The Complete Real Estate Encyclopedia

THE

COMPLETE

REAL ESTATE

ENCYCLOPEDIA

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THE

COMPLETE

REAL ESTATE

ENCYCLOPEDIA

From AAA Tenant to Zoning Variance

and

EVERYTHING In Between

Denise L. Evans, JD

O. William Evans, JD

McGraw-Hill

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DOI: 10.1036/0071476385

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Professional

Want to learn more?

Dedication

This book is dedicated to my parents, Norm and Pat Lier, who bought a set of encyclo-

pedias for me when I was still a baby. Not that I was a prodigy—they just liked to plan

ahead. Over the years, they bought more reference materials and dictionaries, and

always told me to “look it up” when I had a question. They encouraged me to read any-

thing, to learn everything, and to have fun with both. Then they threatened to punish

me if I continued reading to my younger brothers, who were in danger of never learn-

ing the skill at all if I always insisted on doing it for them!

Thank you, Mom and Dad, for everything. You’ve been wonderful role models, tire-

less cheerleaders, and the finest parents imaginable. I’m sure you still have the receipt

for that original set of encyclopedias. Maybe we can find the salesman, and sell him one

of mine!

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Contents

Foreword ix

Preface xi

Acknowledgments xiii

Real Estate Terms: Numbers 1

Real Estate Terms: From A–Z 3

Appendix A 125 Terms All Buyers and Sellers Should Know 449

Appendix B 105 Words for Landlords, Tenants, and their Agents 453

Appendix C 100 Tax Terms Important to Real Estate 455

Appendix D 80 Slang Expressions Used by Real Estate Insiders 457

Appendix E 77 Words Important to Developers 461

Appendix F 60 Useful Ideas for Analyzing Investments 463

Appendix G 50 Words to Important Residential Real Estate Agents 465

Appendix H 50 Federal Laws and Widespread State Laws that Affect Real Estate 467

Appendix I 20 Ways to Hold Real Estate 469

Appendix J Symbols and Abbreviations 471

Appendix K Common Land Measurements and Conversions 477

About the Authors 479

Online Access to Additional Real Estate Tools 480

vii

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Foreword

Real Estate is a fascinating subject. It is absolutely captivating when you begin to under-

stand it. With this book, Denise and Bill Evans have given the reader the primary tools

of a great education in real estate, and an opportunity to share in our wonderful and

exciting industry. Their encyclopedia includes not just definitions of the lingo of the real

estate community, but also examples to put the language into understandable

context. Many of the entries include practical advice about opportunities, pitfalls, and

related concepts. This book is a terrific educational achievement that provides immense

value for the real estate novice and the seasoned professional alike.

What gives me the right to say all this? I’ve been active in real estate for over

50 years, including work in construction, government, corporate America, and private

legal practice.

As a young man, I needed to work during the “down times,” finishing up under-

graduate school at UCLA in June 1955 and waiting to go into the service in 1956.

I found employment in the heavy earth-moving construction business in the fast-paced

housing construction and office-industrial developments of southern California. I saw

first-hand the real world application of important real estate principles. In February

1959, I returned from active duty as an Air Force pilot to Orange County, California and

started UCLA Law School the following September. Still intrigued with the real estate

industry, I returned to the construction business part-time during the first year of

law school. After completing law school and passing the bar exam in 1962, I joined

an Orange County law firm that had a significant portion of its work in the real

estate field.

In June of 1969 I was appointed Chief Deputy Commissioner of Corporations by

Ronald Reagan, who was governor of California at the time. Because of my extensive

real estate experience, I was, along with the Commissioner, responsible for drafting

rules for real estate syndications in California. These rules were substantially adopted

by the SEC and NASD.

In 1972, at the end of my term, I returned to private practice in Orange County, again

concentrating on real estate–related matters. In 1982 I was contacted by the Century 21

real estate brokerage franchise to prepare a business plan for Century 21 to sell real

estate syndication interests through the Century 21 brokerage offices nationwide, in

each of the nine Century 21 regions.

Bill Evans was recommended to me as someone who could prepare, plan, and man-

age the training for the real estate syndications licensing program. Previously, Bill had

been responsible for other real estate training programs throughout the southeastern

United States, but this was his first national platform. He rose to the occasion, writing

the textbooks and traveling the United States to conduct week-long courses, primarily

to residential agents with no prior commercial real estate or securities experience. Over

the course of 18 months, he took the program from absolutely nothing to successful real

estate syndication licensing of over 700 candidates, which included their completion of

a national securities exam. Miraculously, he found time to get married to Denise, and

she eventually forgave me for keeping Bill on the road so much.

Since that time, we’ve each gone on to other endeavors outside Century 21,

but we’ve all stayed active in real estate. Denise and Bill Evans are a great team in all

their real estate related endeavors. I am confident that this book will herald another

team victory.

James L. Kelly

Former President of Century 21

Real Estate Securities Corporation

Foreword

Preface

This work started out as a simple dictionary, an attempt to explain complicated real

estate and finance concepts in everyday language. Somewhere along the way we dis-

covered that definitions were often not enough. People needed to know about related

issues, sometimes a little practical advice, and places to look on the Internet for more

in-depth treatment.

And so, the little dictionary grew to this encyclopedia. We hope you find it useful in

your everyday life, and a much-used resource for refining your understanding of real

estate in the United States.

Up until the final day allowed by the publisher, we were adding new words. There

will always be new words, new ways to use old words, and fresh perspectives on tried-

and-true concepts. On the other hand, we can’t print new versions of the encyclopedia

every week. That’s why we’re really excited about the commitment McGraw-Hill has

made to this project, and to the maintenance of a Web site dedicated to the encyclo-

pedia.

The Web site will contain real estate–related tools such as forms, formulas, and links

to valuable Web sites. It will also provide new words and expanded definitions as

those become available.* This book will grow as we grow. Please feel free to share your

comments with us by sending an e-mail to dle@deniselevans.com

*Take advantage of this additional information by going to mhprofessional.com/reencyclopedia.

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xiii

Acknowledgments

We would like to thank Dianne Wheeler and McGraw-Hill for making this exciting new

project possible. There is a tremendous risk in publishing a work of this stature, in a

fresh new format not yet tried by any other company. They believed in us, made avail-

able their top people to provide editorial and production assistance, and committed to

a Web site for this book before they had seen the first draft. Thank you for the vote of

confidence. We look forward to seeing you gratified to learn it was well-placed.

Thank you, also, to J. Barry Mason, Dean of the Culverhouse College of Commerce

and Business Administration at the University of Alabama, for making the resources

available to us so we could research this encyclopedia. We appreciate all of his confi-

dence and support, and the nurturing and supportive environment he has encouraged

in the entire College among students, faculty, and staff.

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THE

COMPLETE

REAL ESTATE

ENCYCLOPEDIA

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Numbers

80–10–10 mortgage A type of mortgage arrangement with 80 percent of the purchase price

paid by a first mortgage, 10 percent paid by a second mortgage, and the final 10 percent in down

payment; sometimes used in order to avoid having a 90 percent first mortgage and the required

private mortgage insurance premiums.

203(b) loan Standard FHA-insured fixed-interest rate mortgage loans for one- to four-family

residential properties. The loan program features the ability to have down payments as low as

3 percent and to finance closing costs as part of the loan.There are limitations on the maximum size

loan that can qualify. The limitations change over time and by geographic area. The comparable

adjustable-rate program is called a 251 loan.

203(k) loan Also called a HUD rehabilitation and repair loan, it is an FHA-insured loan obtained

through independent lenders. Single-family to four-unit residential properties are eligible, as well as

mixed-use properties with certain ratios of residential to commercial uses.Rehab money can be used

for normal repairs or improvements, or to convert a single-family home to a multifamily dwelling

(up to four units) or the reverse. Homes that have been demolished, or will be razed as part of the

rehab, are eligible as long as some of the foundation structure remains.The maximum loan amount

is 110 percent of the value of the property after rehab. (Do not confuse this type of loan with HUD’s

property improvement loan, also called a Title I loan.)

203(n) loan FHA-insured loan for the purchase of a unit in a cooperative apartment building.

[Program details are similar to that of a 203(b) loan.]

234(c) loan FHA-insured loan for the purchase of a condominium unit. If the unit is in a building

converted from apartments to condos, no insurance will be provided unless (1) the conversion was

more than one year earlier, (2) the potential buyer was a tenant before conversion, or (3) the con-

version is supported by a tenant’s organization that represents a majority of the households in the

project. Eighty percent of FHA-insured mortgages in the project must be to owner-occupants.

[Otherwise, it is similar to the 203(b) program.]

234(d) loan An FHA-insured loan for the construction or rehabilitation of housing projects

intended to be sold as condominium units.

245 loan An FHA-insured loan program also called the graduated payment mortgage. It allows

home purchasers to begin with low monthly mortgage payments and then steadily increase them

over the next 5 to 10 years, when they will remain constant.

245(a) loan FHA-insured loan program also called Growing Equity Mortgage (GEM) Insurance.

251 loan A standard FHA-insured mortgage loan for one- to four-family residential properties at

adjustable interest rates.The comparable fixed-rate program is called a 203(b) loan.

501(c)(3) A charitable organization, named after Internal Revenue Code, Section 501(c)(3), which

gives such organizations tax-exempt status.

1031 exchange (pronounced “ten thirty-one exchange”) From Section 1031 of the Internal

Revenue Code, the ability to exchange like-kind property and defer paying taxes on the gain real-

ized. Under normal circumstances, if a party purchases Blackacre for $10,000 and then exchanges it

for $100,000 in cash, there is a gain of $90,000 on which income taxes must be paid. But, because of

§1031, if Blackacre is exchanged for like-kind property, then the gain is realized (meaning it occurs)

but is not recognized (meaning no tax is due at that time).

The property given up is called the relinquished property, and the property received is called

the replacement property. After the exchange, the basis in the relinquished property becomes

the basis in the replacement party. In other words, the $10,000 purchase price for Blackacre,

called the basis, becomes the basis of the replacement property. When the replacement prop-

erty is sold later for $150,000, the gain would be $150,000 less $10,000, not $150,000 less

$100,000. That is true unless you do another 1031 exchange at that time. There is currently no

limit on the number of exchanges you can do in a lifetime.

The properties must be qualifying use properties, meaning that they have or will be held

for income production (rental) or investment, or used in a trade or business. Personal resi-

dences and vacation homes are not qualifying properties.

Swapping properties is a very handy tax tool, but it is relatively rare to find property own-

ers who want to exchange properties at a simultaneous closing. As a result, the IRS allows the

use of a fiction, a type of like-kind property proxy. In the fiction, the owner of Blackacre may

sell it for cash, but the money must be placed in the hands of a qualified intermediary to hold.

It is said the taxpayer can never have his or her fingerprints on the cash—not to spend, not to

borrow against, nothing. The taxpayer then has 45 days to identify a replacement property

and complete a form with the identification information. After that, the taxpayer has a short

time to close on the replacement property, for which the funds in the hands of the qualified

intermediary may be used. If all this is done exactly right, the taxes will be deferred.

[This entry does not allow enough space for all the technicalities of a 1031 exchange.Specific details

of a 1031 exchange can be found at the IRS Web site (www

.irs.gov),“Publication 544,Sales and Other

Dispositions of Assets”and “Form 8824, Like-Kind Exchanges” (PDF).]

1099 The IRS form for reporting payments made to independent contractors or interest earned

on investments or bank accounts. The person completing the form supplies copies to the party

receiving the payments and to the IRS and state and local taxing authorities. If one’s tax return does

not disclose income reported on a 1099, there is a high likelihood of an audit. Real estate agents

typically receive 1099s from their brokers for commissions earned during the prior year.

245(a) loan 1099

AAA tenant (pronounced “triple-A tenant”but written as AAA tenant) Commercial tenant with the

best possible credit rating and the least likely possibility of default. Owners can secure better selling

prices or better financing terms if they have such tenants in their property.

abandonment An intentional surrender, disclaimer, or termination of ownership with no stated

intention regarding who the next owner should be. Legally requires some external evidence of an

intention to abandon; simply neglecting property will not suffice. Differs from surrender, which

requires that someone accept the property, and from forfeiture, which is unintentional loss of prop-

erty. Abandoned property will generally revert to someone with a prior claim,such as an abandoned

leasehold reverting to the landlord or an abandoned easement reverting to the landowner.

