The ABCs of Real Estate

Acre: A parcel of land that measures 43,560 square feet. Call: An option to buy a specific security at a specified price within a
designated period of time.
Ad Valorem Taxes: Property taxes on the assessed value of property.
Capital Expenditure: The cost of an improvement made to extend the
Adjustable Rate Mortgage (ARM): A mortgage in which the interest useful life of a physical asset, such as property, or to add to its value.
rate is adjusted periodically according to a pre-selector index. The terms,
adjustment schedule, and index to be used can be negotiated by the Capital Improvement: Any permanent improvement to real property that
borrower and lender. Specific types include the renegotiable rate mortgage adds to its value and useful life.
and the variable rate mortgage. Also referred to as a Canadian rollover
mortgage. Capitalization Rate (Cap Rate): Used to determine capitalized value, this
rate is the percentage rate of return an investor can expect. It is the net
All-Inclusive Trust Deed (AITD): An alternative to refinancing the entire operating income of the property divided by the sales price or value of the
loan when a borrower needs additional funds, this technique involves the property expressed as a percentage.
creation of a subordinate mortgage that includes the balance due on the
existing mortgage(s) plus the amount of the new secondary or junior lien. Cash on Cash Return: The rate of return on an investment measured by
the cash returned to the investor based on the investor’s cash investment
Annual Percentage Rate (APR): The percentage relationship of the total without regard to income tax savings or the use of borrowed funds. It
finance charge to the amount of the loan. The Term is used in the Truth in equals the annual dollar income divided by the total dollar investment,
Lending Act. expressed as a percentage.

Apportionment: A pro-rate division and distribution of prepaid or accrued Certificate of Occupancy: Written authorization given by a local
taxes, prepaid insurance premiums, prepaid rents and other income and municipality to a builder or renovator that allows a newly completed or
expenses. Apportionment usually occurs when a property is sold, and is substantially completed structure to be occupied.
the manner of determining the amounts due to or from each party.
Certificate of Title: A written statement of opinion furnished by an
Appurtenance: Any tangible or intangible item attached to the land and abstract or title company or an attorney after a search of the public land
thus part of the property, such as a building (tangible) or an easement and tax records stating that the title to a piece of property is legally vested
(intangible). in the present owner.

Assemblage: The process of acquiring adjacent parcels of land in order to Chattel Mortgage: An agreement between a secured party and a debtor
combine them into a single site for development. creating a security interest in personal property.

Assessor: A public official who evaluates property for the purpose of Conventional Mortgage-Backed Securities (CMBS): Securities whose
taxation. underlying pool of mortgages have no federal guarantees or insurance.

Assignee: The person of corporation to whom an agreement or contract Commitment: An agreement, often in writing, between a lender and a
is assigned. One to whom real property, or an interest in real property, is borrower to loan money at a future date subject to compliance with stated
transferred to set over. conditions.

Assignment of Rents: An agreement between the property owner and Commitment Fee: Any fee paid by a potential borrower to a potential
mortgagee that transfers to the mortgagee the right to collect rents from lender for the lender’s promise to lend money at a specified date in the
tenants in the event of a default by the owner. future. The lender may or may not expect to fund the commitment/

Assumption Fee: The fee paid to a lender (usually by the purchaser of real Compensating Balance: A demand deposit usually required by a
property) resulting from the assumption of a mortgage. commercial bank as a condition for extending a line of credit or a loan.

