, exploiting the massive data resources of Fannie Mae,
Freddie Mac, and large banks.

Balloon loan

Loan characterized by an amortization term that is longer than the

loan term. Because the loan balance will not be zero at the end of the
loan term, a balloon payment is necessary to pay off the remaining
loan balance in full.

Balloon mortgage

Another name for a balloon loan.

Band-of-investment
analysis

See mortgage-equity rate analysis.

Bankruptcy

There are three types of bankruptcy distinguished by their section in

Federal Statutes: Chapter 7, liquidation; Chapter 11, court
supervised work-out; Chapter 13, wage-earners proceedings.
See individual entries.

Bargain-and-sale deed

A deed that conveys the land itself rather than ownership interests
through warranties.

Base rent

Amount paid by retail tenants in percentage leases regardless of the

level of the sales generated by the tenants business.

Baseline

A point of reference that runs east and west and is a feature of

government rectangular survey.

Before-tax cash flows

Annual net operating income less annual debt service.

Before-tax equity
reversion

The net sale proceeds less the outstanding balance on the mortgage
loan.

Benchmark

A reference point used as a standard to quantify the relative

performance of a specific asset or manager acting on behalf of an
investor.

Bid-rent model

Model of how land users bid for location that reveals the influences
on how density of land use is determined, how competing urban land
uses sort out their locations, how urban land value is determined,
and why land uses change over time.

Board of adjustment

In local zoning law, a board of citizens, appointed by the governing

body, to hear and make determinations on appeals for zoning
variances. The board of adjustment is somewhat unique in that its
determinations are final rather than merely recommendations to the
governing body. They can be appealed only in court.

Break-even cash throwoff Another name for the break-even ratio.

ratio

Break-even ratio

The sum of operating expenses, capital expenditures, and debt

service divided by potential gross income, this ratio measures the
ability of a property to cover its obligations.

Broker license

The authority granted by a state for one to own and operate a real
estate brokerage business; the most complete type of real estate
license.

Build-to-suit

With this arrangement, the developer preleases to a financially

strong tenant to build a structure to the tenants specifications. This
arrangement assures the tenant that they will have the space they
require when needed and it assures the owner/builder that the space
will be fully leased upon completion.

Buyer agency agreement A contract for real estate brokerage services between a buyer and a
real estate agent. The broker receives compensation for successfully
locating a property for the buyer to purchase.

C Corporation

Corporate ownership structure that provides limited liability, but

suffers from double taxation and does not enable losses to flow
through to investors for current use.

Cancellation option

Lease clause that gives the tenant or the owner the right, but not the
obligation, to cancel the lease before expiration.

Capital expenditures

Expenditures for replacements and alterations to a building (or

improvement) that materially prolong its life and increase its value.

Capital gain tax rate

Rate of tax applied to the portion of the taxable gain on sale that is
due to appreciation in the market value of the property.

Capital market

The financial sector of the economy that serves to allocate financial

resources among households and firms requiring funds.

Capital structure risk

The risk associated with the financing package used by the investor.
In particular, increased use of mortgage debt (financial leverage)
increases the riskiness of the equity investors return.

Capitalization rate

The percentage that is obtained when the income produced by a

property (or a specified interest in a property) is divided by the value
or sale price of the property (or the specified interest in the
property). (Also see overall capitalization rate.)

Central place pattern

A location pattern in which similar economic entities, such as a

particular type of convenience service or retail establishment, tend to

disperse evenly over the market region.

Certificate of occupancy Issued by the local building inspector certifying that a structure is
safe to occupy.

Chain of title

A set of deeds and other documents that traces the conveyance of the
fee, and any interests that could limit it, down from the earliest time
to the current owner.

Change date

The date the interest rate on an ARM is recomputed.

Chapter 7 bankruptcy

The traditional form of bankruptcy wherein the court simply

liquidates the assets of the debtor and distributes the proceeds to
creditors in proportion to their share of the total claims.

Chapter 11 bankruptcy

A court supervised work-out for a troubled business.

Chapter 13 bankruptcy

Similar to Chapter 11, but applies to a household, that allows the

petitioner to propose a repayment plan to the court.

Checks

A component of a grid system, defined as an area of 24 miles by 24

miles, used in a government rectangular survey.

Civil engineer

An engineer specializing in the design and construction of public

works such as roads, water systems, sewer systems, bridges, dams,
and water retention systems.

Closing

Event at which possession and title to real estate normally are

transferred from seller to buyer.

Closing costs

Sometimes called settlement costs, costs in addition to the price of a

property, usually including mortgage origination fee, title insurance,
attorneys fee, and prepayable items such as taxes and insurance
payments collected in advance at closing and held in an escrow
account until needed.

Coefficients

The calculated relationships between an independent variable and a

dependent variable in a regression equation. The coefficient also
takes into account the influence of other independent variables and
represents the marginal contribution of the explanatory variable to
the predicted value.

Collateral

Property pledged as security for a debt.

Commercial banks

Depository institutions primarily engaged in the business of making

short-term loans to businesses for inventory financing and other
working capital needs.

Commingled real estate

funds

A collection of investment capital from various pension funds that

are pooled by an investment advisor/ fund manager to purchase
commercial real estate properties.

Commission

Payment a real estate salesperson receives for services rendered,

usually expressed as a percentage of the property sale price and not
usually paid until the transaction is closed.

Common area
maintenance (CAM)

Expenses associated with a commercial property typically include

maintenance and repair costs, the cost of security personal and alarm
systems, as well as fees for the management of the common area.

Community development A quasi-governmental unit with broad powers to finance, create,

district (CDD) lien
operate and maintain infrastructure and related services within a
private development or community. The CDD can impose taxes or
assessments on the landowners, and can issue municipal, tax-exempt
bonds. Its board is elected by the community landowners, and its
activities are subject to full public disclosure.

Community property

The automatic right of husband and wife in property acquired by

their spouse during the marriage.

Community Reinvestment A congressional act that encourages mortgage originators to actively

Act of 1977
lend in their communities and that requires financial institutions to
evaluate the fairness of their lending practices.

Community shopping
center

A larger version of a neighborhood shopping center, this type of

center is often anchored by a discount department store.

Comparable properties

Properties similar to the subject property used in the sales

comparison approach to calculate a single indicated value for the
subject property.

Comparison activities

Goods and services whose optimal location pattern is clustering.

Compounding

Calculation of future values, given assumptions about the amount or

amounts invested and the interest rate that is paid on the invested
amounts.

Comprehensive plan

A local governments general guide to a communitys growth and

development based on the communitys goals and objectives.

Concentric ring model

Model created by E. W. Burgess that offered a concentric ring model

of urban form in which the center circle is the central business
district. Adjacent to it is a zone of transition which contained
warehousing and other industrial land uses. This was followed by a
ring of lower-income residential land use, followed by a ring of
middle-and upper-income land use.

Concessions

Lease clauses, such as free rent, that reduce the cost of the lease to
the tenant and therefore provide tenants with an incentive to lease
the space from the owner.

Concurrency

The requirement that public facilities and services, including roads,

sewers, and schools, be available at the same time new development
is completed.

Condemnation

The legal procedure involved with eminent domain, the right of

government to acquire private property, without the owners consent,
for public use in exchange for just compensation.

Condominium

An ownership form that combines a fee simple estate for ownership

of individual units and tenancy in common for ownership of
common areasdescribes an ownership form not a type of
construction.

Condominium bylaws

The official rules and regulations that govern condominium

ownership.

Condominium
declaration

The master deed creating or establishing the condominium

corporation.

Conduits

Agencies and private companies that pool mortgages and sell

mortgage-backed securities, using the pool of mortgages originated
or purchased as the collateral for the mortgage-backed security.

Conforming conventional A conventional loan that meets the standards required for purchase
loan
in the secondary market by Fannie Mae or Freddie Mac.

Consideration

Anything of value given to induce another party to enter into a

contract.

Constant maturity rate

A common index for ARM home loans. The one-year constant

maturity rate, for example, is the average of the market yield, found
by survey, on any outstanding U.S. Treasury debt having exactly one
year remaining to final repayment, regardless of original maturity.

Construction loans

Loans used to finance the costs associated with erecting the building
or buildings.

Construction manager

Person hired by developers to oversee day-to-day construction

activities.

Contract conditions

Specific requirements that must be satisfied by or for a party to a

contract. (See contract with contingencies.)

Contract for deed

A sales arrangement in which the actual delivery of the deed

conveying ownership will not occur until well after the buyer takes
possession of the property. This allows the seller to finance the sale
through installment payments and to have recourse to the property in
case of default by the buyer/ borrower.

Contract for sale

The legal document between a buyer and seller that states the
purchase price and other details of the transaction, and the detailed
manner in which ownership rights are to be transferred. Is generally
regarded as the most important contract in real estate.

Contract rent

The rent specified in the lease contract.

Contract terms

The detailed requirements of a fully enforceable contract, such as the

price, the down payment, any seller financing, provisions for
inspections, type evidence of title, type of deed, dates, and other
details of the transaction process.

Contract with
contingencies

An agreement for sale that makes the sale conditional on the buyers
obtaining something such as financing or a favorable engineering
report.

Convenience activities

Categorization of some types of urban services and products that

users seek to obtain the good or service from the closest available
source.

Conventional mortgages Mortgage loans that do not enjoy government backing in the form of
FHA insurance or a Veterans Affairs (VA) guarantee.

Cooperative

A form of individual ownership of apartments, the property is owned

by a corporation, of which each resident is a shareholder entitled to a
proprietary lease for a particular apartment.

Corrective maintenance

The ordinary repairs to a building and its equipment on a day-to-day

basis.

Correlated returns

Returns on one or more assets that generally move together when

market conditions change.

Correlation coefficient

A relative measure of the tendency of an assets return to vary with

that of another asset over time.

Correspondent
relationship

A business relationship in which a large lender agrees to purchase

loans or to consider loan requests from a mortgage banker or
mortgage broker.

Cost segregation

An income tax strategy separating personal property from real

property. Owners often do this because personal property can be
depreciated at accelerated rates if it can be separated from the real
property and other personal property.

Cost-of-funds index

An index for adjustable rate mortgages based on the weighted

average of interest rates paid for deposits by thrift institutions
(savings and loan associations and savings banks).

Covariance

An absolute measure of the tendency of an assets return to vary with

that of the returns on another asset over time.