Sometimes abandoned property will escheat to the state.

abatement A reduction or decrease. Local governments sometimes offer tax abatements to new

businesses in order to attract them to the area.Commercial leases usually have clauses denying rent

abatement if the leased property is partially destroyed and then rebuilt and made usable again.

able to purchase Financially capable of gaining access to the necessary funds to complete a pur-

chase. Real estate brokers with a written listing agreement are usually entitled to a commission if

they produce a buyer who is “ready, willing, and able” to acquire the subject property at the asking

price, even if the seller then refuses to go through with the sale.

abnormal sale In appraisals, a sale that is not typical of the market at that place and time. Such a

sale may be the result of family transactions, ignorance of true values, threat of foreclosure, or other

unusual events and will not be used to determine the value of the property being appraised.

abode Residence, home, domicile.

above building standard Typically refers to items not included in a landlord’s construction work

letter. A new tenant can usually negotiate the landlord’s agreement to pay for all construction

expenses necessary to customize space to building standard, which might be hollow doors,inexpen-

sive carpet,2 ft  4 ft ceiling tiles,and fluorescent light fixtures,depending on the building.Anything

above building standard must generally be paid by the tenant.

abrogate Withdraw, rescind, revoke, or cancel. Common usage implies an act done in a one-sided

or high-handed manner, but this is not necessary to the definition.

absentee owner One who does not personally occupy or manage their property.

absolute auction A sale will be to the highest bidder, regardless of the amount bid. Common

wisdom among auctioneers is that a property advertised as being sold at absolute auction will

attract more bidders and higher bidding prices than one advertised with even a low minimum

acceptable bid, or reserve price.

absolute net lease Also called a triple net lease, in which the tenant pays rent plus all costs of

ownership, such as insurance, real estate taxes, repairs, cleaning, and utilities.

absolute net rent Rent payments that are pure income to the landlord, because they are not

reduced by any operating expenses.When an owner quotes a figure as absolute net rent, it is a clue

that the tenant will also have to pay all insurance, real estate taxes, repairs, cleaning, and utilities in

addition to the monthly rent.

absolute title A title to real estate without any competing claims such as IRS liens, prior mort-

gages, leases, easements, or spousal claims. A lender will usually require either clear title in the

borrower, or waivers by other parties, so the lender will have absolute title if it has to foreclose.

Also called clear title.

absorption rate The rate at which vacant space is leased or purchased over a specified period

of time. The absorption rate for commercial property is usually expressed in square feet per year;

residential property is quoted in units (homes) per year.

abstract deed Colloquial expression used to refer to the original deed from the government to

the first private owner of a parcel of land. Other times, it is meant to describe a deed that recites

all former owners and their dates of acquisition. Sometimes purchasers who request an abstract

deed mean to communicate that they want title insurance or a title opinion in addition to the

deed. Technically, there is no legal instrument called an abstract deed. (When you encounter this

expression, ask questions in order to determine what is meant.)

abstract of title Synopsis of all prior owners

and important claimants to property, with the

date and origin of their rights and date and

manner of termination, together with all current

owners, lienholders, easements, or other such

claims against the property.

abut Next to, touching, contiguous. Typically

arises in the context of whether property owners

have a duty to clean snow, ice, and debris from

the sidewalks abutting their property.

A/C Shorthand for air conditioning.

absentee owner A/C

Sidewalk abuts

the house

accelerate To demand the full amount due under a contract even though the original agreement

allowed payments over time. Almost all promissory notes and leases have acceleration clauses in

the event of default. If it were not for such clauses, the lender or landowner could be required to file

separate lawsuits when each payment was missed, or wait until the end of the term and sue for all

at once.

accelerated amortization Making additional mortgage payments so as to reduce the principal

amount of the debt more quickly than originally contemplated in the parties’ agreement.

accelerated cost recovery system (ACRS) A method of tax accounting in which the IRS simplified

the rules for depreciation of property. It has been replaced by the modified accelerated cost recov-

ery system (MACRS), but you will still encounter references to ACRS.

accelerated depreciation Depreciation methods that allow larger deductions in early years, trail-

ing off to smaller deductions in later years. It is the opposite of straight-line depreciation, in which

equal amounts are depreciated every year. Accelerated depreciation is not allowed for real property,

but may be employed for certain components,such as fencing, security systems,carpet, or windows.

The most common types of accelerated depreciation encountered in real estate are double declin-

ing balance, also called 200 percent declining balance, and the alternative 150 percent declining

balance method.

Example:

Carpeting in residential rental properties may be depreciated over 5 years.

Assuming $10,000 worth of carpeting is installed in an apartment building, this is each year’s

depreciation using the different methods:

Straight Line 150% Declining 200% Declining

Year 1 $2,000 $3,000 $4,000

Year 2 2,000 2,100 2,400

Year 3 2,000 2,000 2,000

Year 4 2,000 2,000 1,600

Year 5 2,000 900 0

acceleration clause The clause in a promissory note or lease that allows immediate demand,upon

default, for all sums due over the entire term.

acceptance (1) The act of receiving something with the intention of retaining it. Transfer of title to

real estate requires acceptance of the title. (One cannot secretly deed a toxic waste site to an enemy

in hopes that the Environmental Protection Agency will make that person handle the cleanup.) (2) The

act of agreeing to the terms and conditions of an offer,creating a contract by virtue of the acceptance.

Access Board An independent federal agency that develops and maintains design criteria for

buildings and other improvements, transit vehicles, telecommunications equipment, and electronic

and information technology. It also enforces accessibility standards that cover federally funded

facilities.The Access Board’s Web site is www

.access-board.gov.

accelerate Access Board

accessibility (1) Evaluation of the convenience of a property relative to the people who will be

using it. May refer to ingress and egress for customers or lack of obstructions for persons with

disabilities.(2) Important component in pricing surveying services.The more difficult the terrain and

the less accessible the site; the more expensive the fee.

accession The right to own things that become a part of something you already own.When a ten-

ant adds built-in cabinetry or other fixtures to a building, they become the property of the landlord

by virtue of accession. Also frequently encountered in the

realm of riparian (water) rights, such as new land created by

dry river beds or retreating tidal lands.

accessory building A secondary structure that exists for

the benefit of the main building, such as a tool shed or a

detached garage. When drafting an offer to purchase real

estate, you should be sure to include accessory buildings in

your description. Otherwise, easily movable sheds and other

structures not permanently affixed to the soil might be

removed before closing.

access right The right of owners to get to or from their property. Legally, no land may be land-

locked.Therefore, if a parcel is cut off from all public roads and there are no easements for ingress

and egress, then the owner may bring suit and have a court declare an easement of necessity over

the land of another. (This is one of the rare times when private individuals are able to bring con-

demnation actions and force another to give them property rights.)

accessibility access right

Maple Lane

Parcel B must use the most direct access across Parcel A, to the

public alley, not the scenic route to Maple Lane

Parcel A

Parcel B

Not

allowed

Alley

A greenhouse is an accessory

building.

Example: Parcel B is landlocked, but the owner is entitled to access rights to public roads

and may force the owner of parcel A to provide an ingress and egress easement. The easement

must be via the most direct route to the nearest public road, without being unduly burdensome

on parcel A. The owner of parcel B may not force the owner of parcel A to provide a scenic route.

accommodating party A third party who holds money or other property for a short period of

time in order to facilitate a tax-free exchange under Section 1031 of the IRS Code.The third party is

called a qualified intermediary in the tax regulations.

Example:

Jack sells his office building to Jill for $400,000. Jill pays the money to Larry

Lawyer, who keeps it in his escrow account. Larry is the accommodating party. When Jack meets

the timing requirements of Section 1031 and wants to buy an apartment building for $1,000,000,

Larry will write a check to the seller for $400,000 and Jack will pay the remaining $600,000.

In common language, Jack can’t have his fingerprints on the money, so an accommodating party

is necessary.

accommodation party One who signs a promissory note even though he or she receives no

direct economic benefit from it. Typically, a financially strong party who must add his or her name

to the transaction or the true borrower would not qualify for the loan. There is a widespread and

mistaken belief among accommodation parties that they simply signed their name but will not be

held responsible if the loan goes into default. This is incorrect; they will be held liable for the full

amount of the loan if there is a default. (Do not confuse with accommodating party.)

Accredited Rural Appraiser (ACR) A designation granted by the American Society of Farm

Managers and Rural Appraisers (www

.asfmra.org).

accretion The addition of land through natural causes, such as gradual silting. You will often see

accretion used to also describe the addition of land because of receding waters, but this is more

properly called dereliction.

accrual method An accounting method in which income is counted when it is earned (whether

you receive the money at that time or not) and expenses are counted when incurred (whether you

pay the bill at that time or not). It is the opposite of the cash method, in which income is counted

when money is received and expenses are counted when the bills are paid. Most businesses use the

accrual method because it allows income,and the expenses associated with generating that income,

to be accounted for in the same period. (Many small businesses use the cash method because it’s

easier.)

accrue To accumulate; grow. A $100,000 loan at 7 percent interest accrues interest at the rate of

$7,000 per year, or $19.18 per day. The mortgage holder on a property being sold will typically

tell the closing company a payoff amount accurate as of the anticipated closing date, with a daily

accrual for each day closing is delayed.

access right accrue

accrued but unpaid Money that has been earned, such as interest on a mortgage loan, but not

yet collected.

accrued depreciation The total depreciation claimed, to date, on a property. It is an entry on the

balance sheet and is supposed to properly reflect that the property is becoming less valuable with the

passage of time.Realistically, in the case of real estate,the property is usually becoming more valuable

each year. As a result, you may have a book value of $200,000 but a fair market value of $2,000,000.

accrued interest For every day that a loan remains unpaid by the borrower, it earns interest that

must be paid to the lender. This process of earning interest with each passing day is called accrual,

and the money earned is called accrued interest. It may not be payable until the first day of the next

month, but it has already been fully earned by the lender. See also nonaccrual.

accumulated depreciation Also called accrued depreciation.

acknowledge To accept responsibility for something.In real estate, it means to sign an instrument

in front of a notary public, who will certify that the signer stated the signature was an act of free will.

acknowledgment A declaration by one signing an instrument, usually a deed, mortgage, or will,

that their signature was free and voluntary.The declaration must be made before an authorized per-

son, usually a notary public, but may also be designated court officials or others named by statute.

ACM See asbestos containing material.

acquisition The act of obtaining ownership of something. It may occur through derivative acqui-

sition—procured from another who previously owned the thing—or though original acquisition,

which is new creation such as land made when the ocean recedes.

acquisition cost The price and all related expenses of obtaining property; may include closing

expenses, survey, inspections, and paying off adverse claimants.

acquisition, development, and construction (ADC) loan A loan made to allow a developer to

buy land, install infrastructure such as streets and sewers, and build improvements.Because the value

of the collateral depends on the development process adding significant value, these are considered

somewhat risky loans.As a result,lenders limit the number of ADC loans they extend.A loan turndown

from one lender may not be a stamp of disapproval for the project, but simply that lender’s inability

to extend any more ADC loans until others are paid off or converted to permanent financing.

acquisition loan A loan made to acquire a property, also called a purchase money loan. In

bankruptcy law, acquisition lenders receive some special priorities and benefits not granted to other

creditors.

acre Historically,the amount of land a yoke of oxen could plow in one day; today,a quantity of land

containing 43,560 square feet. An acre can be any shape. Especially in the case of commercial prop-

erties, land values are usually expressed in terms of price per square foot rather then price per acre.

accrued but unpaid acre

Example: If you know that a 16-acre parcel recently sold for $10,000,000, you calculate the

price per foot as follows:

16 acres  43,560 square feet per acre  696,960 square feet

$10,000,000  696,960 feet  $14.35 per square foot

acreage zoning Zoning intended to reduce residential density by requiring large building lots.

acre-foot A quantity of water, sand, or minerals equal to a volume 1 foot high over one hypothet-

ical acre of land. It arises in the context of pricing water for irrigation purposes, estimating the value

of minerals in place under the soil, and estimating numbers of fish per acre-foot of water.

ACRS See accelerated cost recovery system.

action to quiet title See quiet title action.

active participation An IRS term relating to passive activity losses that can be deducted only

against passive activity income, not against ordinary income. Rental activities are always passive,

unless you are a real estate professional. There is a small loophole—if you or your spouse actively

participated in a passive rental real estate activity, you can still deduct up to $25,000 in rental activi-

ty losses from ordinary income. As a result, taxpayers are eager to prove they have active participa-

tion in their real estate investments so that large depreciation expenses, for example, can shelter

income from other sources. Active participation can be shown if you make bona fide management

decisions such as approving new tenants, deciding rental terms, approving expenditures, and simi-

lar activities. (See IRS Publication 925, “Passive Activity and At-Risk Rules” at the IRS Web site

www

.irs.gov.)

active remediation Engaging in some affirmative action to remove contaminants from soil or

water. The alternative is passive remediation, which is usually accomplished by normal flushing

processes occurring over time.

active solar heating Method of heat that relies upon the sun to heat either air or liquids in a solar

collector, and then distribute that heat throughout the structure. Contrast with passive solar heat.

Act of God An act caused exclusively by the violence of Nature, without any intervention from

humans. Many contracts contain clauses relieving the parties of responsibility if an Act of God

delays or makes impossible the performance of the contract. Examples include earthquakes,floods,

hurricanes, lightning, tidal waves, tornadoes. (With current controversy over the effects of global

warming, and with allegations that deficiencies in the New Orleans levee system caused the

massive flooding in 2005, we can expect renewed litigation concerning flooding as an Act of God

or of humans.)

actual age In appraisal, the true age of a property,as opposed to its effective age.A building might

have an actual age of 25 years but an effective age of 3 years because of massive renovations made

3 years earlier. A house with six small children in the family might have an actual age of 2 years and

an effective age of 18 years.

acre actual age

actual damages Losses or injuries for which the law allows compensation as a means of reim-

bursement; used also to refer to the money awarded by a court as that compensation. Contrast with

nominal damages, which would award $1, but recognize that the plaintiff’s rights have been violat-

ed even though no economic, physical, or emotional harm occurred. Contrast also with punitive

damages, which are not intended to compensate the victim but to punish the aggressor.