Assumption of Mortgage: Assumption by a purchaser of the primary Completion Bond: A bond furnished by a mortgagor to guarantee
liability for payment of an existing mortgage or deed of trust. The seller completion of construction.
remains secondarily liable unless specifically released by the lender.
Coupon Rate: The annual interest rate of debt instrument expressed as a
Avulsion: The sudden tearing away of land by the violent action of a river percentage of its face value, or principal.
or other body of water.
Covenant: A legally enforceable promise or restriction. For example, in a
Balloon Mortgage: A mortgage with periodic installments of principal and mortgage, the borrower may covenant to keep the property in good repair
interest that do not fully amortize the loan. The balance of the mortgage is and adequately insured against fire and other casualties. A buyer who
due in a lump sum at a specified date in the future, usually at the end of breaches such a covenant may be subject to foreclosure.
the term.
Debt Coverage Ratio: The ratio of effective annual net income to annual
Basis Point: This term describes the amount of change in yield in many debt service. This ratio often is used as a criterion for underwriting income
debt instruments, including mortgages. It is equal to one one-hundreth of property mortgage loans.
one percent.
Deed in Lieu (of foreclosure): A deed given by a mortgagor to a
Blanket Mortgage/Blanket Trust Deed: A mortgage on more than one mortgagee to satisfy a debt and avoid foreclosure.
parcel or unit of land. Blanket mortgages frequently are incurred by
subdividers or developers who have purchased a single tract of land for Defeasance Clause: The clause in a mortgage that gives the mortgagor
the purpose of dividing it into smaller parcels for sale or development. the right to redeem property upon the payment to the mortgagee of the
obligation due.
Book Value: The capitalized cost of an asset, less depreciation taken for
accounting purposes, based on the method used for the computing of Density: The ratio between the total land area and the number of
depreciation over the useful life of the asset. residential or commercial structures to be placed upon it. Density usually
is regulated by local ordinances.
Discounted Cash Flow (DCF): The method of applying an appropriate Internal Rate of Return (IRR): A method of determining the annualized
discount to cash to be received in the future to arrive at the present value effective compounded return rate on an investment over time assuming
of those future earnings. The discount rate used, generally the appropriate a set of income, expense, and property value conditions as well as risk. It
cost of capital, incorporates the risk level of future cash flows. combines the present worth of the right to receive future income streams
with the present worth of the right to receive a particular profit when the
Easement: A right granted to another person to use your land for a specific property is sold.
purpose. Most commonly, easements are granted to public utility and
telephone companies for the purpose of running lines on or under the Kick-Out Clause
property or to neighbors for the purpose of using a common driveway. • Lease: A clause in the lease that permits a tenant to cancel a lease if
the landlord fails to comply with stated conditions or standards.
Eminent Domain: The right of government bodies, public utilities, and • Purchase: A clause that protects the buyer by providing that upon the
public service corporations to take private property for public use on occurrence of some triggering event prior to the deal closing (e.g.,
payment of its fair market value. This may occur, for example, if a state or seller’s acceptance of a new offer) that the buyer has a specific period
locality wants to widen a highway. of time to act (e.g., by matching the terms of the new offer) to avoid
being “kicked out” of the contract. The clause must specify precisely
Encumbrance: Anything that affects or limits the fee simple title to what the seller must do to invoke its rights under it.
property, such as mortgages, leases, easements, or restrictions.
Life Estate: An estate whose life is limited to the life of an individual. Upon
Escalator Clause: A provision in a lease whereby real estate tax increases that person’s death, the property passes to a beneficiary, who retains
imposed on the lessor are passed along to the lessee as additional rent. the use and possession of the property, but may not sell it. The estate is
terminated upon death of the beneficiary.
Estoppel Certificate: A written statement setting forth certain facts
about a piece of real estate, such as the precise amount of indebtedness Loan to Value Ratio (LTV): The relationship of a mortgage to the
remaining. appraised value of a security as calculated by dividing the loan balance
of a property by its market value. This ratio is expressed to a potential
Exculpatory Cause: A clause in contract holding one party harmless in purchaser of property in terms of the percentage a lending institution is
the event of some default. In a lease, the exculpatory clause relieves the willing to finance.
landlord of liability for the personal injury to tenants or damage to tenants’
property. In a mortgage, it allows the borrower to surrender the property to Lock-in Period: There are two common definitions for this term:
the lender without personal liability for the loan. • The portion of the term of a mortgage load during which the loan cannot
be prepaid.
Flip-flop: A technique in partnership agreements for allocating • A set period of time, generally 60-90 days, during which a mortgagor
disproportionately high profits and loss from a project to the cash investors agrees to hold the mortgage rate and points payable by the borrower to
until a certain point in time, then switching (in a “flip-flop”) to a different the rate quoted when the application was taken.
allocation more favorable to the developer. Example: The investors have a
90 percent interest and the developer has 10 percent interest in profit and Mechanics Lien: A legal claim securing priority of payment for work
losses for the first 20 years, after which they shared 50-50. contracted for a performed and material furnished by a mechanic or other
person for the construction or repair of a building. The lien attaches to the
Floor Area Ratio (FAR): The ratio of the total floor area of a building to the land as well as any buildings and improvements. The landowner does not
total area of the site. Also referred to as Floor Space Index. own clear title until the debt is paid.

Floor Space Index (FSI): The ratio of the total floor area of a building to Minimum Lot Zoning: A type of zoning that regulates the smallest lot size
the total area of the site. permitted per building.