Covenant against
encumbrances

A promise that the property is not encumbered with liens, easements,

or other such limitations except as noted in the deed.

Covenant of quiet
enjoyment

A promise that the property will not be claimed by someone with a

better claim to title.

Covenant of seizin

A promise that the grantor truly has good title, and that he or she has

the right to convey it to the buyer.

Covenants

Legally binding promises for which the grantor becomes liable.

Credit scoring

The statistical evaluation of borrower creditworthiness that has

largely replaced the use of credit reports and the subjective
examination of payment punctuality and debt balances.

Credit tenants

Companies whose general debt obligations are rated investment

grade by one or more of the U. S. rating agencies, such as Standard
and Poors and Moodys.

Credit unions

Depository institutions that are restricted by their charters to serving

a group of people who can show a common bond such as employees
of a corporation, government unit, labor union, or trade association.

Custodial maintenance

The day-to-day cleaning and upkeep required to maintain property

value and tenants.

Dealer property

Under U.S. income tax law, real estate held for sale to others.

Debt coverage ratio

(DCR)

A measure of the extent to which NOI can decline before it is

insufficient to service the debt, defined as net operating income over
debt service.

Debt yield ratio

A mortgage underwriting ratio for loans on income producing

property. The ratio is defined as property NOI divided by the
mortgage loan amount. It indicates the rate of cash flow to the loan
amount should the lender become the owner.

Declaration of covenants A document recorded in the public records together with the plat
map of a subdivision. It lists the restrictive covenants for the
subdivision.

Dedicate (dedication)

To convey certain lands of a subdivision to the local government.

Dedicated (property)

The conveyance of property from a private owner to government for

public use. Common examples are the dedication of streets, parks, or
other areas to local government in the course of subdivision
development.

Deed

A special form of written contract used to convey a permanent

ownership interest in real property.

Deed of bargain and sale See bargain-and-sale deed.

Deed of trust

An instrument used instead of a mortgage in some states. The

borrower conveys a deed of trust to a trustee, who holds the deed on
behalf of both borrower and lender. If the loan obligation is paid off
in accordance with the note, the trustee returns the deed to the
borrower. But if the borrower (trustor) defaults, the trustee exercises
his power of sale to dispose of the property on behalf of the lender.

Deed restrictions

Limitations imposed on the use of land and structures by clauses in a

deed.

Deeds in lieu of
foreclosure

A legal instrument issued by defaulting borrowers that transfers all

rights they have in a property to the lender. Does not necessarily
convey a clean title, just whatever interest the defaulting borrower
has at the time of conveyance.

Default

The consequence of prolonged delinquency; the failure of a

borrower to meet the terms and conditions of a note.

Defeasance clause

A clause that may be contained in commercial mortgages to protect

lenders from prepayments in a declining interest rate environment.
With defeasance, a borrower who prepays must purchase for the
lender a set of U.S. Treasury securities whose coupon payments
exactly replicate the cash flows the lender will lose as a result of the
prepayment of the mortgage.

Defeasance prepayment
penalty

See Defeasance clause.

Deferral benefits

The gain to the taxpayer from delaying the payment of income taxes
until the property is sold. This benefit is produced by the annual
depreciation deduction.

Deferred maintenance

Ordinary maintenance not performed at the time a problem is

detected.

Deficiency judgment

The legal right of lenders to file suit against borrowers when the
proceeds from a foreclosure sale do not fully pay off an outstanding
loan, as well as any late fees and charges.

Delivery

An observable, verifiable intent that the deed is to be given by the

grantor to the grantee.

Demand clause

A right that permits the lender to demand prepayment of the loan.

Dependent variable

The variable being explained in a regression equation.

Depreciable basis

Generally, the value of the acquired property, also called the original
cost basis, less the value of the land.

Depreciation

Annual deduction that allows investors to reduce the amount of

taxable income they report by an amount that is intended to reflect
the wear and tear on the property over time.

Depreciation recapture

The cumulative amount of depreciation that has been taken since the
property was placed into service. This amount is generally taxed at
the depreciation recapture tax rate when/if the property is sold.

Depreciation recapture
rate

The tax rate that is applied to the depreciation recapture portion of

the gain on sale when/if the property is sold.

Designated agent

In case a brokerage firm is agent for both a seller and a buyer, the
firm sometimes designates one salesperson to serve the buyer and
one to serve the seller. The two salespersons are presumed to
maintain the privacy, and serve the interest of the party they
represent.

Design-build

An approach to building large structures where the role of architect

and general contractor are merged into one.

Devised

Conveyance or distribution of a decedents real property through a

will.

Direct capitalization

The process of estimating the value of a property by dividing a

propertys annual net operating income by an overall capitalization
rate.

Direct market extraction Method of estimating the appropriate capitalization rate from
comparable property sales.

Discount points

Upfront financing costs charged by lenders to increase the yield on a

loan.

Discounting

The process for equating the value of future benefits from a real
estate investment to an equivalent current (present) value.

Discrimination in
housing

Federal and state laws prohibit discrimination in housing on the

basis of race, color, religion, national origin, sex, familial status, and
handicap.

Disintermediation

Reference to the occurrence of conditions when the growth of

deposits in banks and savings associations becomes negative, due to
other, more attractive, direct investment opportunities.

Diversifiable risk

Unsystematic risk that can be eliminated from a portfolio by holding

securities and other investments with less than perfectly correlated
returns.

Diversification

Allocating portfolio resources among alternative investments to

reduce the risk of the returns on the portfolio.

Doctrine of constructive
notice

A common law tradition stating that if a person is capable of

knowing about a claim or rule, then he or she can be bound by it.

Dominant parcel

A parcel that benefits from a servient parcel in an easement

appurtenant.

Dower

A common law provision that grants a wife a one-third life estate in

all of the real property of a decedent husband.

Dual agency

A situation in which a person or firm has an agency and fiduciary

relationship to both partiesseller and buyerof a transaction.

Due diligence

After a buyer and seller have agreed on a purchase price, the buyer is
provided time to verify the information that has been provided by
the seller. For example, the buyer will want to verify the magnitude
of certain operating expenses, the current rent charged to tenants, the
lack of environmental problems, etc. This process of kicking the
tires before final closing is the due-diligence process.

Due-on-sale clause

The clause in a mortgage document that requires the borrower to pay

off the loan in full if the property serving as security for the loan is
sold.

Early payment
mortgages

Loans where the borrower makes additional payments to reduce

outstanding principal more quickly than scheduled.

Earnest money

A cash deposit by a buyer at the time of the offer to establish

credibility of the offer, and to provide recourse to the seller if the
buyer reneges.

Easement

The right to use land for a specific and limited purpose. the subject,
or servient parcel may give use to an adjacent, dominant parcel

(easement appurtenant), or it may give use to persons or an

organization (easement in gross).

Easement appurtenant

A right of use that continues from owner to owner that involves a

relationship between two parcels of land: a dominant parcel that
benefits from a servient parcel.

Easement by estoppel

The right of use created if a landowner gives an adjacent landowner

permission to depend on her land.

Easement by
prescription

The acquisition of a right of easement by open, notorious, and

continuous assertion of the right, hostile to the subservient land
owners interest. The amount of time required to attain the right of
easement by prescription varies by state.

Easement by prior use

An implied right of use that allows the owner of a landlocked parcel

the right to use a previously existing path across another property for
access and egress.

Easement in gross

The right to use land for a specific, limited purpose unrelated to any
adjacent parcel.

Easement of necessity

A created implied right of use that allows the owner of a landlocked

parcel the right to use a path across another property for ingress and
egress.

Economic and
environmental impact
statements

Studies of the effect that a new development will have on the

economy or the environment of the region.

Economic base

The set of economic activities that a city provides for the world
beyond its boundaries.

Effective borrowing cost The true borrowing cost, including the effect of all up-front
financing costs. Is similar to the annual percentage rate but allows
for the effect of early payoff.

Effective gross income

The total annual income the rental property produces after

subtracting vacancy losses and adding miscellaneous income.

Effective gross income

multiplier

The ratio of the sale prices to the annual effective gross income of
the income-producing property.

Effective rent

See equivalent level rent.

Effective tax rate (income The percentage amount by which income taxes reduce the going-in
taxes)
IRR on a property acquisition or development.

Effective tax rate

(property taxes)

The tax liability divided by the propertys market value or sale price.

Elective share

Provision that gives a surviving spouse a share of most of the wealth

of the decedent.

Electrical engineer

An engineer specializing in the design and construction of electrical

systems for production and distribution of power, and in electrical
circuitry generally.

Elements of comparison

The relevant characteristics used to compare and adjust the sale

prices of the comparable properties in the sales comparison
approach.

Eminent domain

The power of government in to take private property for a public

purpose by paying the owner just compensation.

Encroachment

Unauthorized intrusion of a building or other improvements onto

property owned by another.

Equal Credit Opportunity This act prohibits discrimination in lending practices on the basis of
Act (ECOA)
race, color, religion, national origin, sex, marital status, age, or
because all or part of an applicants income derives from a public
assistance program.

Equitable title

The right of someone to obtain full, legal title to real estate, provided
the terms and conditions of the document creating equitable title
(usually a contract for sale) are fulfilled.

Equity dividend rate

The capitalization rate for equity. It is derived by dividing the

before-tax cash flow by the value of the invested equity capital.
Sometimes referred to as the propertys dividend rate/yield, also the
cash-on-cash return.

Equity of redemption

A period of time allowed by courts in every state that grants

delinquent mortgage borrowers the opportunity to make overdue
payments and come current on the mortgage before foreclosure is
complete.

Equity REITs

Real estate investment trusts that invest in and operate incomeproducing properties.

Equivalent level rent

The fixed monthly payment that has the same present value as the
actual lease payments after concessions or expenses reimbursement
revenue over the same term.

Errors and omission

insurance

A type of insurance that indemnifies professionals if they make an

error in their profession or if they omit something important from
their analyses.

Escrow

The status of real estate transactions that are closed through the help
and intercession of a third party, called an escrow agent. The deed is
delivered to the escrow agent for delivery to the buyer on
performance of a condition (payment of the purchase price).

Escrow account

A segregated account held by brokers for the deposit of earnest

money (deposit) funds. Also, a trust account of a lender used to pay
for property taxes, hazard insurance, or other items on behalf of a
borrower.

Escrow agent

A person or company that performs the closing function for a fee;

escrow agents collect all needed documents and funds for
disbursement at the closing.