Actual damages may be

• Direct damages—those that flow directly and naturally from the wrong

• Consequential damages—those that flow from some consequence of the wrong

Example: Able agrees to purchase Baker’s house. As a result of that contract, Baker agrees to

buy a new condo under construction and pays a nonrefundable $5,000 reservation fee. Able then

defaults and refuses to purchase Baker’s house, even though Able has no justifiable reason for

doing so. Two weeks later the stock market crashes, and Baker counts himself lucky when he is

able to sell his house for $40,000 less than the original contract price. But, Baker is now unable

to purchase the condo and loses his $5,000. Under the right circumstances, Able could be liable

to Baker for actual damages consisting of the $40,000 difference in the two sale prices (direct

damages) and for the loss of the $5,000 earnest money (consequential damages—more indirect

and less predictable) and for punitive damages.

actual eviction Removing someone from property either by force or by legal process. Contrast

with constructive eviction, in which property is rendered unusable because of some action or

inaction of the landlord.

actual notice Commonly means notice expressly and directly given to a person and received by

that person. In legal documents, however, a requirement for actual notice may be satisfied through

express notice or implied notice, but not by constructive notice. Express notice is given by actual

delivery of the information to the person charged. Implied notice is satisfied if the person has suffi-

cient facts available to cause him or her to ask further questions and thereby receive express notice.

Constructive notice occurs when someone is charged by law with making inquiries such as would

cause him or her to learn of facts giving rise to implied notice.

actual possession The physical occupancy or control of property by someone.Contrast with con-

structive possession in which the law assumes possession because of legal rights to the property.

Example:

One who has a deed to 40 acres of land, but uses only 1 acre for a house and yard,

is said to have actual possession of 1 acre and constructive possession of the other 39 acres.

actual value The true market value of a property if it were offered for sale at a particular time to a

buyer with sufficient information about the property to make an informed decision. Contrast with

book value, which is the original purchase price, plus capital expenditures, minus depreciation.

Contrast also with perceived value based on fraud.

ADA See Americans with Disabilities Act.

ADC loan See acquisition, development,and construction loan.

actual damages ADC loan

add-back The amount added to the principal balance of a loan because the monthly payments

are insufficient to pay all currently accrued interest; may be encountered with variable-rate, fixed-

payment loans.

addendum Something added as an attachment to a form contract, before contract execu-

tion; generally used to cover the particular circumstances of that transaction. Real estate

contracts may have addenda (plural of addendum) to cover requirements relative to financing

contingencies, property inspections, disclosure of the possible presence of lead-based paint in

structures built before 1978, and other variables. Especially for properties with lengthy legal

descriptions, an addendum will generally be used for the legal description of the property,

rather than squeezing it into the small space available on the form. Contrast with amendment,

which is an attachment added after contract execution in order to modify or expand upon the

original contract.

additional charge mortgage A mortgage instrument that recites on its face that it is used to

secure present and future debts by the borrower to the lender. It serves to put new lenders on notice

that the equity in the property may decrease in the future, as a result of additional money being

advanced by the first lender. See future advances mortgage and anaconda mortgage.

additional rent Amounts due under a lease in addition to the originally agreed upon base rent.

Leases usually characterize all sums due to a landlord, including late fees, collection costs, and prop-

erty damage, as additional rent. This gives the landlord some legal advantages as far as declaring a

default,obtaining an eviction, and collecting sums due.Examples could include the tenant’s share of

property maintenance and insurance expenses and a retail tenant’s obligation to pay a percentage

of gross income in addition to base rent.

additional first-year depreciation Also called bonus depreciation. An IRS provision that allows

taxpayers to take more than the ordinary depreciation in the first year a property is placed in use.

(After the 9/11 attacks, taxpayers could deduct up to one-half of the basis of their property in the

first year. Ordinarily, only

of the basis could be deducted in the first year. Similarly, in the

wake of the devastating 2005 hurricane year, some taxpayers could take additional first-year

depreciation equal to one-half of the basis.) In addition, taxpayers may take larger than normal

depreciation for some property, called Section 179 property, even it if results in effectively expens-

ing the entire purchase price in the current year.(For more information, visit the IRS Web site

www

.irs.gov.)

add-on interest An interest calculation sometimes used to avoid state usury laws (prohibitions

against excessive interest) or to gain the equivalent of a prepayment penalty not otherwise allowed

by law. The interest for the entire term of the loan is calculated as if no payments will be made until

the loan matures. The total interest is added to the principal, and the borrower then makes equal

monthly payments over the term of the loan. Even though the borrower reduces the outstanding

principal balance with each payment, he or she is still paying interest on the whole amount bor-

rowed. If the borrower prepays the loan, a calculation called the rule of 78s results in a disguised

prepayment penalty.

add-back add-on interest

Example: The difference between 8 percent simple interest and 8 percent add-on interest for

a $25,000 loan paid monthly for 4 years is

Simple interest monthly payments  $610.32

Simple interest total interest paid  $3,586.62

Add-on interest monthly payments  $687.50

Total add-on interest paid  $8,000.00

adequate consideration See consideration.

adequate public facilities ordinances (APFO) A local law controlling growth by requiring com-

pletion of infrastructure—roads, sanitary and storm sewers, waterlines, and schools—prior to, or

at the same time as, new private development that will need those services. Approvals for new

subdivisions or commercial properties may be withheld until regulatory authorities deem there

are adequate public facilities.

adhesion contract A contract that is so grossly one-sided that courts will not enforce it, or will

not enforce specific terms deemed to be unconscionable or oppressively unfair, especially if the

consumer has no other choices in the marketplace.

adjacent Nearby, but not necessarily touching; implies properties separated by a natural barrier

such as a river,or by a street,but not separated by another property. Properties that touch each other

are legally said to be adjoining rather than adjacent, but common usage includes such properties

as within the definition of adjacent.

adjoining Touching, as in properties that are not separated by any natural or human-made

barrier nor by any other property. Contrast with adjacent, which means nearby, but not necessarily

touching.

adjudication A formal declaration by a court, addressing all issues raised by the parties.

Example:

The court’s adjudication declared the seller in default, ordered the seller to execute

a deed to the buyer, and further assessed attorney’s fees and costs against the seller.

adjunction Adding something to property in such a manner that it loses its independent identity.

Example:

Personal property consisting of boards and nails will become part of the real estate

by adjunction when they are used to build an addition to a house.

adjustable mortgage loan See adjustable-rate mortgage.

add-on interest adjustable mortgage loan

Adjacent to my property

Maple Street

My property Adjoins my property

adjustable-rate mortgage (ARM) An instrument granting a security interest in real property as

collateral for a promissory note with interest rates that change from time to time, as specified in

the note.The note should contain

• An initial rate, or the first interest rate to be charged.

• A reference number, called the index, to be used in calculating future interest rates. As the

index increases or decreases, the loan interest rate will increase or decrease by the same

amount.

• The index could be the Federal Reserve overnight funds rate plus a certain percentage, it

could be the prime rate charged by CitiBank to its most credit-worthy customers (CitiBank

Prime), or any number of other indices. You want to avoid any adjustable-rate note with

references to vague generalities such as “market rate” or rates charged by small unknown

lenders.

• A statement regarding the frequency at which the rate may change. Commercial loans

typically change every time the index changes. Consumer loans usually change only

once or twice a year.

• A statement regarding the maximum amount the interest may increase each time, called

a periodic cap. (Consumer loans usually have periodic caps, but not commercial loans.)

• A statement regarding the maximum amount the interest may increase over the lifetime

of the loan, called a lifetime cap. (Consumer loans usually have a lifetime cap around

5 percent; commercial loans usually do not have any lifetime caps.)

Many adjustable-rate mortgages for home loans have a conversion clause allowing (or even requir-

ing) change to a fixed rate of interest after a specified period of time, usually 5 or 7 years.This gives

the homeowner the ability to lock in a fixed rate without having to go through the trouble and

expense of a refinance.

One type of adjustable-rate mortgage is the fixed-payment, adjustable-rate loan. With it, the con-

sumer pays the same amount each month, even if interest rates rise to the point that the payment

does not pay the currently accruing interest.The unpaid interest is added to the principal of the loan.

In such a situation, the loan is said to be negatively amortizing,meaning the principal balance grows

larger each month rather than smaller.

adjusted basis A tax and accounting term referring to the original acquisition cost of a property,

with the following adjustments:

• Depreciation, which reduces the basis

• Capitalized closing costs, which increase the basis

• Capital improvements, such as a new roof, which increase the basis

The difference between the adjusted basis and the ultimate sale price of a property will be the

taxable profit on the sale.The adjusted basis is an extremely important tax concept, and one which

it is important to master in order to comfortably evaluate properties.

adjustable-rate mortgage (ARM) adjusted basis

adjusted sales price In an appraisal, the answer obtained when the sales price of a comparable

property is adjusted for factors that make it different from the property being appraised.

Example:

Property A is being appraised, and property B is a similar property that sold recent-

ly. Property B has some features that property A does not. The sale price of property B would

probably be lower if it, too, lacked that feature, so a downward adjustment is made. Likewise,

property B lacks some features present in property A. If property B had those features, it would

have sold for a higher price, so an upward adjustment is made in property B’s sale price.

Example: Adjusted Sales Price Calculations

A B Adjustments

Sale price — $175,000

Garage Yes No $40,000

Pool No Yes $25,000

Brick Yes No $8,000

Adjusted sale price of B $198,000

adjusted tax basis See adjusted basis.

adjustments Closing: Debits and credits to the purchase price of a property because of items to

be paid by the seller or the buyer. All adjustments should be reflected on a settlement statement.

(The settlement statement used in home sales is a form,called a HUD–1, created by the Department

of Housing and Urban Development.). In appraisal: See adjusted sales price.

administrative expenses Compensation to management for operating or building a property;

may include salaries and professional fees.Contrast with operating expenses, reserves for losses,and

reserves for repairs.

administrator A person appointed by a court to manage and distribute the estate of someone

who has died without a will. Sometimes, the term refers to a male occupying that position, with a

female being called an administratrix.Contrast with executor (male or gender-neutral) and executrix

(female), who are persons named by a will to manage and distribute one’s estate.

administrator’s deed A deed executed by one appointed by a court to administer another’s

estate; usually for someone who died without a will.

administratrix Older term meaning a female appointed by a court to administer the estate of

another, usually someone who died without a will. The male position was called an administrator.

(Today, the term administrator is considered gender-neutral.)

administrivia Slang term meaning the nondeal points contained in small print in documents

written by lawyers, especially seemingly nonsensical items such as “The masculine shall include the

feminine and the singular shall include the plural.”

adjusted sales price administrivia

ADR See asset depreciation range.

adult One who has gained the age of majority, usually 18 or 21 depending on the

state. Sometimes, younger people can take legal steps to remove the “disabilities of nonage,”

after which they will be treated as legal adults even though under the requisite age. Only adults

have the legal capacity to enter into contracts or sell property. Minors may own real estate,

but, because of the inability to enter contracts, they cannot effectively manage it, obtain a mort-

gage, or sell the property. If such actions should prove necessary, the child’s legal guardian will

usually have to ask a court for permission for the proposed action. The court will then appoint a

guardian ad litem to represent the child’s interests, in case the guardian has a conflict of interest

or clouded judgment.

ad valorem tax Literally means “according to the value.”A tax placed upon property and calcu-

lated with reference to the value of the property. Ad valorem taxes usually have a super-priority,

so that a sale for unpaid taxes will transfer title into the buyer, free and clear of any mortgages or

other liens. On the other hand, lienholders are generally given the right to redeem property

from tax sales, and regain all rights simply by reimbursing the purchaser for the sale price plus

accrued interest.

advance In construction financing, to disburse money from the allowable total amount of a loan

in order to pay bills currently due,or to pay the builder or developer according to a previously agreed

upon schedule of payments.Typically, a certain percentage will be advanced upon approval of plans

and drawings, another amount at completion of all clearing and grubbing, at the end of final grad-

ing, when the structure is in the black (the roof decking has been completed), and then again at

completion and final inspection.

advance payment annuity A regular payment made at the beginning of each month, year, or

other period. It is relevant to real estate because many financial calculations, such as those possible

in Microsoft Excel or on a financial calculator, require entry of different formulas depending on

whether you are solving for an advance payment annuity (also called an annuity due) or an ordinary

annuity. Any time you want to solve an equation that involves a payment received at the beginning

of a period, such as rent, you use the format for advance payment annuity. Any time you want to

solve an equation that involves a payment received at the end of a period, such as mortgage

payments, you use the format for ordinary annuity.

adverse claim A claim against real property that is inconsistent with the purported owner’s full

ownership rights.

adverse financial change condition In a loan commitment, a clause that allows the lender to

cancel the commitment without penalty if the borrower’s financial condition changes for the worse

before loan funding.

adverse possession Sometimes called squatter’s rights; method of acquiring title to real estate

when the true owner has neglected to assert his or her own rights for a specified period of time.

