Concepts & Vocab Flashcards
Absorption schedule
The estimated schedule or rate at which properties for sale
or lease can be leased or rented in a given locality; usually used when
preparing a forecast of the sales or leasing rate to substantiate a development
plan and to obtain financing.
Axial theory
A theory of land use development that suggests that land uses tend to
develop in relation to time-cost functions of transportation axes that radiate
from the central business district.
Balloon loan
A loan that does not fully amortize over the term and requires a
lump-sum payment of remaining principal at maturity.
Basis point
One hundredth of one percent, used to express differences in interest
rates.
Binding constraint
Legally enforceable limit on the allowable development on a
given site.
Bonding
A guarantee of completion or performance, typically issued by an
insurance company that will back up the bonded party in any lawsuit. In real
estate, contractors, for example, are often bonded as assurance that they will
complete the work.
Bottom-up approach
An approach to developing an analysis based on the most
disaggregated data available.
Break-even ratio
In finance, the point at which total income is equal to total
expenses.
Brownfield.
site previously used for industrial or certain commercial uses and
possibly contaminated from those uses, but developable upon cleanup.
Building efficiency ratio.
The ratio of net leasable area to gross leasable area.
Building Owners and Managers Association International (BOMA)
A trade
association of owners and managers of apartment and office buildings.
Buildout.
Construction of specific interior finishes to a tenant’s specifications.
Business improvement district (BID)
A public/private partnership in which the
business owners in a district, through legislative approval, contribute funds
through a special tax to the maintenance, development, and marketing of their
commercial area.
Capital market.
Financial marketplace in which savings (from individuals,
companies, or pension funds) are aggregated by financial intermediaries and
allocated to real investors.
Capture rate.
Forecasted rate of absorption in a targeted market segment for a
proposed project, based on an analysis of supply and demand.
CERCLA (Comprehensive Environmental Response, Compensation, and
Liability Act of 1980)
Legislation adopted to provide partial funding for the
cleanup of environmentally contaminated sites by requiring the party
responsible for the contamination to undertake cleanup efforts or provide
compensation for cleanup costs; also known as the Superfund law.
Codevelopment.
Term that refers to the combined development of real estate by
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the private sector and government, where the public sector assumes risks or
costs normally borne by private developers.
Commercial paper
Short-term negotiable financial instruments, usually
unsecured, such as promissory notes, bank checks, bills, and acceptances.
Commitment letter
A written agreement by a lender to loan a specific amount of
money at a specified interest rate within a particular period of time.
Community development block grants (CDBGs).
Federal grants received by cities
that may be used for a variety of community development activities; based on
a formula that considers population, extent of poverty, and housing
overpopulation.
Community development corporations (CDCs)
Entrepreneurial institutions
combining public and private resources to aid in the development of
socioeconomically disadvantaged areas.
Community Reinvestment Act (CRA)
Legislation enacted in 1978 that directs
federal agencies with supervisory authority over depository lenders to
consider a lender’s record in serving local credit needs when making decisions
about the expansion plans of depository institutions.
Comparable property
Another property with which a subject property can be
compared to reach an estimate of market value.
Concentric zone theory
Urban development theory that holds that because
mobility is paramount to community growth, land uses tend to be arranged in
a series of concentric, circular zones around a city’s central business district.
Concession.
Discount given to prospective tenants to induce them to sign a lease,
typically in the form of some free rent, cash for improvements furnished by
the tenant, and so on.
Construction lender
Entity or individual providing interim financing during the construction phase(s) of the real estate development process.
Construction loan.
A loan made, usually by a commercial bank, to a builder to be
used for the construction of improvements on real estate and typically
running for six months to two years.
Contingent interest
A form of equity participation by lenders enabling them to
receive an additional return if the income property securing the loan exceeds
its projected profit or cash flow goals.
Convertible loan
A loan in which the lender, in addition to receiving a stated
interest rate, reserves the right to convert its debt on a project to equity and
thereby participate in the profits.
Covenant.
A restriction on real property that is binding, regardless of changes in
ownership, because it is attached to the title. Used generally in covenants,
conditions, and restrictions.
Covenants, conditions, and restrictions (CC&Rs)
Limitations or restrictions
placed on real estate (such as size of a building, character of landscaping, or
color of house paint), usually decided by a homeowners association.
Critical path method (CPM).
A network analysis method that visually displays the
activities involved in completing a project and shows the relationship between
the activities. This display can show how a delay in one activity will affect
other activities.
Debt (service) coverage ratio
The ratio of the annual net operating income of a
property to the annual debt service of the mortgage on the property.
Deed restrictions
Private form of land use regulation using covenants or
conditions placed on the title to a property; for example, minimum lot sizes.