Escrow clause

Requires a mortgage borrower to make monthly deposits into an

escrow account.

Estate

Interests in real property that include possession.

Estimated closing costs

An estimate of all the costs to be incurred at a real estate closing.

Most commonly, the estimate is provided by a lender, in accordance
with the requirements of the Real Estate Settlement Procedures Act.

Evidence of title

Substantiation that demonstrates that good and marketable title is

being conveyed as part of a real estate transaction. Two main forms
accepted are abstract with attorneys opinion, and title insurance
commitment.

Exceptions and
reservations clause

A clause in a deed that can contain a wide variety of limits on the

property interest conveyed.

Excess deductions

The amount by which allowable tax deductions (including

depreciation) exceed the rental income generated by the property.

Exclusionary zoning

Zoning that tends to exclude lower-income groups and is prohibited.

Exclusive agency listing

An agreement between a seller of property and a broker in which the

seller agrees to pay a commission to the broker if anyone other than
the owner finds a buyer, during the period of the agreement.

Exclusive right of sale

listing

An agreement between a seller of property and a broker in which the

broker is assured of receiving a commission if the broker or anyone
else, including the owner, finds a buyer during the period of the
agreement.

Exculpatory clause

Loan provision that releases the borrower from liability for

fulfillment of the contract.

Expansion option

Lease clause that obligates the property owner to find space for the
tenant to expand the size of their leased space.

Expected value

The weighted average of a series of potential outcomes weighted by

their associated probabilities.

Expense stop

A clause often found in commercial leases that requires landlords to

pay property operating expenses up to a specified amount and
tenants to pay the expenses beyond that amount. The expense stop is
usually stated in a per square foot amount.

External obsolescence

Losses of property value caused by forces or conditions beyond the

borders of the property. The losses are deducted from a buildings
reproduction cost in the cost approach to estimating market value.

Externalities

The unaccounted effects that a land use imposes on surrounding

parcels.

Extraterritorial
jurisdiction

Control by a community of an area larger than the community or

jurisdiction for planning and zoning purposes, granted by the state
legislature, which allows local governments to plan and control
urban development outside their boundaries until annexation can
occur.

Fallout risk

The potential loss of borrowers from the origination pipeline if

mortgage interest rates decline after the loan commitment, but before
the closing of the loan, which results in borrowers choosing not to
close (take down) the loan.

Fannie Mae

Government-sponsored enterprise; one of the largest purchasers of

residential mortgages in the secondary market.

Fast-track construction

An approach to construction wherein actual construction begins

before design and building specifications are complete.

Federal Housing
Administration (FHA)

A government-sponsored housing finance agency that operates in the

primary market by providing a default insurance program, as well as
other housing programs and initiatives.

Fee simple absolute

An estate in land that provides the owner with a complete set of

legal rights, limited only by the powers of government.

Fee simple conditional

Ownership that is subject to a condition or trigger event.

Fee simple estate

The complete ownership of a property; may be either absolute or

conditional.

FHA mortgage insurance Government-sponsored mortgage insurance that protects lenders

from any loss after foreclosure and conveyance of title to the
property to the U.S. Department of Housing and Urban
Development (HUD). Insurance premium is paid by the mortgage
borrower.

Fiduciary relationship

The special duties and obligations to a principal required of an agent,

including complete loyalty, confidentiality, obedience, disclosure,
accounting, care, skill, and due diligence.

Final adjusted sale price The price paid for a comparable property in the sales comparison
approach, adjusted for all conditions and characteristics to
approximate the subject property and the current date.

Financial intermediaries Institutions that bring together depositors and mortgage borrowers.

Financial risk

The risk NOI will be less than debt service.

Fixtures

Personal property that becomes real property by virtue of its

permanent attachment to the realty.

Flat rent

Describes a lease where the rental rate is fixed for the entire term.

Flex space

Industrial space that is often built without fancy lobbies or fixtures

that can be used for storage or for simple offices and that can be
converted from one use to another relatively inexpensively.

Floating-rate mortgage

A debt instrument whose interest rate changes over the life of the
loan based on a market index such as the prime rate or LIBOR.

Floor loan

In financing of large-scale building construction, a minimum level of

loan that is granted until certain progress points in construction and
leasing are achieved. Then the loan is increased.

Foreclosure

A process to force the public sale of property to satisfy the financial

obligations of a delinquent borrower to a lender. The legal purpose is
to terminate ownership claims, and any subordinate liens, so that
title can go to a buyer.

Forward commitment

A contract binding a mortgage lender or investor to purchase or fund

a loan on predetermined terms at a future date.

Freddie Mac

A government-sponsored enterprise and, along with Fannie Mae, one

of the largest purchasers of residential mortgages in the secondary
market.

Freehold

Estate interests in real estate having unlimited duration; titled

interests.

Functional obsolescence

Losses in value of a building relative to its reproduction cost because

the building is not consistent with modern standards or with current
tastes of the market.

Funds from operations

(FFO)

Net (accounting) income, plus tax depreciation, plus amortization of

leasing commissions and tenant improvements. Is considered a
better measure of a REITs cash flow than accounting income.

Future value

The value of money in some period beyond time zero.

Garden apartments

These developments have a relatively low density of development

and are located in suburban and nonurban areas where land is less
expensive than in urban areas.

General agent

One who is empowered to represent a principal, often a business

firm, in its business relationships. A general agent can contract and
bind the principal within the confines of the business or employment
relationship.

General contractor

Usually a construction company that has responsibility for seeing

that all aspects of construction are completed on time and within
budget.

General lien

A security interest or lien that arises out of actions unrelated to

ownership of the property.

General partnerships

An ownership form characterized by multiple owners, unlimited

liability for each equity holder, and flow through taxation of both
taxable income and cash distributions.

General warranty deed

Highest form of deed in which the grantor becomes liable for all
possible covenants, or legal promises, assuring good title.

Geographical information Computerized methods for analyzing data about communities using
systems (GIS)
various maps and combinations or layers of maps.

Going-in cap rate

The overall capitalization rate; the ratio of the first-year net

operating income to the overall value (or purchase price) of the
property.

Going-out cap rate

The ratio of the estimated net operating income in the year following
sale to the overall value of the property at the time of sale. (See
Terminal capitalization rate.)

Government National
Mortgage Association
(GNMA)

A federal government agency that guarantees mortgage-backed

securities issued by private FHA and VA lenders.

Government-sponsored
enterprises

A term that refers to Fannie Mae, Freddie Mac, and several other
less important government entities created by acts of Congress to
promote an active secondary market for home mortgages.

Graduated rent

Describes a lease that calls for prespecified increases in the contract

rental rate.

Grant deed

A deed containing an implied promise that the grantor actually has

title and that it is not encumbered in any way, except as described in
the deed. A grant deed is very similar to a warrantee deed. It is the
predominant form of deed used in California.

Grantee

The recipient of a conveyance of a real property interest.

Grantor

The person or entity conveying the real property interest to the

grantee.

Gross floor area

The gross floor area of a shopping center is equal to the total gross
leasable area, plus the square footage of the common areas.

Gross leasable area

The standard for measuring retail space, the GLA is simply the sum
of the space occupied by the tenant, and is therefore similar to the
usable area of office tenants.

Gross lease

Lease in which the landlord pays all operating expenses of the

property.

Ground lease

Leases of vacant land or of the land portion of an improved parcel of

real estate.

Growth moratorium

A temporary prohibition of further development in a community or

jurisdiction.

Habendum clause

Clause in a deed that defines or limits the type of interest being

conveyed.

Hard costs

Amounts of capital committed in development projects to materials,

labor, and other tangible or nonservice inputs.

Highest and best use

The use of a property found to be (1) legally permissible, (2)

physically possible, (3) financially feasible, and (4) maximally
productive.

High-rise apartment
buildings

Buildings of at least 10 to 15 stories.

Holding period

Length of time an investment is held prior to sale or disposal.

Home equity loans

Second mortgages, used to finance home improvements and other

purchases, where homeowners can borrow against the accumulated
equity in the home.

Home Mortgage
Disclosure Act of 1975

An act of Congress that discourages lenders from avoiding, or

redlining, certain neighborhoods in a manner related to minority
composition.

Home Ownership and

Equity Protection Act

An act of Congress that addresses abusive, predatory practices in

subprime lending and sets a trigger annual percentage rate (APR)
and fee levels at which loans become subject to the laws
restrictions.

Homestead exemption

A provision in some states that allows specified taxpayers (usually

owners of their principal full-time residences) to apply for a
deduction of a certain amount from the propertys assessed value in
calculating the annual property tax liability.

Hospitality property

Property classification that includes hotels, motels, and many types

of restaurants.

Housing expense ratio

A ratio used to assess the ability of a borrower to pay debt; defined

as the monthly payment of principal and interest on the loan plus
monthly payments into an escrow account toward property taxes and
hazard insurance divided by the borrowers gross monthly income.

Hybrid ARM

An adjustable rate mortgage loan that provides for an initial period

of fixed interest charges, hence fixed payments, before the interest
rate becomes adjustable. The fixed interest rate period typically
ranges from three to ten years.

Impact fee

A fee charged by a community and paid by a developer that is

commensurate with the externalities created by a development.
Intended to cover the developments impact on such things as roads,
sewer systems, schools, and police and fire protection.

Implied easement

A right of use not created by an explicit deed or explicit clause in a

deed. It often is created when a subdivision map is placed in the
public records.

Improvements on the
land

Any fixed structures such as buildings, fences, walls, and decks.

Improvements to the
land

The components necessary to make the land suitable for building

construction or other uses and includes infrastructure, such as
streets, walkways, utilities, storm water drainage systems, and other
systems that may be required for land use.

Income capitalization

The process of converting periodic income into a value estimate.

Independent variables

Variables in a regression equation that are believed to partially

explain variations in the dependent variable.

Index rate

A market-determined interest rate that is the moving part in an

adjustable interest rate.

Index rent

See Indexed lease.

Indexed lease

With an indexed lease, rent increases are tied to changes in a

regularly reported index. For example, the rental rate on a lease
indexed to the consumer price index (CPI) may increase 4 percent in
the second year of the lease if the CPI rose 4 percent during the first
year of the lease.

Indicated value

The final value estimate for the subject property resulting from
application of one of the major approaches in the appraisal process.

Industrial property

Property classification that includes warehouses and structures that

house light manufacturing.

Industry economies of
scale

The growth of an industry within a locality that creates special

resources and cost advantages for that industry.