ADR adverse possession

Commonly arises in the context of boundary line disputes. The next most common occurrence is

when there is some technical defect in the title which can’t be cured with a corrective deed

because the person who must sign has disappeared, is dead, or refuses to sign. If one actually

occupies property without permission, in an open and notorious manner, that is exclusive and

hostile, and the true owner takes no action to dispossess the claimant, then the actual owner will

be forever barred from asserting any rights to the property. The requirement of hostility does

not mean there must be animosity between the parties, but simply that the adverse possessor

claims ownership of the property, and therefore is legally hostile to any other claimants. The

lack of permission refers to the absence of a lease or other such agreement granting possession

but not necessarily title.The required time period, called the holding period, may vary from 10 to

20 years.

By law, one cannot adversely possess against the government.

Example:

Seth and Rose are next-door neighbors and the best of friends. Seth erects a fence

on what he believes to be their boundary line. For the next 10 years (or 20, depending on the

jurisdiction) he mows the lawn up to the fence. Rose believes the fence marks the boundary

between their two properties, but she is mistaken. Rose then sells her property to Greg, who

orders a survey. The survey reveals that 20 feet of Emma’s land is on Seth’s side of the fence. In

a lawsuit over the property line, Seth will usually claim that Greg’s surveyor is mistaken and

will also claim that even if the survey is correct, Seth has gained title to the 20 feet by virtue of

adverse possession. It was Emma’s responsibility to know the true location of her property lines.

If she did not assert her rights during the 10- or 20-year time period, she, and all others coming

after her, lose those rights.

aesthetic value A premium attached to the value of property because of its physical appearance

or the scenic views that may be enjoyed from the property; the artistic worth of something, rather

than its practical value.

aesthetic zoning Zoning regulations that require new construction to conform to certain

architectural and landscaping requirements. Examples include prohibitions against metal

buildings, requirements that retaining walls be hidden behind shrubberies or trees, and

restrictions on the location of off-street parking. Failure to investigate aesthetic zoning

requirements can result in a project going substantially over-budget and possibly becoming

economically disastrous.

affiant A person who makes a written statement under oath by way of an affidavit.

affidavit A written statement signed by the person making the statement—the affiant—and

sworn to as true and accurate.

affirm Confirm, ratify, positively acknowledge as correct. One may affirm a statement in an

affidavit.Witnesses may affirm that all testimony to be given will be true and accurate.

adverse possession affirm

affirmative lending Obligation placed upon federally chartered lenders by virtue of the

Community Reinvestment Act, and upon state-chartered lenders by similar state legislation.

Requires lenders to exert efforts to match the demographic character of their loan portfolios to the

demographic character of the community in which they operate.

affirmative marketing program A voluntary program designed by the U.S. Department of

Housing and Urban Development in order to further its fair housing goals. This program seeks

to involve builders, developers, lenders, and the real estate industry in a wide variety of coopera-

tive enterprises to improve communication, focus, and sensitivity. Signatories are contractually

bound to abide by the requirements of the plan. Many local governments have their own versions

of an affirmative marketing program. Developers may agree to be bound by the master plan,

or they must present and obtain approval of their own plan before construction permits will

be granted.

affordability index See housing affordability index.

affordable housing Housing for people whose income is a certain percentage below the median

income for an area, as determined by the U.S. Department of Housing and Urban Development

(HUD). National and local governments provide incentives and cash assistance to developers to

build new affordable housing or rehabilitate older apartment buildings or other projects and offer

housing at rates deemed affordable for the area.

Currently, HUD has three affordable housing programs.They are

1. HOME. Provides grants to state and local governments to fund their programs to meet the

housing needs of low-income and very low income families.

2. SHOP. Provides funds to nonprofit organizations to acquire home sites and develop or

improve the systems for delivery of sweat equity and volunteer-based homeownership

programs for low-income families.

3. HOZ. Provides funds for communities to reclaim vacant and blighted areas and create

home ownership zones of mixed income, pedestrian friendly neighborhoods.

after acquired property clause A clause in a mortgage that “scoops up,” as additional collateral,

property acquired after the original loan.The intent is to protect the lender in case the borrower has

a defective title to the property at the time of the loan, but later cures those defects and gains

full legal title. It is also intended to gain a security interest in contiguous land purchased later, and

having some practical relationship to the mortgaged land.(In practice, the clause is usually buried in

the fine print and allows lenders to increase the value of their collateral when that was never the

original intent of the parties.)

after-tax cash flow A financial analysis of an income-producing property to determine cash

benefits to the owner after paying all expenses, mortgage payments, and taxes, and after deducting

affirmative lending after-tax cash flow

amounts that must be taken into income for tax purposes, but which have not yet been collected. If

the tax savings from depreciation or other tax shelters will result in tax losses, thus reducing taxes

that must be paid on other income, then those savings are added back in, just as if they were addi-

tional income. The intent is to discover the amount of money that can be deposited in the bank

at the end of each year.

Analysis of a Property Management Company for One Year

After-Tax

Financial Items Profit Cash Flow Cash Flow

Total billings $80,000 $80,000 $80,000

Outstanding receivables as yet unpaid N/A (22,000) (22,000)

Labor expenses (35,000) (35,000) (35,000)

Office equipment depreciation (4,000) N/A N/A

Loan principal payments N/A (6,000) (6,000)

Loan interest payments (1,200) (1,200) (1,200)

Net taxable income 39,800 N/A N/A

Taxes on income (9,154) N/A (9,154)

Net cash flow N/A 15,800 N/A

Net cash flow after taxes N/A N/A 6,646

After-tax income $30,646 N/A N/A

N/A  not applicable.

after-tax equity yield Methods of financial analysis for an equity position in real estate, being

the net return rate on an investment after deducting expenses, interest, and taxes.

Example:

An investor buys a property with $100,000 down (equity) and $400,000 in financ-

ing. The investor receives $7,000 in cash flow each year, after paying income taxes on money

earned from the investment. After 5 years, the investor sells the property and receives $150,000

after deducting mortgage balance, taxes, and sale costs. The investor received a return of the orig-

inal $100,000 and a sale profit of $50,000 upon sale, plus the $35,000 received over the course

of 5 years, for a total of $85,000.

After quantifying the various components, one then calculates yield by using any of several

formulas, such as cash-on-cash and internal rate of return.

after-tax income Income after deducting taxes.After-tax income is not the same thing as after-tax

cash flow.The major difference between the two will usually occur because depreciation is a deduc-

tion from income but not cash flow.You don’t write a check for depreciation.The other major differ-

ence arises because you write a check for mortgage principal payments, which reduces cash flow,

but you can’t deduct it, so it does not reduce taxable income.

after-tax cash flow after-tax income

Difference between After-Tax Income and After-Tax Cash Flow

After-Tax Income After-Tax Cash Flow

Total rents $10,000 $10,000

Operating expenses (1,000) (1,000)

Depreciation (1,500) N/A (not a cash item)

Mortgage interest (1,000) (1,000)

Mortgage principal N/A (not deductible) (500)

Subtotals 6,500 7,500

Taxes (1,820) (1,820)

Final number $4,680 $5,680

N/A  not applicable.

after-tax proceeds from resale The amount of money left for the investor upon a sale after

deducting all sale costs and taxes.This is the money available for reinvestment in another property.

agency A relationship in which the principal gives an agent the right to act on the principal’s

behalf and to exercise some business judgment and discretion.Agents owe very high degrees of loy-

alty, good faith,and confidentiality to their principals,often expressed as fiduciary obligations.Except

for the agency coupled with an interest, agency relationships automatically terminate when the

principal dies or becomes incapacitated. Agents do not have to receive payment for their services,

and the agency agreement does not have to be in writing unless it relates to transferring an interest

in real estate.The consequence is that many people enter into principal-agent relationships almost

accidentally, being unaware of the responsibilities and obligations each has to the other.

• There is a great variety of agency relationships that arise in a number of ways. All states

have statutes regulating real estate agents and defining their duties and responsibilities, but

this is by no means the exclusive method of defining the relationship or its obligations.

• Agency by estoppel arises when a principal allows someone to engage in such activities

that the public is justified in believing the person is acting as an agent, even if the person

had no such authority. This becomes important when someone makes commitments he or

she had no authority to make, and an innocent third party, relying on those commitments,

suffers an injury. The principal will not be allowed to avoid the commitment by claiming

the supposed agent had no authority, because the law will impose an agency by estoppel.

• Exclusive agency is a real estate sales relationship in which the owner of property grants a

particular agent the exclusive right to market the property and secure buyers, but the

owner retains the right to sell the property himself or herself and pay no commission at all.

Contrast with an open listing, in which the owner agrees to pay a commission to any real

after-tax income agency

estate professional who brings a buyer to the closing table. Contrast also with an exclusive

right to sell agreement, in which not only does the agent have an exclusive agency, but

even if the owner sells the property, the agent receives a commission.

• General agency occurs when the agent is empowered to do all acts in connection with a

particular trade, business, or employment. Contrast with special agency, in which the agent

is authorized to conduct a single transaction or series of transactions not involving a contin-

uing relationship. Real estate agents are special agents.

• Agency by ratification arises when one purports to act on behalf of a principal, without

true authority, but the principal later learns of the act, ratifies it, and agrees to be bound.

Requires some proof that the principal made a conscious decision to ratify the act. Contrast

with agency by estoppel, in which the principal becomes bound because of his or her negli-

gence, not because of any conscious decision.

• Agency coupled with an interest is a special relationship that arises when the agent also

has an interest in the property with which he or she is dealing. This agency will not auto-

matically terminate upon the death of the principal.

• Types of real estate agency:

A listing agent represents the seller of a property.

A selling agent works with the buyer, but may be a subagent of the seller or an agent of

the buyer. Real estate agents must disclose which party they are representing, before

someone accidentally reveals any confidential information.

A dual agent is supposed to represent both the buyer and seller, but this is virtually impos-

sible for one person to do. The status arises most often when one real estate agent in an

office represents the seller and another real estate agent in the same office represents the

buyer; then the broker is technically considered a dual agent. In such situations the broker

must take care that each agent not reveal confidential information to the other.

A transaction agent is technically no agent at all, but is simply a facilitator who uses supe-

rior knowledge of real estate customs and practices to assist buyers and sellers.

agency disclosure State laws that require agents to disclose which party to a transaction they are

representing.Some states also require agents to disclose all agency relationships offered by their firm.

agent One who acts on behalf of a principal in an agency relationship.See agency for an extended

discussion.

aggrieved party A party who has suffered a wrong or an injury; one who has a grievance or a

complaint against another.

agreed boundary A doctrine that allows adjoining landowners to agree regarding the location of

the true boundary line between themselves, if the line is in doubt. An oral agreement as to the loca-

tion of the true boundary line is usually enforceable, despite statute of frauds laws that require all

contracts relative to real estate to be in writing. In contrast, an oral agreement to compromise a

boundary line,perhaps to “split the difference”and establish it someplace in the middle between two

conflicting opinions, must be in writing to be enforceable.

agency agreed boundary

agreement of sale Typically refers to any real estate sales contract. In a few states, however,

the term refers specifically to a type of seller financing also called a bond for title, land sale

contract, or contract for deed.In that instance, the seller retains legal title to the property until the

purchaser has made all payments over the term of the financing period. At the end, if there has

been no default, the seller executes a deed to the buyer. This device is often used in high-risk

financing situations because it can often avoid legal protections given to the buyer in the event

of foreclosure or bankruptcy.

Agricultural Foreign Investment Disclosure Act A law requiring foreign persons with an interest

in more than one acre of agricultural land to report their ownership to the U.S. Secretary of

Agriculture, using form FSA 153. The law is only one of a number of mechanisms for monitoring

foreign investment in the United States, its effect on pricing Americans out of the market, and its

concentration of critical resources into foreign hands. (For more information, go to the U.S.

Department of Agriculture Web site www

.usda.gov and search for “FSA 153.”)

agricultural use exemption In ad valorem taxes, an exemption that allows agricultural land to be

valued at its current usage, rather than the possibly much more expensive highest and best use val-

uation. Oftentimes, the appraised value is then further reduced by a certain percentage to reach an

assessed value, upon which the taxes are based. (Many say this is done as an incentive to maintain

green spaces and agricultural land rather than developing it in order to generate money to pay

extremely high real estate taxes. Others say the exemption is a result of powerful agricultural and

timber lobbies.)

AIDS Acquired immunodeficiency syndrome. Persons who are HIV-positive, or who have AIDS,

are protected from discrimination by the Americans with Disabilities Act (ADA) and other federal

and state legislation. This extends to decisions to buy, rent, or sell. Further, in many states it is

considered a violation of privacy to reveal that a former tenant or owner was HIV-positive or

suffered from AIDS.