Density bonus
A zoning tool that permits developers to build at a higher density
in exchange for providing some benefit to the community.
Discounted cash flow.
Present value of monies to be received in the future;
determined by multiplying projected cash flows by the discount factor.
Draw.
The lender’s release of construction loan funds in accordance with set
procedures for providing portions of the total amount as each stage of
construction is satisfactorily completed.
Effective rent
Rental income after deductions for financial concessions such as no-rent
periods during a lease term.
Enterprise concept
The idea that encouraging private enterprise will facilitate
economic revitalization or other socioeconomic goals. Encourages owners to
look at real estate as another type of private enterprise.
Equity.
That portion of an ownership interest in real property or other securities
that is owned outright, that is, above amounts financed.
Equity kicker
A provision in the loan terms that guarantees the lender a
percentage of the property’s appreciation over some specified time or a
percentage of income from the property or both.
Estoppel letter.
U.S. dollars deposited in European foreign banks and used as a
medium of international credit.
Exactions.
Fee or payment-in-kind required of a developer by a local jurisdiction
for approval of development plans, in accordance with state and local
legislation regarding the provision of public facilities and amenities.
Fast-tracking
A method of project management in which construction of a project
actually begins before all details are finalized.
Feasibility study
A combination of a market study and an economic study that
provides the investor with knowledge of both the environment where the
project exists and the expected returns from investment in it.
Floor amount
Initial portion of a floor-to-ceiling mortgage loan, advanced when
certain conditions—for example, construction of core and shell—are met.
Floor/area ratio.
The ratio of floor area to land area, expressed as a percentage or a
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decimal number, that is determined by dividing the total floor area of the
building by the area of the lot; typically used as a formula to regulate building
volume.
Floor load.
The weight that the floor of a building is able to support if such weight
is evenly distributed; measured in pounds per square foot.
Garden apartments
Two- or three-story multifamily housing featuring low
density, ample open space around buildings, and convenient on-site parking.
General contractor
Person or firm that supervises a construction project under
contract to the owner; also known as the “prime contractor.”
General obligation bond
Municipal bond backed by the full faith and credit of the
issuer as opposed to being backed by a particular project
Gross income multiplier.
Rule-of-thumb calculation to estimate the value of
residential property, derived by dividing the sale price of comparable
properties by their gross annual or monthly rent.
Gross leasing activity.
The sum of all leases signed during a given time period,
including renewals and leases signed in new buildings.
Guaranteed investment contract (GIC).
A written guarantee to an investor of a
certain yield for a defined period of time.
Hard costs.
In new construction, includes payments for land, labor, materials,
improvements, and the contractor’s fee.
Income kicker
A provision in loan terms that guarantees the lender’s receipt of a
portion of gross income over an established minimum, for example, 10
percent of the first year’s gross rent receipts.
Internal rate of return (IRR).
The discount rate at which an investment has zero
net present value (that is, the yield to the investor).
Joint venture
An association of two or more firms or individuals to carry on a
single business enterprise for profit.
Junk bond
Any bond (a long-term debt obligation of a corporation or a
government) with a relatively low rating. The lower the rating, the more
speculative or risky the investment. Returns can be much higher than for a less
speculative investment, however. Bonds are rated by credit-rating companies,
the best known being Standard & Poor’s.
Lease-up
Period during which a real estate rental property is marketed, leasing
agreements are signed, and tenants begin to move in.
Leverage.
The use of borrowed funds to finance a project.
Levered.
With use of debt financing. Unlevered is before debt financing is taken
into account.
LIBOR (London interbank offered rate).
An interest rate frequently used as an
index in adjustable mortgage loans; most often the interest rate on three- or
six-month euro deposits.
Lien.
The right to hold property as security until the debt that it secures is paid. A
mortgage is one type of lien.
Limited partnership
A partnership that restricts the personal liability of the
partners to the amount of their investment.
Linkage.
Typically, a payment to a municipality for some needed development that
is not necessarily profitable for a developer (say, low-income housing) in
exchange for the right to develop more profitable, high-density buildings (say,
commercial development).
Loan placement analysis.
The decision by a lender to hold a loan or to sell the loan
in the secondary market, or the decision not to make a loan if the lender is
unwilling to hold it and no secondary market exists.
Mechanic’s lien
A claim that attaches to real estate to protect the right to
compensation of one who performs labor or provides materials in connection
with construction.
Miniperm loan.
A short-term loan (usually five years) meant to be an interim loan
between a construction loan and a permanent loan. A miniperm loan is
usually securitized like any other loan; the interest rate could be less onerous
than a construction loan but not as favorable as a permanent loan.
Money market instruments
Investment tools such as U.S. Treasury bills and
commercial paper used by money markets.
Mortgage-backed security.