Inflation risk

The risk that general inflation in the economy will be greater than or
less than expected.

Institutional-grade real
estate

Larger, more valuable commercial properties, generally well over

$10 million, targeted by institutional investors, such as pension
funds and foreign investors. These investments are generally located
in the 50 to 60 largest U.S. metropolitan areas.

Insurance clause

Requires the borrower/mortgagor to maintain property casualty

insurance acceptable to the lender, giving the lender joint control in
the use of the proceeds in case of major damage to the property.

Intangible assets

Nonphysical assets such as patents and copyrights.

Intercept

The base value estimate in a regression assuming that all of the

explanatory variables are set equal to zero.

Interest

Rent or a charge paid for the use of money. Interest may also refer to
the bundle of rights held by owners of real property.

Interest rate risk

The risk that changes in the general level of interest rates will affect
the pricing of all securities and investments.

Interest-only amortizing A mortgage loan that is interest only for some years, perhaps ten or
mortgage
fifteen, after which the payment increases to an amount sufficient to
fully amortize the loan in the remaining term.

Interest-only balloon
mortgage

A mortgage loan that is interest only for its full term and then must
be refinanced or paid off in full.

Interest-only loans

Loan alternative in which borrowers pay only interest over the life of
the loan, and then completely repay the principal in one installment
at loan maturity.

Interlease risk

The risk associated with the replacement of a tenants first lease with
another lease of uncertain terms and conditions.

Intermediaries

In real estate investment, third party specialists who use their

expertise and knowledge to invest and manage funds on behalf of
clients.

Internal rate of return

(IRR)

The rate of interest (discount) that equates the present value of the
cash inflows to the present value of the cash outflows; that is, the
rate of discount that makes the net present value equal to zero.

Internal Revenue Service Created by Congress to collect federal income taxes and to clarify
(IRS)
and interpret tax rules and regulations.

Internet marketing

Use of the Internet to advertise real estate services, to market

properties, and to provide information about specific properties.
While few properties are sold exclusively through the Internet, it has
become a central tool to real estate marketing today.

Intestate

Conveyance of a decedents property without a will.

Inverse condemnation

A suit by a landowner to force a government to resort to eminent

domain under the argument that regulation has effectively taken the
full value of a property.

Investment

Any decision that involves incurring significant costs in the present

for the right to receive future benefits. An outlay of money or
something of value for uncertain income or profit.

Investment-grade
property

Synonymous with institutional-grade real estate, large, relatively

new and fully leased commercial properties located in major
metropolitan areas, generally well over $10 million, targeted by
institutional investors, such as pension funds and foreign investors.

Investment property

Asset, as defined in the U.S. Internal Revenue Code, owned

primarily for earning an investment returnespecially capital
appreciationas opposed to an asset that is held for use in ones
trade or business. Raw land and developed lots are real estate
examples of investment properties.

Investment risk

The possibility that future cash flows or nonmonetary costs and

benefits will differ from expected values.

Investment value

The value of the property to a particular investor, based on his or her

specific requirements, discount rate, expectations, and so on.

Investment yield

The growth in the invested dollars of an investment. Usually stated

as a percentage growth or return.

Joint tenancy

A form of co-ownership in which two or more owners hold equal

shares and have equal rights of possession. The surviving partners
divide the interests of a deceased partner.

Joint venture

Generally, an association of two or more persons or firms in order to

carry out a single business project. In real estate, often a business
partnership formed between a lender and a developer or investor to
develop or purchase a specific property or properties.

Judicial deed

A deed issued through a court-ordered proceeding.

Judicial foreclosure

The process of bringing the property of delinquent borrowers to

public sale that involves court action. Proceeds from the foreclosure
sale are used to pay off, to the extent possible, the borrowers
creditors.

Jumbo loans

Nonconforming loans that exceed the maximum loan amount for

purchase by Fannie Mae or Freddie Mac. Because these loans cannot
be purchased by one of the GSEs, they usually carry a slightly
higher interest rate.

Just compensation

Payment to an owner for property taken in condemnation

proceedings, usually the market value of the property taken by the
government.

Land

Commonly used to refer to a parcel that does not include any

structures but may include some improvements to the land.

Land acquisition loans

Loans to finance the purchase of raw land; perhaps the most risky of
real estate loans.

Land development loans Loans to finance the installation of the on-site and off-site
improvements to the land that are necessary to ready the land for
construction.

Land planner

In land development, lays out the basic map for use of the land,
including location of roads, utilities, structures, water retention
areas, and other elements.

Landscape architect

An architect specializing in planning the arrangement of trees, other

plantings, and placement of other harmonizing objects on land.

Usually the focus is designing the grounds for a building or group of
buildings.

Late fees

Fees assessed for standard home loans when payments are received
after the 15th of the month the payment is due. Also found in
commercial mortgages.

Law of agency

The legal rights, duties, and liabilities of principal, agent, and third
parties as a result of the agency relationship between them.

Law of descent

The laws and procedures controlling how a state will convey a

decedents estate among the heirs if no will exists.

Leased fee estate

The bundle of rights possessed by the landlord in a leased property,

made up primarily of the right to receive rental payments during the
lease term and ultimately to repossess the property at the end of the
lease term.

Leasehold (estate)

The interest or rights of a lessee or tenant in a leased property,

including the possessory interests that are a temporary conveyance
of the rights of exclusion, use, and enjoyment, but not the right of
disposition. The tenant receives these rights in exchange for the
payment of rent.

Legal life estate

A life estate created by the action of law.

Legal title

Ownership of property; for real estate, a lawful claim, supported by

evidence of ownership.

Lenders yield

The implied discount rate, or internal rate of return, on a loan

given all of the cash inflows and outflows on the loan to the lender.

Level-payment mortgage A fully amortizing loan with equal periodic payments.

Leverage

The use of mortgage debt to help finance a capital investment.

Levered cash flows

The propertys net rental income after subtracting any payments due
the lender.

LIBOR

A common index of interest rates for income producing property, the

London Interbank Offering Rate is a short-term interest rate for
loans among foreign banks based in London.

License

The permission to use anothers land for a specific and limited

purpose.

Licensing laws

State laws that authorize persons who meet specified qualifications

to engage in a business or profession.

Lien

An interest in real property that serves as security for a loan

obligation. In case of default the holder of the lien is entitled to have
the property sold to satisfy the debt.

Lien theory

Legal theory that interprets a mortgage as a lien rather then a

temporary conveyance of title.

Like-kind exchange

A popular method of deferring capital gain taxes which allows

owners, under certain circumstances, to exchange their properties for

another and avoid paying capital gain taxes at the time of the
transaction.

Limited liability company A hybrid form of ownership that combines the corporate
(LLC)
characteristics of limited liability with the tax characteristics of a
partnership.

Limited partnership

A partnership in which one party (the general partner) assumes

unlimited liability in exchange for control of all material decision
making. The limited partners enjoy liability that is limited to the
extent of their equity contributions to the entity. All parties involved
benefit from flow-through income and taxation; that is, the
partnership is not taxed.

Linkages

The attractions or important access needs that one land use has for
other land uses.

Liquidity

The ability to sell an asset quickly for fair market value.

Liquidity risk

The risk that an owner will not be able to sell an asset quickly for its
fair market value.

Listing contract

An agreement between an owner of real estate and a real estate

broker that obligates the broker to attempt to sell the property under
specified conditions and terms. It obligates the property owner to
pay a commission to the broker if the broker is successful in
obtaining a ready, willing, and able buyer for the property on terms
specified or on terms acceptable to the seller.

Load factor

Another name for the ratio of rentable to usable area in an office

building. The factor is multiplied by the tenants usable area to

determine rentable area.

Loan balance

The outstanding principal balance on a loan. Will always be equal to

the original balance if the loan is an interest-only loan. Declines over
time if the loan is self amortizing.

Loan commitment

A written agreement that commits the lender to make a loan to the

borrower provided the borrower satisfies the terms and conditions of
the commitment.

Loan constant

The annual debt service on a loan divided by the initial amount of

the loan.

Loan servicing

All actions and activities associated with administering a mortgage

loan, including collection of payments, monitoring insurance and tax
obligations, and notification of delinquent borrowers. This function
is often provided by an entity different from the entity that owns the
mortgage.

Loan underwriting

Involves an analysis by the lender of the riskiness of the promised

mortgage payments. Requires analysis of the potential borrowers
willingness and ability to make scheduled mortgage payments.

Loan underwriting
process

The process by which a prospective borrower submits a formal loan

application and the lender analyzes all relevant information and
decides whether or not to commit to the loan.

Local economic activities Activities in a city that serve the local businesses and households.

Location quotient

The ratio between the percentage of employees in a certain type of

work or job classification in a community and the percentage of

employees in that same type of work or job classification nationally.
If the ratio exceeds 1 it indicates the activity is a base economic
activity.

Lockout provision

A mortgage clause or provision prohibiting prepayment of the

mortgage for a specified period of time after origination.

Low-income housing

Housing targeted to households with low or moderate incomes.

Lump sum

A one-time receipt or expenditure occurring in a given period.

Macroeconomic risk
factors

Risk factors or variables that can potentially affect the values and
returns on all properties in all markets.

Management agreement The agreement that forms the basis for the relationship between the
property owner and the property management firm.

Management risk

Risk that a property will not be effectively managed, causing a

reduction in net cash flows and returns.

Margin

The markup, typically two to three percentage points, over and

above the index rate, which is charged on adjustable rate mortgages.

Market conditions

The relationship between supply and demand for a particular type of

real estate in a local market at a specified point in time.

Market parameters

Critical summary features such as occupancy rates, rental rate

growth, or sales rates, that characterize a real estate market.

Market rent

The rent that could be obtained by renting a property on the open

market.

Market risk factors

Risk factors or variables that cannot be diversified away. Also called

systematic risk factors.

Market segmentation

Identification and delineation of submarkets.

Market value

The price a property should sell for in a competitive market when

there has been a normal offering time, no coercion, arms-length
bargaining, typical financing, and informed buyers and sellers.

Marketability study

An analysis of how best to bring a product or service to the market.

It considers characteristics of the product or service in relation to the
needs of potential customers and which marketing channels are most
likely to produce the desired results.

Marketable title

Title to real property that is free of reasonable doubt.

Marketable title laws

State laws intended to limit the number of years that title search
must reach back through the title chain.