AIDS Housing Opportunity Act Legislation passed in 1990 to provide state and local govern-

ments with the resources and incentives to devise long-term comprehensive strategies for meeting

the housing needs of persons with AIDS and the families of such persons.

air rights Historically, property owners owned to the center of the earth and to the top of the heav-

ens, which included the right to all the air above the property and the right to exclude trespassers

from that air. Until the invention of aircraft, the matter typically arose

only in disputes over the right to remove tree limbs extending over one’s

property. Today, aircraft constantly trespass into property owner’s air

space and violate their air rights.As an accommodation to modern tech-

nology, courts allow reasonable trespasses to air rights. Airports and

governments frequently purchase air rights adjacent to an airport,called

avigation easements, to provide glide paths for aircraft. (Because of the

scarcity of prime real estate near city centers, many local governments

are investigating and implementing plans to lease air rights above

transit hubs to developers, for building hotels and other such projects.)

agreement of sale air rights

Metlife

Grand Central Station

The 58-story MetLife building in New York City is

built in air rights above Grand Central Station

air space A three-dimensional slice of property above ground level. People who own condomini-

ums own the rights to a specific air space.

ALDA See Asset Conservation, Lender Liability and Deposit Insurance Act of 1996.

alienation The act of transferring ownership or some partial interest in real property from one

person to another. Voluntary alienation occurs when one executes a deed or a lease. Involuntary

alienation occurs when there is a foreclosure, tax sale, or condemnation.

alienation by devise Occurs when property passes by virtue of a will, and alienation by descent

occurs when it passes by intestate succession in the absence of a will.

aliquot parts subdivision Method of describing

large parcels of lands as being entire sections, or

regular percentages of sections. Under the public

land survey system employed in most southern

and western states, the states were divided into

townships containing 6 square miles each. Town-

ships were subdivided into 36 sections, and each

section had 640 acres. Smaller parcels are descri-

bed in terms such as quarters or halves of sections.

All townships and sections are numbered, so it is

fairly easy to identify a particular parcel of land by

reference to its section township number, section

number, and then its quadrant within the section.

alley A path between buildings or behind build-

ings, usually with walls on both sides.

alligator property Derogatory slang term referring to a property with negative cash flows that eat

up large amounts of investor cash.

all-inclusive deed of trust A purchase money deed of trust which is secondary to the seller’s

deed of trust to its own lender, which remains in place rather than being paid off at the time of

sale. Now largely extinct because almost all commercial lenders have loan clauses allowing them

to accelerate the note and demand all sums due immediately when a sale occurs. As a result, it is

now virtually impossible to sell property without paying off the first mortgage or deed of trust,

unless one engages in some type of fraud in order to prevent the lender from discovering the

property has been sold. (Similar to a wraparound mortgage, but used in states that employ deeds

of trust rather than mortgages.)

allodial system A system of real property law in which individuals may fully own all the rights

associated with property and dispose of that property as they wish. The system had been evolving

for many centuries, but the theory and the term were first clearly articulated by Thomas Jefferson in

1774,when he argued against an attempted land grab by King George III and used the theory to pro-

vide one of the supports for the American Revolutionary War. Contrast the allodial system with the

air space allodial system

W 1/2 320 acres

NE 1/4 160 acres

N 1/2 of SE 1/4

80 acres

N 1/2 of SW 1/4

of SE 1/4 20 a.

S 1/2 of SW 1/4

of SE 1/4 20 a.

1/4 of

1/4

40 acres

Subdividing a Section

feudal system, in which the sovereign owned all land and could grant usage rights to others, but

those rights were revocable at will.

allowance An accounting term used to describe entries on a profit and loss statement for expens-

es that might become necessary in the future. Examples include an allowance for bad debt, in

which a certain percentage of income is deducted because of the likelihood it will be uncollectible.

Alpha Sigma Gamma A national real estate honorary for college students participating in

real estate education programs. It is sponsored by the American Real Estate Society

(www

.aresnet.org/ASG/index.htm).

all-risks policy An insurance policy that covers all perils except those specifically excluded in

writing. Mortgage lenders typically require an all-risks policy on their collateral.

alluvium The material deposited on land by virtue of the process of accretion. The accretion

process occurs when rivers or other waters deposit silt and mud on land, and thus create more land;

the silt and mud making up the new land is called alluvium.

ALTA See American Land Title Association. The acronym is usually pronounced as a word—”all

tuh”—and used to describe a particular type of survey or other requirements imposed by the

lender at a real estate closing, for example, “The mortgage lender will require an ALTA survey.”

Although this expression is common, there is no such thing as “an” ALTA survey. There are various

ALTA requirements for a survey, some or all of which might be demanded by a lender.

alterations Physical changes to a property.Tenants are usually prohibited from making any alter-

ations to the leased property. Disputes arise over whether something constitutes an alteration, or

mere decoration or even repair.

alternative investments See specialty investments.

alternative minimum tax Tax reform enacted in 1969 as a result of the increasing financial bur-

den of the Vietnam War. It was designed to impose a flat tax upon wealthy individuals who used all

available tax shelters and loopholes in order to avoid paying any taxes at all.The treasury secretary

at the time, Joseph Barr, warned against a taxpayer revolt once it became widely known that the

country had 155 citizens who made over $200,000 per year but paid no income taxes at all, and 20

of them were actually millionaires! His predictions were accurate; more people wrote their con-

gresspersons to complain about the 155 “tax cheats”than wrote to complain about the Vietnam War.

To remedy the situation, Congress revised the Internal Revenue Code so that complex calculations

must be performed as if certain tax preference items were not deductible and then a minimum tax

imposed on that figure so that “wealthy”individuals would pay their fair share of the tax burden.The

problem with the system is that it is not indexed for inflation,so a 1969’s wealthy individual is today’s

typical two-income middle-class family. The New York Times predicts that, by the year 2010, nearly

30 million taxpayers will have to pay the alternative minimum tax. There is increasing pressure to

abolish the tax entirely, or to revise it to provide relief for middle-class Americans.

allodial system alternative minimum tax

alternative mortgage instrument Any mortgage other than a fixed-rate, fixed-term, fully

amortizing mortgage.

alternative workspace Various concepts relating to novel uses of space, including:

• Telecommuting. Working at home or on the road, with a computer network and possibly

video links to a central office.

• Hoteling. Using office space on an as-needed basis via reservations, like a hotel room.

• Hot desking. In which telecommuters come into the office and use any available office or

cubicle, without the need for reservations.

• Office sharing.

• Open office plans.

amendment A change to an agreement; an attachment added after contract execution in order

to modify or expand upon the original contract.

amenities Particular features that add to the value of a property, such as a whirlpool tub and

steam shower in a house, or swimming pool and tennis courts in a condominium project.

American Bankers Association A trade organization for officers of commercial banks

(www

.aba.com).

American Institute of Architects A professional association for architects, designers, and

developers (www

.aia.org).

American Institute of Real Estate Appraisers A professional organization formerly associated

with the National Association of REALTORS®. It merged with the Society of Real Estate Appraisers in

1991 to form the Appraisal Institute (www

.appraisalinstitute.org). It awards two designations, the

MAI (Member, Appraisal Institute) and SRA (Senior Residential Appraisal) to members who have

completed rigorous experience and testing requirements. In common parlance, an MAI appraisal,

being one performed by someone with the MAI designation, is supposed to be more accurate and

more reliable than one prepared by a licensed appraiser without the MAI designation.

American Land Title Association An association founded in 1907 as the trade association for the

abstract and title insurance industry (www

.alta.org).

American Motel Hotel Brokers Network An association for real estate brokers who special-

ize in hotels, motels, resorts, casinos, bed and breakfasts, and assisted living facilities

(www

.amhbnetwork.com).

American National Standards Institute, Inc. Founded in 1918, the organization (www

.ansi.org)

promulgates and oversees the implementation of a wide variety of standards, from acoustical

devices to building measurements to livestock production. It also accredits programs that assess

conformance to the ISO 9000 (quality) and ISO 1400 (environmental) management systems.

American Planning Association A professional organization of regional and urban planners

(www

.planning.org).

alternative mortgage instrument American Planning Association

American Real Estate and Urban Economics Association An organization of scholars and prac-

titioners concerned with the economic analysis of real estate activities. The association publishes

Real Estate Economics, the oldest academic journal concentrating on the real estate industry. The

organization’s Web site, www

.areuea.org, includes a searchable database of article abstracts.

American Real Estate Society Describes itself as an “association of real estate thought leaders…

dedicated to producing and disseminating knowledge related to real estate decision making and

the functioning of real estate markets.”Membership is open to anyone with an interest in real estate

research.The society’s Web site is www

.aresnet.org.

American Society of Appraisers A professional organization of appraisers (www

.appraisers.org).

It offers testing and accreditation in all appraisal disciplines, including

• Appraisal review and management

• Business valuation

• Gems and jewelry

• Machinery and technical specialties

• Real property

• Personal property

American Society of Farm Managers and Rural Appraisers Founded in 1929 as an association

of farm managers; it added rural appraisers in 1936. It confers the designation ARA (Accredited Rural

Appraiser).The organization’s Web site is www

.asfmra.org.

American Society of Home Inspectors (ASHI) A professional organization for home inspectors,

founded in 1976.It is North America’s oldest and largest professional society of home inspectors.The

organization’s Web site is www

.ashi.com.

American standard Shorthand for measurement methods used by the Building Owners and

Managers Association and adopted by the American National Standards Institute Inc. (ANSI) so that

there is uniformity in measuring and calculating office space.

Americans with Disabilities Act (ADA) A federal law that grants civil rights protections to

individuals with disabilities. It guarantees equal opportunity for individuals with disabilities in

public accommodations, employment, transportation, state and local government services, and

telecommunications.

• Real estate: The Act is most relevant in its provisions regarding public accommodation.

Responsibility for compliance is placed on both landlords and tenants, as well as other

property owners. Many commercial leases allocate the burden of ADA compliance so that

the tenant must pay for any alterations or improvements necessary to bring a property into

compliance.

• Places of public accommodation: These include a wide range of entities, such as restau-

rants, hotels, theaters, doctors’ offices, pharmacies, retail stores, museums, libraries,

parks, private schools, and day care centers. Private clubs and religious organizations

are exempt.

American Real Estate and Urban Economics Association Americans with Disabilities Act

• Accessibility for existing properties: Steps must be taken to remove barriers, if it can be

done easily and without much expense. The evaluation of the expense depends on the size

and financial strength of the entity.

• Accessibility requirements when a property undergoes alteration or renovation: For exam-

ple, if during renovations a doorway is being relocated, the new doorway must be wide

enough to meet the new construction standard for accessibility. When alterations are made

to a primary function area, such as the lobby of a bank or the dining area of a cafeteria, an

accessible path of travel to the altered area must also be provided. The bathrooms, tele-

phones, and drinking fountains serving that area must also be made accessible. These addi-

tional accessibility alterations are only required to the extent that the added accessibility

costs do not exceed 20 percent of the cost of the original alteration.

• Accessibility in new construction: The ADA requires that all new construction of places of

public accommodation, as well as of “commercial facilities” such as office buildings, be

accessible. Elevators are generally not required in facilities under three stories or with fewer

than 3,000 square feet per floor, unless the building is a shopping center or mall; the profes-

sional office of a health care provider; a terminal, depot, or other public transit station; or

an airport passenger terminal.

• Litigation: Private individuals may bring lawsuits to obtain injunctive relief to force com-

pliance with the ADA and recover their attorneys’ fees for the litigation, but may not

obtain money damages. Citizens may also file complaints with the United States attorney

general, who is authorized to bring lawsuits in cases of general public importance or

where a pattern of discrimination is alleged. The suit can ask for money damages and

civil penalties.

• The official ADA Web site is www.usdoj.gov/crt/ada/.

AMI See alternative mortgage instrument.

AML See adjustable mortgage loan.

amortization (1) In mortgages,the gradual payment of a loan, in full, by making regular payments

over time of principal and interest so there is a $0 balance at the end of the term. (2) In accounting,

refers to the process of spreading expenses out over a period of time rather than taking the entire

amount in the period the expense occurred. For example, some real estate closing expenses may

be deducted on one’s taxes in the current year, but others must be amortized over the life of the

mortgage loan and only a small percentage deducted each year.

amortization schedule A report that usually shows the principal and interest allocation of each

monthly payment during the first year, the total principal and interest paid in each subsequent year,

and the total interest that will be paid over the life of a loan. Download a template for creating loan

amortization reports by going to the Microsoft Excel Web site at h

ttp://office.microsoft.com/

en-us/templates.