A type of bond or note that is based on pools of
mortgage loans or collateralized by the cash flows from the principal and
interest payments of a set of mortgage loans.
Money markets
Name given to financial markets for short-term investment
instruments that mature in one year or less.
Mortgage loan constant
Percentage of the original loan balance represented by
the constant periodic mortgage payment.
Multifamily housing
Structures that house more than one family in separate units
(apartments). Can be high rises, low rises, garden apartments, or townhouses.
Net absorption.
The change in square feet of occupied inventory over a specified
period of time, including the addition or deletion of building stock during that
period of time.
Net operating income (NOI)
Cash flow from rental income on a property after
operating expenses are deducted from gross income.
Net present income
The value of an income-producing property at a given
discount rate, minus the original investment cost.
Nonrecourse loan
A loan that, in the event of default by the borrower, limits the
lender to foreclosure of the mortgage and acquisition of the real estate; that is,
the lender waives any personal liability by the borrower.
Operating expense ratio
The ratio of operating expenses to either potential gross
income or effective gross income.
Participation loan
A mortgage wherein one or more lenders have a share in a
mortgage with the lead or originating lender.
Passive investor
An investor who seeks no active role in construction or operation
of a building but merely seeks to invest funds to earn a return. Institutional
investors such as pension funds are typically passive investors.
Pass-through
Lease provision whereby certain costs flow through directly to the
tenant rather than to the owner (for example, property tax increases on a
long-term lease).
Pass-through certificate
An investment instrument in which the periodic debt
service payments on a package of mortgage loans are paid out (passed
through) to the investors owning the instrument.
Prepayment or callability risk.
The risk that a borrower will pay off a loan before it has matured, thus depriving the lender of additional interest payments.
Present value
The current value of an income-producing asset, estimated by
discounting all expected future cash flows over the holding period.
Profitability ratios
A set of single-period ratios that indicate the capacity of a
project to produce income relative to the capital investment required to obtain
that income.
Rational nexus
A reasonable connection between impact fees and improvements
that will be made with those fees. Jurisdictions must be able to justify the fees
they charge developers by showing that the fees will be spent on
improvements related to the development
Real estate investment trust (REIT)
A tax-free ownership entity that provides
liquidity and limited liability. Ownership is evidenced by shares of beneficial
interest similar to shares of common stock.
Recourse loan
A loan offering no protection to the borrower against personal
liability for the debt, thus putting at risk the borrower’s personal assets in
addition to any collateral securing the loan.
Repos.
Short-term repurchase agreements between financial institutions.
Retainage.
A portion of the amount due under a construction contract that the
owner withholds until the job is completed in accordance with plans and
specifications; usually a percentage of the total contract price.
Risk-free interest rate
A short-term, base interest rate calculated before various
risk premiums are added; approximated by the rate on U.S. Treasury bills.
Securitization.
The pooling of mortgages for securities offerings.
Sensitivity analysis
A cost-benefit examination of the features and aspects of a real
estate development project such as operating costs, amenities, management
costs, and visual appeal, and the impact of adjustments to them on the value of
the project.
Soft costs.
Outlays for interest, origination fees, appraisals, and other third-party
charges associated with real estate development.
Subordination clause
Clause in which one party agrees, under certain conditions,
to yield its priority to another mortgagee.
Subprime rate
A rate that is at least three points above the current prime rate for a
bond of comparable maturity. Loans at subprime rates are costlier and higher
risk, and are generally given by commercial banks to customers who have
poor or insufficient credit.
Syndication
The process of acquiring and combining equity investments from multiple sources (for example, syndicating units in a limited partnership).
Takeout commitment
The permanent loan commitment for a project to be
constructed.
Takeout loan
The long-term financing that replaces or “takes out” the
construction loan.
Temporary financing.
Short-term financing, usually for land acquisition,
preconstruction infrastructure, and construction of improvements.
Term or maturity risk premium
Risk premium charged by lenders to compensate
for the opportunity costs of long-term loans.
Tilt-up construction
Concrete elements such as wall panels that are cast
horizontally, adjacent to the building footprint, then tilted up to final vertical
position when hardened.
Top-down approach
An approach to analysis that is based on the use of
aggregated data first.
Transfer package
Documentation compiled at the time a project is sold or
transferred to an asset manager that attempts to measure objectively the
project’s standing in the marketplace in order to provide a benchmark for the
asset manager’s future performance.
Transferable development rights
A method of allowing landowners to sever
development rights for a tract of land and sell those rights to develop, which
then can be assigned to another tract of land to enable higher-density
development. For example, the “sending area” may be farmland, ensuring that
it will never be developed, and the “receiving area” may be an urban area with
a strong demand for development, which can then benefit from the allowance
of greater density.