Market-adjusted normal Normal sale price adjusted for changes in market conditions
sale price
between the date of sale and the date of appraisal of the subject
property.

Maturity imbalance
problem

Situation faced by banks, thrifts, and other financial institutions in

which long-term assets are funded with short-term liabilities.

Mechanical engineer

An engineer specializing in the design and construction of heating,

ventilating, and air-conditioning systems, and in other kinds of
mechanical systems.

Mechanics liens

Liens that arise from construction and other improvements to real

estate.

Metes and bounds

Method of describing real estate in which a mete is a unit of measure

(foot, mile) and a bound is a boundary marker. Essentially, a
sequence of directed distances that are the boundaries of the
property.

Metropolitan statistical
area (MSA)

An MSA is comprised of one or more urban counties, identified as a

single labor market area, centered around a city with at least 50,000
in population.

Mezzanine loans

A method of obtaining additional leverage on top of a traditional

first mortgage. This debt is secured by the pledge of an equity
interest in the borrowers partnership or businessit usually is not
secured by a lien on the property.

Microeconomic risk
factors

Risk that is specific to a particular property or local market and that

is controllable by the owner/ investor. This risk can be diversified
away in a portfolio.

Midmonth convention

Tax rule that assumes the acquisition of an income producing

property occurs on the 15th day of the month, regardless of the
actual acquisition date.

Midrise apartment
buildings

Apartment buildings that range in height from four to nine stories.

Millage rate

The dollars of tax per $1,000 of property value. For example, a

millage rate of 20 means that a person owning a property having an
assessed value of $100,000 would pay 20 100 = $2,000 in tax.

Mills

Units used to state the amount of property tax assessment; the

number of dollars per $1,000. Twenty mills means $20 per each
$1,000.

Mineral rights

Rights to the subsurface, including rights to oil, gas, coal, and other
substances that are mined, and can be separated from land
ownership.

Miniperm loan

A loan from an interim lender that provides financing for the

construction period, the lease-up period, and for several years
beyond the lease-up stage.

Mixed-asset portfolio

A portfolio that contains a variety of types of assets; for example,

stocks, bonds, and real estate.

Monthly loan constant

A loan payment factor used to determine payments on a level

payment, fixed rate loan.

Mortgage

A lien on real property as security for a debt. A special contract by

which the borrower conveys to the lender a security interest in the
mortgaged property.

Mortgage assumption

When buyers take over payments of mortgages of sellers and

become personally liable by creating a note in their name.

Mortgage bankers

Full-service mortgage companies that process, close, provide

funding, and sell the loans they originate in the secondary mortgage
market, and service loans for loan investors.

Mortgage brokers

An intermediary between those who demand mortgage funds and

those who supply the funds. Brokers arrange mortgage loans for a
fee, but do not originate or service the loans.

Mortgage insurance
premium (MIP)

Upfront insurance premium required by FHA insured loans.

Mortgage joint venture

A relationship between developers and others who supply all or most

of the funds in the form of loans to develop properties that will be
used in their business or enter their portfolios.

Mortgage menu

The many types of residential loans offered by originating lenders to

residential borrowers. The menu includes the cost of the various
mortgage items, including the contract interest rate and number of
upfront discount points and origination fees.

Mortgage pipeline

An originating lenders approved, but currently unfunded, loan

commitments plus loans funded but unsold.

Mortgage REITs

Real estate investment trusts that purchase mortgage obligations and

effectively become real estate lenders.

Mortgagee

The lender, who receives the mortgage claim.

Mortgage-equity rate
analysis

Estimation of an overall capitalization rate by calculating a weighted

average of the capitalization rate for debt (mortgage constant) and
the capitalization rate for equity (equity dividend rate). The weight is
determined by the percentage that each component (debt and equity)
is of the total investment.

Mortgagor

The borrower or grantor of the mortgage claim.

Multifactor asset pricing Models for determining required discount rates that assume there are
model
several sources of macroeconomic (nondiversifiable) risk in the
economy for which investors must be compensated in the form of a
higher going-in internal rate of return.

Multifamily property

Residential property classification that includes apartments.

Multinuclei city

Phrase coined by Harris and Ullman in a landmark study that

described the effects of the motor vehicle, combined with new
technologies of production, that released the city from its absolute
ties to the CBD.

Multiple listing service

(MLS)

Sharing of property sales listings by a number of real estate brokers

with an agreement as to how costs and commissions are to be
shared.

Multivariate regression
analysis (MRA)

A statistical procedure used to examine the relationship between a

dependent variable and multiple independent, explanatory,
variables.

Mutual Mortgage
Insurance Fund

The depository for FHA insurance premiums and the source of

reimbursement for lenders in the case of foreclosure losses on FHAinsured properties.

NAREIT index

A value-weighted index that tracks the total return patterns of all

exchange listed REITs. Produced by the National Association of
Real Estate Investment Trusts.

National Association of
Realtors

A principal trade or professional organization of real estate brokers.

Members agree to abide by a code of ethics.

Natural vacancy rate

The proportion of potential gross income not collected when the use
(rental) market is in equilibrium.

NCREIF Property Index A measure of the historical performance of income properties held
by pension funds and profit-sharing plans. Produced quarterly by the
National Council of Real Estate Investment Fiduciaries.

Negative amortization

Occurs when the loan payment is not sufficient to cover the interest
cost and results in the unpaid interest being added to the original
balance, causing the loan amount to increase.

Neighborhood shopping
center

Located for the convenience of a nearby resident population, this

type of center contains retail establishments offering mostly
convenience goods. Typically it is anchored by a supermarket.

Net asset value

Equal to total market value of a REITs underlying assets, less

mortgages and other debt.

Net income multiplier

A cash flow multiplier calculated as the acquisition price divided by

the net operating income.

Net lease

Lease in which the tenant pays some or all of the operating expenses
of the property in addition to rent.

Net listing

Type of contract in which sellers specify the amount they will accept
from the sale, with brokers keeping all proceeds in excess of that
amount.

Net operating income

(NOI)

The type of income to a property used in direct capitalization,

calculated by deducting from potential gross income vacancy and
collection losses and adding other income to obtain effective gross
income. From this amount all operating expenses are subtracted,
including management expense and a reserve for replacements, or
capital expenditures, and other nonrecurring expenses.

Net present value (NPV) The difference between the present value of the cash inflows and the
present value of the cash outflows.

Net sale proceeds

The expected selling price less selling expenses.

New urbanism

School of planning thought that seeks to revive residential

neighborhood features of the preautomobile era, including
sidewalks; houses with front porches located close to streets; narrow,
grid pattern streets; and supporting nonresidential services
interspersed within neighborhoods.

Nonamortizing

Loans that require interest payments but no regularly scheduled

principal payments.

Nonbasic employment

Jobs that are not involved in the production of goods or services that
will be exported outside of a community. These are usually jobs
involved in serving local residents. Examples are barbers,
beauticians, most retail, real estate and insurance salespersons, and
local bankers.

Nonconforming
conventional loan

A conventional loan that does not satisfy one or more underwriting

standards required for purchase in the secondary market by Fannie
Mae and Freddie Mac.

Nonconforming use

A land use inconsistent with current zoning classification, but which

is permitted to remain because it predated the current zoning. To be
allowed to remain, the use must be uninterrupted, and the property
structures cannot be substantially improved.

Nonjudicial foreclosure

A process of bringing the property of defaulting borrowers to public

sale by the lender or a trustee, outside of the court system. It must
follow statutory guidelines, particularly concerning public notices of
the sale.

Nonmonetary

The nonfinancial costs and benefits of an investment decision.

Nonrealty items

Items of personal property.

Nonrecourse loans

Loans that relieve the borrower of personal liability but do not

release the property as collateral for the loan.

Normal sale price

The transaction price of a comparable property adjusted for

nonmarket financing and non-arms-length bargaining (conditions of
sale).

Note

The document (contract) defining the exact terms of a debt

obligation and the liability of the borrower for the obligation.

Officers deed

Same as definition of executors deed.

Open listing

Agreement between the seller of property and a broker that provides

for the broker to receive a commission if he or she sells the property.
No exclusive protection is provided to the broker.

Open-end construction
loan

A situation in which a forward commitment has not been obtained to

repay the construction loan.

Operating expense
escalation clause

A commercial lease clause in which increases in one or more

operating expenses, relative to a base year, become the financial
responsibility of the tenant.

Operating expense ratio

A measure of annual operating costs, defined as operating expenses

divided by effective gross income.

Operating expenses

The expenses that are necessary to operate and maintain an income

producing property.

Opportunity cost

The return the investor is forgoing on an alternative investment of

equal risk in order to invest in the asset under consideration. Said
differently, it is the return the investor could earn on his next best
alternative of similar risk.

Option

The right, but not the obligation, to do something, such as buy a

property, within a certain time.

Option ARM

An adjustable rate mortgage loan that offered the borrower a variety

of payment choices. The choices typically included a payment to
fully amortize (pay off) the loan in 15 years, one to fully amortize
the loan in 30 years, an interest-only payment, and a payment at an
artificially low level such that unpaid interest was added to the
outstanding balance each month. The loan often began with a below
market interest rate for a few months.

Option contract

Sets a time over which developers may buy property at a specified

price.

Ordinary annuity

A fixed amount of money received every period for some length of

time.

Ordinary life estate

Estate in which the property owner retains all rights of exclusive

possession, use, and enjoyment for life while a subsequent owner
holds a remainder interest that follows the life estate.

Ordinary tax rate

The rate of tax applied to taxable income that is not deemed to be

capital gain income or depreciation recapture income.

Original cost basis

The total costs paid to acquire the property including land, building,
personal property, and other acquisition costs such as lawyer fees,
brokerage commissions, and so on.

Outlet center

A variation of specialty shopping centers that generally sell namebrand goods at lower prices.

Overall capitalization

The type of capitalization rate used in direct capitalization,

rate

calculated by dividing comparable properties net operating incomes

by their selling prices.

Overall caps

Caps on adjustable rate mortgages that limit interest rate changes

over the life of the loan.

Overall rate (of return)

Another common name for the overall capitalization rate.

Overall rate of direct

capitalization

An overall capitalization rate estimated directly from actual

transactions for comparable properties.

Ownership structure
risk

The effect that the chosen form of ownership can have on the risk
and return ultimately earned by the investors.

Par value

The remaining balance, or outstanding principal amount of a debt.