Americans with Disabilities Act amortization schedule

Loan principal amount $175,000.00 Annual loan payments $13,971.36

Annual interest rate 7.000% Monthly payments $1,164.28

Loan period in years 30 Interest in first calendar year $12,193.68

First year of loan 2007 Interest over term of loan $244,140.80

First month of loan January Sum of all payments $419,140.80

Beginning Cumulative Cumulative Ending

Year Month Balance Payment Interest Principal Interest Balance

2007 Jan $175,000.00 $1,164.28 $1,020.83 $143.45 $1,020.83 $174,856.55

Feb $174,856.55 $1,164.28 $1,020.00 $287.73 $2,040.83 $174,712.27

Mar $174,712.27 $1,164.28 $1,019.15 $432.86 $3,059.98 $174,567.14

Apr $174,567.14 $1,164.28 $1,018.31 $578.83 $4,078.29 $174,421.17

May $174,421.17 $1,164.28 $1,017.46 $725.65 $5,095.75 $174,274.35

June $174,274.35 $1,164.28 $1,016.60 $873.33 $6,112.35 $174,126.67

Jul $174,126.67 $1,164.28 $1,015.74 $1,021.87 $7,128.09 $173,978.13

Aug $173,978.13 $1,164.28 $1,014.87 $1,171.28 $8,142.96 $173,828.72

Sep $173,828.72 $1,164.28 $1,014.00 $1,321.56 $9,156.96 $173,678.44

Oct $173,678.44 $1,164.28 $1,013.12 $1,472.72 $10,170.08 $173,527.28

Nov $173,527.28 $1,164.28 $1,012.24 $1,624.76 $11,182.32 $173,375.24

Dec $173,375.24 $1,164.28 $1,011.36 $1,777.68 $12,193.68 $173,222.32

Year Beginning Payment Principal Cumulative Cumulative Ending

Balance Principal Interest Balance

2008 $173,222.32 $13,971.36 $1,906.07 $3,683.75 $24,258.97 $171,316.25

2009 $171,316.25 $13,971.36 $2,043.97 $5,727.72 $36,186.36 $169,272.28

2010 $169,272.28 $13,971.36 $2,191.73 $7,919.46 $47,965.98 $167,080.54

anaconda mortgage A mortgage containing a clause saying it secures the debt originally intend-

ed by the parties, and all future debts that may become due and owing in the future. Such clauses

are sometimes called dragnet clauses or Mother Hubbard clauses.The effect is that a borrower with

multiple loans—real estate, automobile, line of credit, checking account overdraft protection, busi-

ness—may find that the lender will require all sale proceeds when the property is sold, even though

the borrower might have substantial equity under the terms of the specific note originally secured

by the mortgage. Debtors find themselves squeezed to death, like being encircled by an anaconda

snake.The courts disfavor such clauses and usually refuse to enforce them unless there is some rela-

tionship among the debts and some specific reference in later loan documents to the earlier anacon-

da clause. Despite that, it is recommended that you ask mortgage lenders to delete the clause from

their instrument before you sign.

anchor tenant A major department store or chain store located in a shopping center so as to

attract customers who will then shop at the smaller, satellite stores; sometimes referred to as a

traffic generator or magnet store.

amortization schedule anchor tenant

• Because of the critical importance of that traffic to the smaller tenants, wise shopping

center owners in a position to negotiate terms will prohibit the anchor from going dark,

meaning vacating its space. Otherwise, the anchor could move to a more desirable loca-

tion, continue paying the rent for the old property, but effectively cause most of the other

tenants to go out of business and default on their leases because of the lack of traffic.

Unfortunately, important anchor tenants usually have the clout to refuse to sign a lease

with such terms.

• Anchor tenants often reserve the right to dictate the selection of the satellite tenants and to

prohibit ones which might be incompatible with their core philosophies (such as liquor

stores) or who might compete with their merchandise sales.

• A related term is shadow anchor, used when a small shopping center wants to commu-

nicate that an important traffic generator is next door or directly across the street. An ad

might read, “Subject property shadow anchored by Wal-Mart to the east and Target to

the west.”

ancient lights doctrine Early English doctrine holding that one could not build a structure so as

to block the sunlight from a neighbor’s window. Despite the abundance of available land in this

country, Americans love of high-rise architecture, coupled with a general unwillingness to expand

private property rights to contiguous spaces, means that the concept never really caught on here.

One exception occurs when a neighbor builds a spite fence for a malicious purpose to obstruct

light; the courts will order removal of the fence. Recently, some courts are revisiting the doctrine

and allowing application,especially as it relates to the use of solar-powered equipment.Such courts

reason that public policy now disfavors unbridled development and favors use of alternative

energy sources.

ancillary tenant A shopping center tenant that occupies smaller space and is less important than

an anchor tenant. See satellite tenant.

angel investors See venture capital.

animal unit A unit of measurement indicating the ability of land to support range animals.

Generally, a 1,000-pound animal grazing 26 pounds of dry forage per day (a mature cow or

equivalent) is equal to one animal unit. Livestock grazing permits are usually expressed in terms of

animal units per area or total animal unit months.

annexation The process of joining property to another. Arises in two contexts: (1) Personal prop-

erty is annexed to real property, becoming a part of it, and must remain if the property is sold or if a

leasehold interest comes to an end. (2) Local governments expand their jurisdictional limits and tax

bases by annexing property. The process is usually accomplished through local ballot and is gener-

ally hotly contested by groups of property owners who do not want to lose their independence or

see an increase in property taxes.

annual bumps Slang for annual increases in such items as rent or operating expenses.

anchor tenant annual bumps

annual cap An agreed-upon limit on the amount an adjustable-rate mortgage may increase

the interest rate each year. Consumer mortgages usually have annual caps; commercial mortgages

usually do not.

annual debt service The total of all principal and interest payments made over the course of a

year.This figure provides one of the analytical tools for mortgage lenders of income-producing prop-

erties, who compare net annual income of the property to annual debt service on the proposed

mortgage to arrive at a debt service coverage ratio. Acceptable ratios depend on the particular

industry and on lending market conditions at the time.

annual mortgage constant The amount of annual debt service compared to the principal

amount of a loan and then expressed as a dollar amount.

Annual debt service  Mortgage principal  Annual mortgage constant

The constant tells you the total principal and interest payments per year per $100 of debt. (Before

the widespread availability of simple financial calculators and computer spreadsheet templates,

figures obtained from annual mortgage constant tables were the only quick and reliable way to

calculate mortgage payments.)

annual percentage rate (APR) Usually different from the quoted interest rate or face rate on a

promissory note, the annual percentage rate is a creation of the federal Truth in Lending Act, which

requires that certain loan expenses be treated as if they were additional interest paid over the life of

the loan, and then a new interest rate calculated based on that assumption.The intent was to force

standardization in calculating the cost of obtaining credit, so that consumers could shop wisely and

make informed decisions without fear of hidden charges making credit more expensive than antic-

ipated. In reality, there is no real consensus or practical guidance about the necessity to include or

ability to exclude many loan charges from the APR calculations, resulting in continued widespread

confusion about the cost of credit.

Annual Percentage Rate Finance Charge Amount Financed Total of Payments

The cost of your credit as The dollar amount The amount of The amount you

a yearly rate. the credit will credit provided to will have paid

cost you. you on your behalf. after you have

made all payments

as scheduled.

8.69% $227,087 $125,000 $352,087

Sample disclosures required by the Truth in Lending Act for a $125,000 loan for 30 years at a quoted interest

rate of 7.25% but a higher APR because of prepaid interest points and other charges

annuity A sum of money received on a regular basis as one of a series of fixed payments. Real

property is sometimes sold in exchange for a private annuity.The buyer guarantees a fixed monthly

income to the seller for the seller’s lifetime.The seller, of course, is gambling he or she will live much

longer than anyone could expect, and thus ultimately receive far more than the property was worth.

annual cap annuity

The buyer is gambling that the seller will die sooner as opposed to later, and the buyer will have a

windfall. Wise sellers will include a clause guaranteeing a minimum term for payments, even if they

must be made to their estate or heirs. See advance payment annuity and ordinary annuity.

annuity due See advance payment annuity.

anticipation,principle of In appraisal, the concept that the value of property today is equal to the

value of future income, discounted to present value. Discounting rests on the assumption that the

right to receive $1 in the future is not worth $1 today, but something less than $1.

anticipatory breach An affirmative statement or action indicating that a party has no intention of

honoring his or her contractual commitments.This is important because one cannot ordinarily bring

a lawsuit until there has been an actual breach of a contract. For tactical or other reasons, it may be

important to avoid delays. If there has been an anticipatory breach, the aggrieved party may bring

suit immediately.

antideficiency legislation Laws in some states that protect consumers from deficiency judg-

ments after foreclosure of a purchase-money mortgage on residential real estate. The lender may

take the real property in satisfaction of the debt. If the property is worth less than the debt at that

time, the lender suffers the loss and may not sue the borrower for the difference.

antitrust laws State and federal laws designed to encourage competition and discourage

or prohibit monopolies. Relevant in the real estate context because of the somewhat monopolis-

tic power of local real estate boards, their ability to admit or exclude members, the possibility

of de facto (informal) price fixing relative to real estate commissions, and their control of

the Multiple Listing Service® database of properties offered for sale. This is an exceptionally

complex area of law. (For more information, visit the Department of Justice Web site at

www

.usdoj.gov/atr/overview.html and the National Association of REALTORS® antitrust pages at

www

.realtor.org/libweb.nsf/pages/fg704.)

APA See American Planning Association.

apartment (building) A building with multiple residential tenants.

APFO See adequate public facilities ordinances.

APN See assessor parcel number.

APP Shorthand for appreciation.

appeals board A local board empowered to overturn decisions of a permitting, zoning, taxing, or

other regulatory authority. Before embarking on any possibly contested activity in these areas, such

as a zoning change request, it is extremely important to determine the name and requirements of

the correct appeals board, should it become necessary to ask for reversal of a decision. Many boards

have very limited and technical grounds for appeal that, if known in advance, can be factored into

tactical decisions at the level below. In addition, the time limits for filing appeals are generally

extremely short.

annuity appeals board

application fee A fee charged by a lender, ostensibly for the time and trouble involved in process-

ing a loan request, analyzing available data, and calculating what terms and conditions to offer. In

reality, this view is a holdover from the days when consumers went to lenders, hat in hand, to plead

for money.In today’s very competitive lending market,where virtually every television show includes

at least one mortgage lender as an advertiser, it is ludicrous to think that a consumer would pay

someone for the opportunity to review a loan request.This fee will usually be waived upon request;

it is simply another source of profit for the lender.

apportion To divide into parts.Co-owners of property may decide to apportion maintenance costs

among themselves, according to the percentage of ownership enjoyed by each. Buyers and sellers

usually apportion real estate taxes so that the portion earned by local government before closing,but

not yet paid because not yet due,will be paid by the seller in the form of a credit against the purchase

price.When the property tax bill is later received by the buyer, he or she will pay the entire bill in full,

but will have already received the equivalent of reimbursement through the credit at closing.

apportionment Division into parts. Typically used when deciding how to allocate expenses rela-

tive to oil and gas leases, and when deciding that portion of the income of a company or utility that

was earned in a particular state and thus subject to state income taxes. See apportion.

appraisal The process of developing an opinion about a property’s value. That opinion is sup-

posed to reflect what a willing buyer would pay a willing seller after reasonable exposure to the

marketplace,with neither buyer nor seller operating under any sort of duress or pressure.An apprais-

al is generally required when property is financed,and should be required before a real estate agent

attempts to market anything significantly different from properties commonly and frequently sold

in the marketplace.It may not be necessary to obtain an appraisal of a four-bedroom ranch house in

a good school zone, but some assistance may be needed in arriving at a price to market an 11,000

square foot ski-lodge-type home in a small town.

• There are three common approaches to estimating the fair market value of a property. They

are comparison, cost, and income.

• The comparison approach to appraisal seeks to obtain information about recent sales of

comparable properties. It would be highly unlikely for the properties to be identical, so the

appraiser will make adjustments in the sale price of the other comparable properties—

called comps for short—in order to calculate what the sale price might have been if it were

identical to the subject property. For example, if the subject property had no garage, but

the comp had a two-car garage, the appraiser might subtract $50,000 from the sale price of

the comp. The appraiser might then add $30,000 because the subject property has a fin-

ished attic providing more livable square footage, and another $15,000 because the subject

property is brick while the comp is wood frame needing new paint. A residential appraiser

will typically use three comps, commercial appraisers will employ more because it’s gener-

ally difficult to find truly comparable properties, resulting in a large number of adjust-

ments. The more adjustments, the more likely error will creep into the calculations. At the

end of the process, the appraiser will have a value based on the comparison approach.

application fee appraisal

• Cost approach. This approach uses an estimate of the reproduction or replacement cost of

the improvements, less depreciation, plus land value. The reproduction cost is the amount

necessary to build exactly the same building. Replacement costs are those necessary to

build an improvement with substantially the same usefulness using today’s materials and

techniques, but not necessarily the same exact characteristics.

• Income approach. This approach assumes that the value of the real estate is directly relat-

ed to the value of the income generated by that real estate, such as shopping centers,

apartments, and office buildings. The appraiser will calculate a net operating income

(NOI) for the property by taking all possible income over the course of a year, and then

subtracting operating expenses, insurance, real estate taxes, reserves for bad debts, a cer-

tain percentage for anticipated vacancies, and sometimes a certain dollar amount for the

value of the owner’s management and supervision. The bottom line number, the NOI, is

then capitalized by dividing it by a certain percentage. That percentage rate is supposed

to reflect the return an investor would expect on his or her money taking into considera-

tion all the variables associated with the property. Variables could include the strength of

the tenants, the likelihood of default, the remaining term on the leases, the prospect of

future rent increases built into the leases, the likelihood of lease renewals at the expira-

tion of current terms, the cost of financing to purchase the property, the availability of

other investment sources and their rates of return, and other such factors. If a property

had an NOI of $100,000 and a capitalization rate (cap rate for short) of 10 percent, then

you divide $100,000 by 0.1 and arrive at a value of $1,000,000. Increasing the cap rate to

11 percent decreases the value to $909,090. Decreasing the cap rate to 9 percent increases

the value to $1,111,111.