Forbearance: The act of refraining from taking legal action despite the Net Book Value: The capitalized cost of an asset, less depreciation taken
fact that the mortgage is in arrears. It is usually granted only when a for accounting purposes, based on the method used for the computing of
mortgagor makes a satisfactory arrangement by which the arrears will be depreciation over the useful life of the asset.
paid at a future date.
Net Present Value: The method of applying an appropriate discount to
Graduated Lease: A lease in which the rent is fixed for the initial term cash to be received in the future to arrive at the present value of those
and increases at certain set intervals by predetermined amounts or by future earnings.
amounts based on periodic appraisals.
Non-disturbance Agreement: An agreement that permits a tenant under
Gross Income Multiplier: A tool used to assess the approximate value of a a lease to remain in possession of the property for the term of the lease
rental property by comparing its rental income with other like properties. It despite any foreclosure proceedings.
gives the relationship between the gross rental income and sales price.
Non-recourse Loan: A type of mortgage loan in which the borrower cannot
Gross Rent Multiplier (GRM): A tool used to assess the approximate be held personally liable in the event of foreclosure.
value of a rental property by comparing its rental income with other like
properties. It gives the relationship between the gross rental income and Opportunity Cost: The amount of return from a real property investment
sales price. Also referred to as gross income multiplier. that is distributed entirely to preferred investors until these investors have
received a specified return on their investment.
Guillotine Clause: A clause in a mortgage that enables a lender to call a
loan if specified goals are not met. Origination Fee: The fee charged by a lender to prepare loan documents,
make credit checks, inspect and sometimes appraise a property being
Holdover Tenant: A tenant who remains in possession of leased property considered for a new loan, Usually, it is computed as a percentage of the
after the expiration of the lease term. face value of the loan. The amount varies according to various factors,
including whether the loan is being placed in the prime or subprime market.
Impound: That portion of a mortgagor’s monthly payments held by the
lender or servicer to pay for taxes, hazard insurance, mortgage insurance, Overall Capitalization Rate: A market-derived capitalization rate based on
lease payments, and other items as they become due. Known as the sale prices and rental rates at comparable properties. The rate is
impounds or reserves in some states. calculated by dividing the net operating income of sale properties by their
sale prices.
Overall Rate of Return: A market-derived capitalization rate based on Sky Lease: A lease of air rights.
the sale prices and rental rates at comparable properties. The rate is
calculated by dividing the net operating income over sale properties by Step-down Lease: A lease that provides for specified decreases in rent at
their sale prices. set intervals.

Plat: A map, drawn to scale, showing the divisions of a piece of land, Step-up Lease: A lease in which the rent is fixed for the initially term
including streets, boundaries and easements. and increases at certain set intervals by predetermined amounts or
by amounts based on periodic appraisals. Such leases are also called
Population Density: The ratio between the total land area and the number graduated leases.
of residential or commercial structures to be placed upon it. Density
usually is regulated by local ordinances. Stop Clause: A provision in a lease whereby real estate tax increases
imposed on the lessor are passed along to the lessee as additional rent;
Preferred Return: Sometimes referred to as “opportunity cost,” preferred also referred to as an Escalator clause.
return is the amount of return from a real property investment that is
distributed entirely to preferred investors until these investors have Subordination: establishment of priority between different existing
received a specified return on their investment. interests, claims, liens and encumbrances on the same parcel of land,
as acknowledged in a written recorded document. Subordination may
Put: An option to sell a specific security at a specified price within a apply to mortgages, leases, real estate rights, and any other types of debt
designated period. instruments.

Recourse Note: A debt instrument under which the lender can take action Subrogation: A legal technique under which one person substitutes for
against the borrower or endorser personally, in addition to foreclosure. another in reference to a debt, claim or right.

Release Price: The amount of compensation needed for a lien to be Tax Stop Clause: A provision in a lease whereby real estate tax increases
removed by a mortgagee. The amount may be the full amount of the loan imposed on the lessor are passed along to the lessee as additional rent;
or some part thereof. also referred to as an Escalator clause.

Restrictive Covenant: A legal obligation imposed in a deed by the seller Tenancy in Common (TIC): In the law, the type of ownership created when
upon the buyer of real estate to do or not to do something (for example, real or personal property is granted to two or more persons, each of whom
not to build on certain parts of the property). Frequently, such restrictions has an undivided interest in the property and an equal right to use the
are enforceable on subsequent buyers of the property. property without expressed words creating a joint tenancy. There is no
right of survivorship.
Rule of 78s: A method of allocating interest charges for the life of a loan
to the periods within the loan. It is often used by lenders (usually on Underwriting: The analysis or risk and the matching of it to an appropriate
installment loans) for calculating an interest rebate on a loan paid off, or rate and term.
refinanced, prior to its maturity date or for accruing earned discount.
Usury: The practice of taking or contracting for an exorbitant or illegally
Sale Leaseback: A technique in which a property owner sells property to high rate for a loan. Maximum interest rates are set by state law.
a buyer and then immediately leases the property back from that buyer,
usually on a long-term basis. Wraparound Mortgage: An alternative to refinancing the entire loan when
a borrower needs additional funds, this technique involves the creation
Sandwich Lease: Leasing arrangement under which the lessee of a subordinate mortgage that includes the balance due on the existing
becomes a lessor by subletting the property. Typically, the owner of the mortgage(s) plus the amount on the new secondary or junior line. Also
sandwich lease is neither the owner nor the user of the property. called an All-Inclusive Trust Deed (AITD).

Setback Lines: Lines that establish required distances for the location
of a structure in relation to the perimeter of the property. They are
defined in building codes, deed restrictions, and zoning requirements.

Used with permission of author Marc Wieder, CPA, Chairman of the real estate practice of Anchin Block & Anchin LLP, a BKR member firm. Copyright © 2013
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