Partially amortizing

A loan alternative in which the outstanding principal is partially

repaid over the life of the loan, then fully retired with a larger lump
sum balloon payment at maturity.

Passive activity income

IRS classification of income that includes all income generated from

trade and business activities such as rental real estate.

Passive activity loss

restrictions

IRS rules that, in general, allow losses from passive activities, which
includes all rental properties, to be used only to offset income from
other passive investments.

Patent

Special type of deed that conveys title to real property owned by

government to a private party.

Payment caps

Protects the borrower against the shock of large payment changes; it

is possible for the interest rate to increase enough that the resulting
payment increase will not cover the additional interest cost.

Pension funds

Retirement savings accounts that now represent a major source of

equity capital in commercial real estate markets.

Percentage rent

The amount of rent paid by a retail tenant in addition to the base

rent. It generally is a percentage of tenant store sales above a
prespecified threshold level.

Performance standard

An approach to land use control that addresses concerns for urban

systems such as traffic, watershed, green space, air quality or other
aspects of the environment through limits to detrimental activities.

Periodic caps

Provisions in adjustable rate mortgages that limit change in the

contract interest rate from one change date to the next.

Periodic tenancy

Any lease agreement that automatically renews each period until

either party gives notice of termination.

Permanence potential

The preference to lease residential units to households whose prior

history indicates a probability of a long-term occupancy.

Permanent loan

Long-term mortgage financing.

Personal liability

Liability assumed by borrowers that allows lenders to sue them

personally for fulfillment of the contract.

Personal performance
(contract)

A contract that requires a service or action on the part of one party.

This includes leases and mortgage loans, for example, which require
regular payments. Generally, these contracts are not fully assignable
in that the lessee or mortgagor remains liable for the obligation.

Personal property

Objects that are moveable and not permanently affixed to the land or
structure, including furniture and tenant fixtures that are often
purchased in conjunction with real property acquisitions.

Personal residence

An owner-occupied housing unit.

Personal rights

Personal freedoms derived primarily from the Bill of Rights and

other amendments and clauses of the U.S. Constitution.

Physical deterioration

Loss of value of a building from its reproduction cost, resulting from

wear and tear over time.

Piggyback loan

In home mortgage lending, a second mortgage loan created

simultaneously with creation of a first mortgage loan, the latter
having a loan-to-value ratio of no more than 80 percent. The
piggyback second mortgage enables a buyer to achieve greater
than 80 percent financing without incurring mortgage insurance on
the first mortgage.

Pipeline risk

The time between making a loan commitment and selling the loan.
The mortgage banker is exposed to considerable risk during this
period.

PITI

The monthly payment of principal and interest on a home mortgage

loan, plus monthly payments into an escrow account toward annual
property taxes and hazard insurance.

Planned unit development A development project, often involving a mixture of land uses and
(PUD)
densities not permitted by normal zoning. It is allowed because the
entire development is viewed as an integrated whole.

Plat books

Register of recorded plat maps maintained by a city or county which

shows boundaries, shapes, and sizes of land parcels.

Plat lot and block

number

An unambiguous means to provide a description of property that

identifies each parcel in a surveyed map of a subdivision.

Plottage value

Value added to land by assembling small parcels into larger tracts.

Police power

Right of government to regulate personal activity and the use of

property to protect the health, welfare, and safety of the population.

Polychlorinated biphenyls Cancer causing chemicals formerly used in the manufacture of

(PCBs)
electrical connectors and equipment.

Portfolio income

An IRS classification of income generated from securities such as

stocks and bonds. Income directly obtained from rental real estate
activities is not considered portfolio income.

Portfolio lenders

Financial institutions such as banks that fund mortgage loans and

then hold the loans as investments.

Portfolio perspective

Viewing real estate investments in the context of an owners other

assets and overall situation.

Potential gross income

The total annual income the property would produce if it were fully
rented and had no collection losses.

Power of sale

Mortgage provision that grants the authority to conduct foreclosure

to either the lender or a trustee. Enables nonjudicial foreclosure.

Power shopping center

These centers typically contain three or more giants in hard goods

retailing (for example, Wal-Mart and Home Depot). The dominating
feature of a power center is the high ratio of anchor tenants to
smaller tenants.

Prepayment penalties

Charges, designed to discourage prepayment, incurred when a

mortgage is repaid before maturity.

Present value

The value of future cash flows at time zero.

Preventive maintenance

A program of regular inspections and care to avert potential

problems.

Primary mortgage
market

The loan origination market where borrowers and lenders negotiate

mortgage terms.

Prime mortgage

Referring to qualifying home mortgages. The specific use of the

term varies. Some use prime to refer to loans where the borrower has
a FICO score of 660 or higher. Others also include FHA and VA

mortgage loans. Still others distinguish prime by the type of lender.

Principal

In brokerage, the person giving authority to an agent; in finance, the

amount borrowed and owed on a loan.

Principal meridian

A line of geographic reference that runs north and south in a

government rectangular survey.

Private grants

Conveyance of property from one private owner to another.

Private mortgage
insurance (PMI)

Insurance offered by private companies that reimburses the lender

for capital losses in the event of default by the borrower.

Pro forma

A cash flow forecast prepared to facilitate discounted cash flow

analysis.

Probability distributions The distribution of all potential outcomes and their associated
likelihood.

Probate

State law that governs the disposition procedure of the conveyance

of real property upon the death of a property owner.

Promissory note

A note indicating the terms of a financial agreement.

Property

Anything that can be owned, or possessed. It can be either a tangible

asset or an intangible asset.

Property adjustments

Five sale price adjustments made to comparable property

transactions prices: location, physical characteristics, economic
characteristics, use, and nonrealty items.

Property management

Direction of the day-to-day operations of properties.

Property managers

Individuals in charge of the day-to-day operations of a property.

Property rights

Rights in property that include (exclusive) possession, use

(enjoyment), and disposition.

Property tax lien

Automatic lien placed by local governments to assure payment of

property taxes.

Proprietary lease

A lease of indefinite length in which the lessee pays expenses but not
rent, associated with a cooperative.

Pro rata share

An amount proportionate to the ownership interest of an investor.

Prorating

Allocation of costs and revenues between buyer and seller of real

property at closing, based on the time of ownership by each party.

Psychographics

A data intensive, multivariate statistical approach for sophisticated

determination of market segmentation.

Public purpose

In eminent domain cases, expansion by courts of the public use

concept, no longer requiring actual physical use by the condemning

agency to justify condemnation.

Public use

In eminent domain, requirement of actual physical use by the

condemning agency to justify condemnation.

Purchase-money
mortgage

A mortgage created simultaneously with conveyance of ownership.

Typically, where the seller lends part of the purchase price of a
property to the purchaser, but also used to refer to any mortgage
used to finance a purchase.

Qualified mortgage QM

A class of home mortgages created by the Dodd-Frank Act aimed to

assure very high ability to repay. Generally, QMs must be fully
amortizing within 30 years, with limited fees. Underwriting
requirements include a maximum debt-to-income ratio and carefully
qualified income and assets. QMs afford the lender special
protection against legal defenses in foreclosure.

Qualified residential
mortgage QRM

A special class of Qualified Mortgages which financial institutions

will be able to securitize and sell without retaining a portion of the
credit risk. With non-QRM, financial institutions will be required to
retain at least five percent of credit risk if the loans are securitized
and sold.

Quiet enjoyment

In leasing, once the owner has conveyed possession of the property

to the tenant, the owner must provide the tenant with uninterrupted
use of the property without any interference that may threaten the
tenants leasehold interest in the property. In conveyance of title, the
assurance that no one holds a claim to title superior to that of the
grantee, and that the grantor will defend the title claim of the
grantee.

Quitclaim deed

Deed that conveys an individuals property rights to another but has

none of the covenants of the warranty deed.

R 2 statistic

Coefficient of multiple determination that measures how well a

regression model fits the data.

Radon

A naturally occurring radioactive gas found in soils in most parts of

the country. In large concentrations, the gas may contribute to or
cause cancer.

Range line

A feature of a government rectangular survey that separates

townships by east and west.

Rate lock agreement

An agreement in which a loan applicant pays a nonrefundable

deposit to protect against an interest rate increase before the loan is
closed.

Raw land

Land that does not include structures or any improvements.

Real asset

Tangible objects that have value because they are useful.

Real estate

The tangible assets of land and buildings; the bundle of rights

associated with the ownership and use of the physical assets; and the
industry, or business activities, related to the acquisition, operation,
and disposition of the physical assets.

Real estate commission

Appointed commission responsible for overseeing the

implementation and administration of a states real estate license
law. It usually is empowered to grant, revoke, or suspend licenses,
and otherwise discipline real estate brokers operating in the state.

Real estate investment

trusts (REITs)

A corporation or trust that uses the pooled capital of many investors

to purchase and manage income property (equity REIT) and/or
mortgage loans (mortgage REIT).

Real Estate Settlement

and Procedures Act
(RESPA)

A federal law requiring lenders to provide information on all costs

associated with closing a residential loan within three business days
of the loan application, to use the HUD-1 closing statement, to limit
required escrow deposits, and to avoid kickbacks on loan-related
services.

Real property

Rights associated with ownership of land and all permanent

attachments to land.

Reconciliation

The process of forming a single point estimate from two or more

numbers. It is used widely in the appraisal process. For example, in
the sales comparison approach to develop a single indicated value
from several final adjusted sale prices of comparables, and in final
reconciliation to develop a final estimate of value from two or more
indicated values.

Reconstructed operating A statement of property income and expenses formatted for the
statement
purposes of appraisal and investment analysis. Differs from typical
management operating statement in the treatment of certain
expenses, including management fees, mortgage payments, and
vacancy and collection losses.

Recorded plat map

See Plat books.

Recording

Filing of a document with the appropriate public official or office in

order to provide constructive notice to the public of a sales
transaction or legal contract.

Recording statutes

State laws requiring documents that convey an interest in real

property to be placed in the public records in order to be binding on
the public.

Recourse loans

Loans in which the borrower has personal liability and the lender has
legal recourse against the borrower in case of default.

Recovery fund

Reserve of funds collected from real estate license fees to pay for
losses to clients legally judged to have been caused by a licensed
salesperson or broker. The existence of such funds varies from state
to state.

Redlining

Term used to describe when mortgage lenders avoid certain

neighborhoods without regard to the merits of the individual loan
applications.

Regional shopping
center

These centers are focused on apparel and discretionary merchandise,

and have at least two anchor tenants that are major department
stores.