• Integration. Sometimes the appraiser will have to employ several methods in order to

account for different aspects of the property. An income-producing property might include

additional acreage for future development. The appraiser would value the current

improvements using the income approach, and the surplus or excess land using the

comparable approach.

• Reconciliation. At the end of the analysis, the appraiser will take all methods employed, as

appropriate to the property, and reconcile the differing values into one value. This will then

be the appraised value of the property.

appraisal review A report that comments on the completeness and accuracy of an appraisal

report. Lenders frequently employ in-house review appraisers as a check on the accuracy and

honesty of third-party appraisals.

appraiser One who performs appraisals of real or personal property.The various associations and

organizations for real estate appraisers include:

• Appraisal Institute (www.appraisalinstitute.org). Offers the designation MAI, among

others.

• National Association of Independent Fee Appraisers (NAIFA) (www

.naifa.com). Founded

in 1961.

appraisal appraiser

• National Association of Master Appraisers (NAMA) (www.masterappraisers.org). Founded

in 1982. It offers three designations: Master Residential Appraiser; Master Farm and Land

Appraiser, and Master Senior Appraiser.

• National Association of Real Estate Appraisers (NAREA)

(www.iami.org/NAREA/home.cfm). Founded in 1966.

• National Association of Review Appraisers and Mortgage Underwriters (NARA/MU)

(www.iami.org/NARA/home.cfm). Founded in 1975.

• National Society of Real Estate Appraisers

(www.nareb.com/affiliates/society_appraisers.shtml).

• American Society of Farm Managers and Rural Appraisers (www.asfmra.org).

appreciation The process of increasing in value. As a practical matter, although the IRS allows

taxpayers to depreciate real property improvements as if they were becoming less valuable over

time and will eventually be worthless, real property generally appreciates over time with proper

maintenance and repair.

appreciation return Expressed as a percentage, the return generated by the appreciation of a

property or portfolio over the period of analysis.

appropriation (1) Taking private land for public use, as by condemnation. (2) Taking public prop-

erty for private use,such as using water from a navigable river for irrigation purposes.(3) Legislatively

designating government funds for a project.

appurtenance That belonging to something of greater importance. Contracts usually describe a

main structure and add a catchall for all appurtenances. (See figure on page 34.)

• In real estate law, easements, or the right to use another’s property, may be appurtenant or

in gross.

• If appurtenant, then the easement belongs to what is called the dominant estate (property)

and passes to new owners for all time until the easement is abandoned. For example, an

easement for ingress and egress over another’s property is an easement appurtenant. The

property that enjoys the easement is the dominant estate, and the property over which one

may travel is called the servient estate. A sale of the dominant estate automatically includes

a transfer of the easement, because it is appurtenant.

• Contrast with an easement in gross, which might be a right to park one’s antique car at a

friend’s house and gain ingress and egress for purposes of using the car. This easement is

personal and not tied to any particular real estate.

• This is a tricky area of the law that generally requires the assistance of a lawyer specializing

in complex real estate issues. The seminal case on the subject is the 1850 English case of

Ackroyd v. Smith.

APR See annual percentage rate.

ARA See Accredited Rural Appraiser.

arable Able to be cultivated.

appraiser arable

arbitrage The simultaneous purchase in one market and sale in another market of a commodity,

security, or monies,in the expectation of making a profit on price differences in the differing markets.

Generally thought of as involving foreign currency exchanges, in which one enters contracts to buy

euros and sell yen and hopefully make money in a moment in time when the exchange rates work

out in one’s favor (this is highly risky).

arbitraries Shortened property descriptions used in title plants for indexing real properties,rather

than the sometimes lengthy, technically accurate, surveyor’s descriptions. Also called arbs.

arbitration A method of nonjudicial or alternative dispute resolution (ADR) which long existed

at common law but has recently gained renewed vigor because of the Federal Arbitration Act and

the U.S. Supreme Court’s pronouncements that the Act applies to all disputes involving matters

in interstate commerce. Virtually every construction contract, architectural agreement, and mort-

gage loan document today contains an arbitration clause and is deemed to involve interstate com-

merce because of the nationwide impact of those industries. The American Arbitration Association

maintains a Web site at www

.adr.org.

The process relies upon aggrieved parties agreeing to one or more disinterested persons hearing

their complaints and defenses and then coming to a conclusion establishing the rights and respon-

sibilities of the parties and their damages, if any. In theory, at least, the arbitrators are skilled and

knowledgeable in the particular field of the dispute and allowed to factor into their decisions their

own knowledge and experiences. This is in contrast to the modern jury system, in which the law

seeks to obtain a jury absolutely ignorant of any details of the industry or dispute, and willing to

come to a conclusion based solely on the evidence presented by the lawyers.

• Pros. The process is usually much more informal than a traditional trial, allowing a leveling

of the playing field when consumers attempt to represent themselves against lawyers

arbitrage arbitration

Elm Street

Servient estate

Right of way

easement

Dominant estate

representing the other side. In some markets, for some types of disputes, you can reach a

hearing and resolution faster and more cheaply than in the court system. For others, a

shortage of trained arbitrators for complex cases means the dispute might actually take

longer. There are no formal rules of evidence, and the arbitrator simply factors in issues

such as hearsay when deciding how much weight to give evidence, rather than excluding it

entirely. Discovery is usually very limited in consumer cases so that extensive time and

money is not spent searching for documents to produce, attending depositions, and other

such matters. The final judgment is confidential and not publicly reported anywhere unless

it is a money judgment not paid within the required time period, in which case the winner

may record his or her arbitration award in the public records and attempt to enforce it.

• Cons. As a practical matter the arbitration award cannot be appealed or overturned, even

if the arbitrator made obvious mistakes of law that directly resulted in a wrong decision.

There are exceptions, but they are exceedingly technical, generally disfavored by appellate

courts, and usually require a level of sophistication at the hearing level not enjoyed by

most consumers. That is because, for most of the few allowable grounds of appeal, you

must know those grounds and all their technicalities in advance and make tactical deci-

sions at the hearing level that will preserve your rights to appeal. This lack of appellate

rights was considered a trade-off for the ability to have an arbitrator knowledgeable about

your field and supposedly able to reach a more fair decision than a jury. In reality, this

rarely works out.

architecture The science and art of structural design and construction supervision.

Architectural and Transportation Barriers Compliance Board The former name of the Access

Board.

architectural drawings Project drawings provided by the architect, typically showing the floor

plan; elevations (views of the various sides of the structure); finish schedules; and details of moldings,

cabinetry, doors, and other such matters necessary for the builder to order the proper materials for

construction. It typically does not include engineering drawings for heating and air conditioning,

electrical, audiovisual, telecommunications, security, waste management or plumbing systems, or

landscaping plans and topographical details. All such plans, obtained from other professionals, are

typically combined with the architectural drawings into a set of working drawings.

area A measurement of the square footage contained within certain boundaries.

ARELLO See Association of Real Estate License Law Officials.

ARES See American Real Estate Society.

AREUEA See American Real Estate and Urban Economics Association.

Argus A computer program widely used among real estate investors to analyze portfolio perfor-

mance and purchase opportunities. It is becoming increasingly important for graduates of business

schools to have working knowledge of the Argus software if they want to secure employment with

arbitration Argus

large institutional owners and managers of real estate. (For more information go to Realm Web site

at www

.realm.com.)

ARM See adjustable-rate mortgage.

arm’s-length transaction A transaction in which the parties have equal bargaining strength in

order to protect their individual interests and are not related or involved in some other type of rela-

tionship that would tend to call into question the fervor with which they attempt to protect their

interests. If the IRS determines that a sale of real estate was not an arm’s-length transaction for fair

market value, it may deem part of the value of the property as a gift, which could result in gift taxes.

arrears (1) Being past due on a debt. (2) Paid at the end of the period rather than the beginning.

Rent is usually paid in advance, at the beginning of the month for the coming month.Interest is usu-

ally paid in arrears, at the beginning of the month for interest accrued during the prior month. Real

estate taxes are usually paid in arrears.

arterial street Designed to carry traffic through an area as quickly and efficiently as possible in

order to reach another destination. One might not want to locate a retail business on an important

arterial street, because there would be limited ability for commuters to exit the artery and shop at

the retail establishment.Arterial streets are designed for the benefit of the city as a whole,rather than

the communities through which they pass. See feeder road.

artificial intelligence The ability of a computer program to evaluate data and make decisions

according to parameters set out in the software. Automated underwriting software is a type of

artificial intelligence. The increasingly popular AVM—automated valuation model—uses artificial

intelligence and related property data to create appraisals for lenders and for the IRS.

artificial person A legal entity that is granted some of the rights and responsibilities of a natural

person, such as corporations that may enter into contracts, partnerships that may sue and be sued,

and church associations that may hold title to real estate.Almost all artificial persons enjoy the same

rights and responsibilities as each other.

ASA See American Society of Appraisers.

asbestos A mineral fiber once commonly used for its fire-retarding and insulation properties. It

was widely employed in insulation, roofing, floor tiles, household products, and appliances. After

extensive studies, the Environmental Protection Agency determined that asbestos caused lung and

stomach cancer in people exposed to it over long periods of time. If real property contains asbestos

in it, most lenders will require removal, or a firm commitment for removal, before they will fund any

loans to buy or renovate the property. Real estate agents are required to disclose the presence of

asbestos on property, if known. Asbestos removal is generally accomplished by specially trained and

licensed asbestos abatement contractors.

asbestos containing material (ACM) Under Environmental Protection Agency regulations, any

material containing more than 1 percent asbestos. There are different regulatory requirements

depending on whether the ACM is friable or nonfriable.

Argus asbestos containing material (ACM)

as-built drawing Not infrequently, the owner or contractor of a building under construction

will make field modifications to the original architectural or engineering drawings. Ideally, all such

modifications should be noted on one set of plans set aside for that purpose. At the completion of

the project, the respective professionals will be asked to generate a new set of drawings showing

the actual construction details, rather than original designs, so that future work can be planned

and executed in a knowledgeable manner with reference to what already exists in the property.

In the alternative, long after a building has been constructed, the owner may employ professionals

to prepare plans showing all details of the building and its various systems. Both of these result in

as-built drawings.

as is In its current condition without any guarantees by the seller.

as-is value An estimate of the value of real property in its current condition, which may be

depressed because of necessary repairs and maintenance.

ASHI See American Society of Home Inspectors.

assemblage The process of putting together the purchase, or options for the purchase, of several

small parcels from multiple owners in order to create a larger parcel of land. The goal is to obtain

enough land for a particular development in mind, or to conduct the assemblage as a speculative

venture,in order to sell the larger parcel for more money than it cost to purchase the smaller parcels.

This increase in value due to the assemblage is called plottage value.

assessed value The value of real property for the purposes of calculating property taxes and other

similar charges such as school taxes and fire district dues; the tax appraiser will establish a fair mar-

ket value for the property. The assessed value is then frequently calculated as a specific percentage

of the appraised value. Oftentimes the percentage will vary depending on the use of the property

and any applicable exemptions. In some states, for example, property is assessed at 20 percent of its

fair market value. Persons residing on their property, and claiming a homestead exemption, may be

entitled to an assessment of 10 percent of fair market value.

Example: Assessed Value of Real Property at 310 Main Street

Appraised value $370,000

Assessment ratio of 10% for owner-occupied

residential properties, results in assessed value $37,000

Tax rate of 2% of assessed value $7,400

Taxes due $7,400

assessment (1) The official valuation of property for tax purposes. (2) A one-time charge made

against property owners for each one’s pro rata share of the expense of repairs or improvements to

be enjoyed by all of them in common, such as a condo association assessment to replace a roof, or

a local government assessment to pave a dirt road. (3) Determination of the value of property in a

condemnation case.

as-built drawing assessment

assessor A public official charged with maintaining the property tax rolls and the accuracy of the

appraised and assessed value of properties.

assessor parcel number (APN) A number assigned by the local assessor in order to identify a par-

ticular property. Often used in real estate contracts until a more detailed legal description can be

obtained, because each parcel has its own unique APN; deemed to be more reliable than a street

address.

asset Something of value. On a balance sheet or personal financial statement, assets will include

the following items, typically arranged in order according to the ease with which they can be

converted into cash:

Cash and equivalents

Cash on hand

Cash in banks

Marketable securities

Receivables

Accounts receivable

Less reserves for bad debts

Furniture, fixtures, and equipment

Fine art

Real property

General intangibles

Stock in closely held corporations

Intellectual property rights

Goodwill

When lenders examine balance sheets, they generally assume that individuals and small businesses

overvalue the furniture, fixtures, and equipment and the general intangibles. Large entries for cash

and equivalent assets will overcome a poor credit rating 9 times out of 10.