Regulatory taking

Under precedents of the U.S. Supreme Court, the degree of land

regulation that is considered to constitute effective taking of the
property. If this degree of regulation is reached, the government
must compensate the property owner for loss of value.

Rehabilitation

The restoration of a property to satisfactory condition without

changing the floor plan, form, or style of the structure.

Reinvestment risk

The risk that lenders will need to reinvest the remaining loan balance
at a lower rate when borrowers prepay mortgages with above-market
rates.

Release of liability

A document by which a lender releases a borrower from personal

liability on a note.

Reliction

Receding water line that leaves dry land to be added to an adjacent

landowners property.

Relocation option

Generally, a lease clause that gives the property owner the option to
relocate a tenant within a shopping center or office building,
provided the new space is of similar size and quality and provided
the owner agrees to pay all reasonable moving costs.

Remainder estate

The ownership interest subsequent to a life estate which, upon the

death of the life estate owner, becomes a fee simple absolute interest.

Remodeling

Actions resulting in changes to the floor plan, form, or style of a

structure to correct functional or economic deficiencies.

Renewal option

Lease clause that gives the tenant the right, but not the obligation, to
renew the lease.

Rentable area

The office tenants usable area, plus his or her prorated share of the
common areas.

Rentable/usable (R/U)
ratio

The ratio of total rentable area to total usable area. Will be greater
than 1 in office buildings.

Repeat-sale analysis

Estimation of the rate of property appreciation through statistical

examination of properties that have sold twice during the sample

period. Normally, the analysis is by statistical regression.

Replacement cost

The cost to build a new building of equal utility to an existing

building that is not an exact physical replica of the existing building.

Reproduction cost

The cost to build a new building that is exactly like an existing

building in every physical detail.

Rescind (rescission)

The termination of a contract by cancellation. Under the Truth-inLending Act, a borrowers right to cancel a non-purchase loan
contract within three days that is secured by his or her principal
residence.

Reserve for replacements An allowance in a cash flow forecast to reflect an annual allocation
for periodic replacements, releasing expenses, or tenant
improvements.

Restricted appraisal
report

Provides a minimal discussion of the appraisal with large numbers of

references to internal file documentation. If the client just wants to
know what the property is worth and does not intend to provide the
appraisal to anyone for use or reference, a restricted report may be
sufficient.

Restrictive covenants

See deed restriction.

Reverse mortgage

An arrangement where the lender agrees to pay money to an elderly

homeowner, either regularly or occasionally, and to be repaid from
the homeowners equity when he or she sells the home or obtains
other financing.

Reversion

The cash proceeds from sale.

Reverter

An uncertain interest held by the previous owner (or heirs)

associated with a conditional fee.

Right of first refusal

Commercial lease clause that grants the tenant first choice to lease
space in a property should it become available.

Right of prepayment

The right to retire a mortgage before maturity. The right of

prepayment will depend on the law of the state where the property is
located and on the particular mortgage contract.

Right of survivorship

The rights of surviving partners in a joint tenancy to divide the

interests of a deceased partner.

Riparian rights

The rights of adjacent landowners to bodies of nonnavigable waters.

Risk

The possibility that actual outcomes will vary from what was
expected when the asset was purchased.

Risk-adjusted discount
rate

The discount rate used by potential investors to value risky cash

flows. Must reflect the relative riskiness of the asset/property being
valued.

Risk-weighted assets

The sum of an institutions portfolio assets weighted by their

appropriate risk classification, used to determine regulatory capital
requirements for depository institutions.

Rule of capture

The owner of an oil or gas well could claim all that is pumped from
it, regardless of whether the oil or gas migrated from adjacent
property.

S corporation

Corporate ownership structure that provides limited liability. It is

not, however, a separate taxable entity; hence, income and losses
flow through taxation to stockholders.

Sale-leasebacks

As a method of financing needed real estate, a property owner/user

simultaneously sells the property to a buyer and leases the property
back from the buyer.

Salesperson license

Authority granted by a state to engage in the real estate brokerage

business as an employee or agent of a real estate broker.

Sandwich lease

A sublet arrangement in which the initial lessee collects rent from

the new lessee and pays rent to the landlord under the original lease
agreement.

Savings and loan

associations (S&Ls)

Historically, a highly specialized home mortgage lending depository

institution. Today, S&Ls range in character from mortgage lending
specialists to being very similar to commercial banks.

Savings banks

Historically empowered with wider investment powers than S&Ls,

the two institutional forms are virtually indistinguishable today.

Second mortgage

Like the first mortgage lien, a second mortgage is secured by the

borrowers property that has been pledged as collateral for the loan.
However, the lender holding a second mortgage is second in line
behind the holder of the first mortgage to receive the sale proceeds
from a foreclosure sale. Thus, the second lender is in a more risky
position.

Secondary mortgage
market

The market where mortgage originators can divest their holdings,

and existing mortgages are resold.

Section

A specifically surveyed and identified square mile within the

framework of the rectangular survey system.

Section 203 loan

The most widely used FHA program, covering single-family home

mortgages insured by the FHA under Title II, section 203 of the
National Housing Act.

Section 1231 property

Trade or business property held for more than one year, as classified
in Section 1231 of the Internal Revenue Code.

Sector model

Model of urban form proposed by Homer Hoyt that is characterized

by radial corridors or wedges, particularly for higher income
residential land use.

Securitized investments

Investment instruments that pool investment assets, enabling

investors to purchase a share in the pool of assets.

Self-contained appraisal Includes all the detail and information that were relevant to deriving
report
market value or the other conclusions within the report. Most selfcontained appraisal reports use the narrative reporting option. The
narrative appraisal report is the longest and most formal format for
reporting and explaining appraisal conclusions and contains a stepby-step description of the facts and methods used to determine
value. Self-contained narrative reports are typical in appraisals of
major income-producing properties.

Selling expenses

Costs associated with the disposition of a property.

Separate accounts

An investment manager acting on behalf of multiple clients holds

each clients assets in a separate account rather than as part of a
commingled fund to permit customized investments for each client.

Separate property

In community property states, property that the husband or wife

acquired prior to the marriage, or gifts or inheritance received during
the marriage.

Servient parcel

A parcel that is constrained or diminished by an easement

appurtenant.

Sheriffs deed

Same as definition of executors deed.

Single-factor asset pricing A model for determining required risk-adjusted rates of return that
model
classifies investment risk into only two categories, systematic (or
macroeconomic) and property-specific (or microeconomic).

Sinking fund factor

The amount that must be deposited periodically at a specified

interest rate, for a specified time period, to accumulate to $1.00 at
the end of the period.

Site plan

Map showing the arrangement of structures, parking, streets, and

other features of a development or subdivision project.

Smart growth

Planning philosophy that embraces revitalization of existing

communities, compact design, walkable neighborhoods, sense of
place, preservation of open spaces and critical environment,
community involvement in development.

Soft costs

A component of construction cost including the cost of permits, legal

fees, financing and insurance fees, architectural and design costs,
other professional fees, and the cost of marketing.

Soils engineer

An engineer specializing in the analysis of soils and soil loadbearing capacity, and in determining adequate footing and
foundation requirements for a structure.

Sole proprietorship

Ownership structure where all cash flow and income tax

consequences flow through directly to the individuals income tax
return, thereby avoiding taxation at the entity level.

Special agent

A person to whom a principal has granted authority to handle a

specific business transaction or to perform a specific function. Real
estate brokers and salespersons are special agents.

Special assessments

Property taxes levied to finance special improvements to benefit

adjacent property owners. For example, property owners in a
subdivision could be forced to pay for the installation of sanitary
sewers.

Special warranty deed

Identical to a general warranty deed except that the covenant against

encumbrances applies only to the time that the grantor owned the
property.

Specialty shopping
center

These centers are characterized by a dominant theme or image and

many are located in downtown areas or rehabilitated historic
structures. Outlet centers are a variation of this theme.

Specific lien

An interest that derives directly from events related to a property,

such as property tax and assessment liens, mortgages, and
mechanics liens.

Specific performance

A legal action brought in a court of equity, compelling a party

defaulting on a contract to carry out the exact requirements of the
contract rather than, for example, settling for damages.

Sprawl

A term applied pejoratively to many aspects of suburban

development. A relatively restrictive use of the term refers to
unregulated real estate development outside of central urban areas,
and to leap-frog development.

Spread

The difference between the expected yield on an investment and the

yield on a riskless Treasury security with a comparable maturity.

Standard deduction

The amount of deductible expenses, specified by Congress, that a

taxpayer may claim in lieu of itemizing allowable personal
expenditures.

Standard deviation

A measure of the dispersion of a distribution around its expected

value, defined as the square root of the variance.

Standard error (SE)

The standard deviation of the sampling distribution of a statistic,

such as an estimated mean value, or a regression coefficient.

Standby forward
commitment

In mortgage lending, forward commitments where the mortgage

banker has the right, but not the obligation, to sell a prespecified
dollar amount of a certain loan type at a prespecified price to the
seller of the commitment.

Statement of condition

A document signed by the tenant of a residential property before

moving in that lists any prior damage to the unit.

Statute of Frauds

Provision adopted by all states requiring that all deeds, long-term

leases and mortgages must be in writing to be enforceable. Derives
from the original Statute of Frauds in 1677.

Statutory redemption

See Statutory right of redemption.

Statutory right of
redemption

In foreclosure, this is the right afforded the defaulting mortgagor to

recover the foreclosed property for a period of time after foreclosure
sale by paying the full amount of the defaulted loan plus legal costs
of the foreclosure. This right is not available in all states. In states
where it exists, it ranges for a few days to several years.

Structural engineer

An engineer specializing in the design of buildings and other

structures that are efficient for their purpose, while meeting
standards of sturdiness and safety.

Subagency

The agency role of a broker is extended to one or more additional

brokers, who also become a fiduciary of the principal and are
empowered to act on his or her behalf. The subagent shares any
commission with the original broker. This agency chain can extend
through multiple agents in the case of multiple-list services.

Subchapter S
corporation

Corporate ownership structure that is a federal tax election made

with the unanimous consent of the shareholders. An S corporation
possesses the same limited liability benefits for its shareholders as
do C corporations but it is not a separate taxable entity.

Subcontractor

Companies or individuals who provide specialized construction

activities, such as installation of heating, ventilating, and airconditioning systems, elevator systems, painting, carpet installation,
and a multitude of other building components.

Subject property

The property for which an appraisal of fair market value is produced.

Subject to

When a buyer acquires a property having an existing mortgage loan

and begins making the required payments without assuming personal
responsibility for the note.

Subjective probability
distribution

For a set of possible outcomes of an uncertain event, an opinion or

guess as to the likelihood of each possible outcome.

Sublease

Occurs when the original tenant transfers a subset of his or her rights
under the lease to another tenant, although the original tenant
(lessee) continues to be obligated for payments.

Submarket

Segment or portion of a market in which all of the properties are

considered to be close substitutes by a relatively homogeneous
group of potential buyers; properties that provide similar utility or
satisfaction.

Subordination
agreement

A contract by which a party holding a superior claim agrees to make

it subject to a previously inferior claim. Commonly used to reverse
the priority of mortgage liens.

Subprime loans

Loans made to homeowners who do not qualify for standard (prime)

home loans. Subprime loans can have high fees, and costly
prepayment penalties that lock in the borrower to a high interest
rate.

Summary appraisal
report

This report summarizes the conclusions of the appraisal. The

majority of the data and techniques used in the appraisal are kept in
the appraisers work file. Most summary appraisal reports use the
form reporting option. Forms reports are much shorter than
narrative reports, and their frequent standardization creates
efficiency and convenience. Form reports are generally required by
mortgage lenders when households are purchasing or refinancing a
singlefamily home.

Superregional malls

These shopping centers have as many as five to six major tenants

and hundreds of minor tenants.

Survey (of land)

Process of accurately establishing the boundaries of a parcel of real

estate.

Syndicate

A group of persons or legal entities who come together to carry out a

particular investment activity.

Systematic risk

Risk that cannot be diversified awayeven in a large portfolio. This

type of risk results from exposure to macroeconomic risk factors.

Take-out commitment

Agreement, issued by a long-term lender, to disburse the permanent

loan proceeds when construction of a project has been completed
according to specifications.

Tangible assets

Physical things, such as automobiles, clothing, land, or buildings.

Tax assessor

The local public official in charge of determining the taxable value

of property in the jurisdiction as the basis for property taxation. In
some states this official is called the county property appraiser.

Tax base

All of the taxable properties in a jurisdiction.

Tax certificates

Obligations for unpaid taxes sold by taxing jurisdictions in order to

collect the amount of unpaid taxes. The property owner, in order to
redeem (take back) the property, or any future purchaser of the
property, must pay off the tax certificates to obtain title to the
property.

Tax depreciation

The reduction in annual taxable income, in accordance with IRS

rules, intended to reflect the wear and tear that income properties
experience over time.

Tax rate (property tax)

The number of dollars of property tax divided by the taxable value

of the properties. The percentage that, when multiplied by a
propertys taxable value, will yield the tax liability.

Taxable value

The assessed value less any applicable exemptions, to determine the

amount of property tax owed.

Tax-exempt properties

Properties against which local jurisdictions may not levy taxes,

usually including churches, synagogues, public schools, and
government property.

Teaser rate

The initial interest rate on an adjustable rate mortgage if it is less

than the index rate plus the margin at the time of origination.

Tenancy at sufferance

A tenancy that occurs when a tenant that is supposed to vacate does

not, but continues to pay rent, and the landlord accepts it.

Tenancy at will

A tenancy granted by landlords to tenants allowing them to remain

in possession without written agreement.

Tenancy by the entireties A form of joint tenancy ownership for husband and wife.

Tenancy for years

A leasehold interest for a definite period of time exceeding one year.

Tenancy in common

The normal form of direct co-ownership, which is as close to the

fee simple absolute estate as is possible, subject to the provision that
one owner cannot use the property in a manner that infringes on the
rights of co-owners.

Tenant improvement
allowance

The amount of funding the owner of commercial property must

provide toward the cost of refurbishing the space to meet the tenants
needs.

Tenant mix

The synergism created by the right grouping of tenants that results in

the right mix of tenants that makes the whole greater than the sum
of its parts.

Tenant reps

Brokers or agents that specialize in helping tenants find suitable

space to lease.

Term for amortization

Time period that determines the payment, and the schedule of

interest and principal payments on a mortgage.

Term to maturity

Term found in a balloon loan that determines when the entire

remaining balance on the loan must be paid in full.

Terminal capitalization
rate

Rate used to convert annual net cash at the end of an expected

holding period into an estimate of future sale price. (See Going-out
cap rate.)

Terminal value

The sale price at the end of the expected holding period.

Terms

See Contract terms.

Testate

Conveyance of real property upon the death of a property owner in

accordance with a will.

Thrifts

Depository institutions that evolved primarily to collect and invest

household savings. Usually the term encompasses (former) savings
and loan associations and savings banks, but not credit unions.
Thrifts invested largely in home mortgage loans, and for well over a
century, until about 1980, were the backbone of home mortgage
finance in the United States.

Tier line

A feature of a government rectangular survey that serves to number

townships south or north from the base line.

Timesharing

Property occupancy arrangement in which multiple individuals have

use of property but, unlike traditional forms of co-ownership, the
interests are at different time intervals rather than simultaneous. A
timesharing arrangement may involve true co-ownership, leasehold
interests, or simply permission to occupy (i.e., license).

Time value of money

(TVM) techniques

Standard techniques for quantifying the effects of time and risk on

value.

Title abstract

The compilation of all documents summarizing the chain of title into

a chronological volume and then given to an attorney for final
interpretation.

Title abstract with

attorneys opinion

Traditional evidence of title.

Title insurance

Insurance paying monetary damages for loss of property from

unexpected superior legal claims or for litigation to protect title.
Deemed superior to the traditional abstract with opinion as evidence
of title since it offers insurance, in addition.

Title insurance
commitment

A commitment to issue a title insurance policy. One of the two

primary forms of evidence of title.

Title search

The task of examining the evidence of title in the public records.

Title theory

Lender receives title to the mortgaged property that ripens upon

default.

Torrens certificate

A rarely used means of providing evidence of title.

Total debt ratio

One of two common ratios used by home mortgage lenders to

determine a borrowers ability to pay a debt; defined as PITI and
other long-term obligations divided by the borrowers gross monthly
income.

Township

A unit within the government rectangular survey system having an

area of six miles by six miles, and containing 36 fully described, one
square mile sections.

Toxic waste

Hazardous materials such as asbestos, fiberglass, lead paint, radon,

PCBs, leaking underground storage tanks, and the like.

Trade fixtures

Personal property usually paid for by the tenant that may be

removed by the tenant at lease expiration.

Trade or business
property

Under Section 1231 of the Internal Revenue Code, real estate held
for more than one year in a trade or business activity, including most
income producing property.

Transaction broker

One who facilitates a real estate transaction but who is not an agent
of either buyer or seller. A transaction broker is required to deal
honestly and fairly with both parties and to exercise skill, care, and
diligence in carrying out his or her duties.

Transaction price

The prices observed on sold properties.

Transactional
adjustments

In an appraisal, adjustments to comparable property transaction

prices that concern the nature and terms of the deal.

Trustee

In mortgage lending, person who holds the deed on behalf of both

the borrower and lender in a deed of trust.

Trustees deed

A deed issued by the trustee in a court-supervised disposition of

property, for example by an executor and administrator of an estate,
a guardian of a minor, a bankruptcy trustee, or possibly by an
attorney in divorce proceedings.

Truth-in-Lending Act
(TILA)

A federal law requiring lenders to provide residential loan applicants

with estimates of the total finance charges and the annual percentage
rate (APR).

Turnkey

Refers to a project where the owner or builder makes a property

ready for the occupant to immediately move in and begin business.

Umbrella partnership
REIT (UPREIT)

An organizational structure in which a publicly traded REIT owns a

fractional interest in an operating partnership, which in turn, owns
all or part of individual property partnerships.

Uniform Standards of
Professional Appraisal
Practice (USPAP)

Rules governing the appraisal process and reporting of appraisals

that are developed by the Appraisal Standards Board of the Appraisal
Foundation. Appraisers are obligated by law to follow these rules
and guidelines.

Universal agent

One to whom a principal delegates the power to act in all matters

that can be delegated in place of the principal.

Unlevered cash flows

The expected stream of NOIs and the expected net sale proceeds
(NSP). This represents the income-producing ability of the property
before subtracting the portion of the cash flows that must be paid to
the lender to service or retire the debt.

Unsystematic risk

The variation in portfolio returns that can be eliminated by holding

securities and other investments with less than perfectly correlated
returns. Results from exposure to microeconomic risk factors.

Up-front financing costs

Cost incurred by the property owner to obtain mortgage financing,

including loan origination fees, discount points, appraisal fees, and

survey. On a rental property investment, these costs are amortized
over the life of the loan for tax purposes.

Urban service area

An area delineated around a community within which the local

government plans to provide public services and facilities and
beyond which urban development is discouraged or prohibited.

Usable area

The area of an office building that is in the sole possession of the

tenant.

User markets

Potential occupants, both owner occupants and tenants, or renters

competing for physical location and space.

VA-guaranteed loan

A government-guaranteed loan designed to help veterans obtain

home mortgage loans for which they might not otherwise qualify.

Variance (statistics)

A measure of the dispersion of an ex ante distribution probability

around its expected value or the dispersion of historical (realized)
cash flows or returns around the mean value.

Variance (zoning)

A permitted deviation for a particular property from the applicable

zoning requirements. To be granted only when the zoning ordinance
imposes undue hardship to the property owner.

Veterans Affairs (VA)

A U.S. government Department whose purpose is to help veterans

readjust to civilian life.

Warehouses

Provide space for the temporary storage of goods.

Warehousing

The provision by commercial banks of short-term funds to mortgage

banking companies to enable them to originate and fund mortgage
loans until they can be sold in the secondary mortgage market.

Words of conveyance

Early in the deed will be words such as does hereby grant, bargain,
sell, and convey unto. . . . that serve to assure the grantor clearly
intends to convey an interest in real property and indicates the type
of deed offered by the grantor.

Yield maintenance
prepayment penalty

A mortgage loan prepayment penalty computed as the present value

of interest income to be lost by the lender due to the early
prepayment. The idea is to make whole the lender. Yield
maintenance penalties are found strictly in loans on incomeproducing properties.

Zoning

Regulation of land use by dividing the community into various

residential, commercial, industrial and other districts. The districts
are further differentiated by maximum building density.