Asset Conservation,Lender Liability and Deposit Insurance Act of 1996 An amendment to the

Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) made in

response to mortgage lender anxiety regarding statutory language that might make lenders liable

for cleanup of contaminated sites, simply by virtue of their mortgage interest or as the result of a

foreclosure.The amendments protect lenders from liability, preforeclosure, unless they participated

in the contamination. It also shields them after a foreclosure, but only if they sell the property at the

earliest practicable, commercially reasonable, time.

asset cost recovery system (ACRS) See accelerated cost recovery system,which is the correct name

for an outdated tax accounting methodology abbreviated as ACRS. Unfortunately, one often

encounters this method erroneously described as “asset cost recovery system.”

asset depreciation range (ADR) An elective depreciation method allowed by the IRS after 1970

and before 1981.It had over 100 classes of property from which to choose appropriate depreciation

periods.The entire system was a hotbed of taxpayer versus IRS controversy, so it was replaced by the

assessor asset depreciation range (ADR)

ACRS system in 1981, and then by the MACRS in 1987. One still encounters the ADR in literature, but

it no longer exists.

asset management The umbrella name for all phases and areas of expertise in the acquisition,

management, leasing, operation, and eventual sale of real property assets.

assign To transfer one’s property rights or contract rights to another. In the context of real proper-

ty, an assignment is commonly used in three circumstances: (1) An investor signs a contract to pur-

chase real property and reserves the right to assign that contract to some business entity to be

created in the future, but still owned or controlled by the same investor. (2) An investor wishes to

purchase property anonymously because of fears the owner will increase the asking price if he or

she knew the identity of the true purchaser. As a result,the investor employs a straw man to sign the

purchase contract,and the contract is then assigned to the ultimate purchaser. (3) A speculative pur-

chaser of condominium units or other property to be built in the future will sign a purchase contract

for a fixed price, in the expectation that prices will increase dramatically by the time construction is

completed. At that time the speculator may then assign their (below-market price) contract to

another for a substantial profit.

assignee One to whom a contract or lease has been assigned. See assign.

assignment of lease Transferring all rights in a lease to real property to another. Leases typically

contain prohibitions against assignment without landlord approval, but the approval may not be

unreasonably withheld. Reasonable grounds may include a change in the creditworthiness of the

tenant, an increase in the burden placed upon the property by the new tenant because of addition-

al parking demands, or incompatibility with other tenants such as a liquor store coming into a small

shopping center of family-oriented businesses. When a tenant assigns its lease, it remains liable for

the entire lease term unless the landlord agrees to a novation, which is a declaration that the old

lease is void and the landlord has entered into a direct relationship with the assignee.

assignment of rents Additional collateral usually required by lenders for commercial properties.

The lender may wish to take some step short of foreclosure if there is a default. By virtue of the

assignment of rents, the lender may exercise its rights to contact all tenants and advise them to pay

their rent directly to the lender rather than to the landlord borrower.

assignor A person making an assignment.

associate broker A real estate classification used in some states to describe someone who has

obtained his or her broker’s license and is thereby legally capable of heading a real estate office, but

who works as a salesperson under the supervision and control of the lead broker, usually called the

qualifying broker or a managing broker.

Associated Builders and Contractors (ABC) A national trade association representing contractors,

subcontractors, materials suppliers, and related firms.The organization’s Web site is www

.abc.org.

Associated General Contractors of America (AGCA) A trade association for general contrac-

tors; established in 1918 after Woodrow Wilson expressed a need for such an organization. The

organization’s Web site is www

.agc.org.

asset depreciation range (ADR) Associated General Contractors of America (AGCA)

Association of Real Estate License Law Officials (ARELLO) This association was organized in

1929 to facilitate the exchange of information and cooperation among regulators and policy mak-

ers in the area of real property. Today, the ARELLO mission statement is to “Support jurisdictions in

the administration and enforcement of real estate license laws to promote and protect the public

interest.”Their Web site, www

.arello.org,includes a consumer section with links to consumer protec-

tion agencies and to a database for checking whether persons selected by you have current real

estate licenses in their jurisdiction.

assumable loan A loan that can be taken over by a purchaser, who may then continue making

payments in the same amount, at the same interest rate, for the remaining term of the loan.

History and background: Before the high interest rates and banking crises of the 1980s, most mort-

gage loans were freely assumable if the purchaser paid a small assumption fee.Problems arose when

interest rates skyrocketed to nearly 20 percent, creating a lively market in people wishing to assume

old 6 and 7 percent loans rather than obtain new purchase money loans at 20 percent.The lending

industry also began to see a high percentage of non-credit-worthy purchasers, unable to obtain

financing on their own, assuming loans. This all seemed good for consumers, but it was bad for

lenders. Caught in the squeeze, many went under in the giant banking and savings and loan deba-

cles of the era. To prevent future interest rate squeezes, and future underwriting disasters, lenders

introduced a new loan clause called the due on sale clause. It stated that if the underlying property

were sold or otherwise conveyed, the entire note would be due and payable immediately, even if it

had not matured and there had never been a single default or late payment. California led the way

of states antagonistic to this attempted infringement on consumer rights and outlawed the enforce-

ability of due on sale clauses. The federal government, facing gigantic cash losses as a result of its

lending industry bailouts, was strongly in favor of due on sale clauses so the current crisis would not

repeat itself in the future.It passed legislation preempting states laws in the case of all federally char-

tered or federally insured (FDIC) financial institutions. The new law stated that due on sale clauses

were enforceable and state laws to the contrary did not apply.The ability to assume mortgage loans

is now effectively dead.

Today, some loans are still characterized as assumable, but the purchaser must meet all underwrit-

ing requirements necessary for an original loan, and the interest rate can usually be increased to

market rates.In a true loan assumption, the original borrower remains liable on the promissory note,

in addition to the purchaser of the property.

assumptions and limiting conditions A recital of the assumptions on which an appraisal is

based.These typically include matters such as: the appraisal is an accurate reflection of the value of

the property, but only if there are no hidden defects, there are no boundary line problems, factual

information obtained from others is correct, zoning allows the current or anticipated future use, and

other such matters.

at-risk rules IRS rules limiting the deductibility of some losses, which are not allowed to exceed

the amount the taxpayer has at risk, meaning the total of cash contributions and liability on promis-

sory notes. Under certain circumstances, nonrecourse loans secured by real property but not by the

Association of Real Estate License Law Officials (ARELLO) at-risk rules

individual’s guarantee or endorsement may still satisfy the at-risk rules.(For more guidance, go to IRS

Web site www

.irs.gov and download IRS Publication 925,“Passive Activity and At Risk Rules.”)

attached housing Housing that is attached to each other

on at least one side. Contrast with detached housing, which is

best exemplified by the traditional suburban home.

attachment The legal process of seizing real or personal

property for the payment of nonmortgage debts such as tax

liens or judgments.

attest To witness by observation and signature, as one who attests that another has signed a real

estate contract. Contrast with acknowledgment,in which the signer states he or she signed the doc-

ument voluntarily, and then a notary public or other such individual affixes his or her signature and

seal as evidence of hearing the acknowledgment and witnessing the signing.

attorn The act of a tenant formally agreeing to become the tenant of a new landlord, but for the

same property. Usually occurs when there has been a sale or foreclosure of the leased property.The

new owner will want to obtain an attornment in order to cut off defenses and claims the tenant

might have against the old landlord, and to prevent the old landlord from muddying the waters by

making claims for rent, even though no longer owning the real estate.

attorney-in-fact A person authorized to act for another under a properly executed power of

attorney.

attorney’s opinion of title The written opinion of an attorney regarding the identity of all current

title owners, lienholders, and possible claimants to a particular parcel of land. Although lenders

always require title insurance, which will pay off claims if the title opinion turns out to be inaccurate,

many cash purchasers are content with simply the attorney’s opinion of title. If other persons then

assert claims in the future,the purchaser may suffer loss of the property, with the only recourse being

to sue the attorney for malpractice,a difficult and expensive process and one further complicated by

the general inability to find lawyers willing to sue other lawyers.

attornment See attorn.

attractive nuisance A concept in tort law holding that if a person creates or allows a condition

to exist on his or her property that a reasonably prudent person would know presents a danger to

children, then that person must take steps to protect children of tender years from the condition,

especially if it is something known to be attractive to small children. Liability can also be imposed if

someone creates such a condition on someone else’s property or even in a public place. Examples

would be a swimming pool on one’s own property, a rope swing installed by a private individual over

a pond in a public park,or even an old refrigerator dumped by the side of the road in a rural area,but

which could trap and suffocate children inside.Many courts hold that an artificial body of water, such

as a pool, is an attractive nuisance but a natural one, such as a pond, is not.

at-risk rules attractive nuisance

auction A sales technique in which real or personal property is offered for sale and bidders

make oral offers in varying amounts until one is accepted. Frequently used for involuntary trans-

fers of real estate, such as foreclosures and tax sales. In some states, foreclosure auctioneers

must be licensed.Where property is offered by the owner voluntarily for auction sale, the fine print

in the auction terms usually contains a provision for a buyer’s premium. The amount of the

winning bid is automatically increased by the stated amount, and that percentage is used to pay

the auctioneer’s fees.

automated mortgage underwriting Loan processing that is entirely or predominantly per-

formed by computers using artificial intelligence, without human assistance or intervention. The

computer has a complex set of instructions to follow depending on the data input by the consumer

or by a data entry clerk, including ordering credit reports and other financial data and evaluating all

borrower information against predetermined profiles for acceptable lending requirements.

automated valuation model (AVM) Originally a computerized method of estimating large num-

bers of property values in an efficient,if not entirely accurate,manner;frequently used by tax apprais-

ers to periodically reappraise properties for purposes of real estate taxes. A disgruntled property

owner may appeal the valuation and present evidence the computer made a mistake in that partic-

ular instance. Today, AVM artificial intelligence has progressed to the level of respectability that

lenders use it to appraise property for mortgage loan purposes and the IRS uses it to evaluate a

taxpayer’s assets.

automatic stay A bankruptcy provision that stops all creditor actions,including foreclosures,imme-

diately upon a debtor’s filing for bankruptcy protection. There is then a breathing period during

which no creditor action may take place.Afterward,a creditor may ask the court for permission to pro-

ceed, called a request to lift the automatic stay.To be successful, it must prove that neither the debtor,

nor any other creditors, will be prejudiced if foreclosure or repossession is allowed to continue.

average downtime An estimate of the length of time a leasehold property will remain on the

market after the expiration of one lease term and before the commencement of a new tenant’s lease.

average free rent The number of months typically given as free rent in order to provide incentives

for a tenant to vacate their old premises and move to new ones without being liable for double rent

during the overlapping terms, or to provide competitive incentives for new tenants to rent in one

building rather than another.

average rate of return One way of measuring an investment’s profitability.To calculate,one takes

the total net earnings,divides by the total number of years the investment was held,and then divides

that answer by the investment’s initial acquisition cost.

Example:

Rainer spent $800,000 to buy an apartment building. After deducting all operat-

ing expenses, real estate taxes, and insurance, she receives $65,000 in the first year, $71,000 in

the second year, $69,000 in the third year, and $70,000 in the fourth year. The total net earnings

are $275,000. Divide that number by the 4 years being analyzed, to reach $68,750 as an average

auction average rate of return

annual return. Divide $68,750 by the initial $800,000 investment to calculate the average rate

of return of 8.59 percent.

Drawback:The procedure does not take into account the time value of money.The $65,000 received

in the first year was more valuable than the $70,000 received in the fourth year, because the $65,000

could have been invested to earn still more money.

avigation easement An easement obtained by airport authorities, through purchase or condem-

nation, and used to provide clear access for low-flying aircraft on the glide path.

avulsion A sudden and perceptible loss or addition to property as a result of the action of water

either taking soil from one property and leaving it on another, or by virtue of a river or other running

water changing the course of its bed.The rule is that boundary lines described with reference to the

midpoint of the stream will remain at the midpoint of the old stream, and not the midpoint of the

new stream. This is because of the sudden nature of the change, so that people may reasonably

notice and mark the location of the old stream bed as a matter of reference.

axial growth A growth pattern for cities, which typically expand outward along major arteries

such as interstate highways or other controlled access roads.The population centers will appear star

shaped, or like spokes in a wheel, when viewed from above.

average rate of return axial growth

lide path (avigation eas

ement)

Airport Runway

Avigation easement for a glide path for departing aircraft.

4444

bachelor apartment A small rental dwelling unit that combines living and bedroom spaces into

one room (and, sometimes, kitchen space as well). (Do not confuse with single-room occupancy,

which generally has shared cooking or bathroom facilities.)

back-end ratio One method of analyzing a borrower’s ability to meet underwriting requirements

for a home loan. This method takes into account existing long-term debt of the applicant, plus the

payments on the requested loan,in order to arrive at a percentage of income that will be devoted to

debt service. Lenders typically like to see ratios below 36 percent of take-home pay. Contrast with

front-end ratio, which compares only the requested loan against take-home pay.

Example: Back-End Ratio

Monthly take-home pay $3,600

Auto loan payments $480

Mortgage loan payments $790

Total long-term debt $1,270

Ratio of debt to take-home pay 35.28%

Back-end ratio 35.28%

backfill In construction and excavation work, to fill something with additional dirt. When building

foundation walls or retaining walls,one excavates a space large enough to build the walls and provide

a comfortable work space, and then backfills with additional rock and dirt afterward.

back taxes Unpaid property taxes, which remain a lien on property even after it is sold to another;

could result in a forced sale.

back-to-back lease One type of rental concession in commercial leases; encountered in

markets with large amounts of vacant space on the market and no real prospect of filling the

space with new entrants. As a result, landlords must resort to “stealing”tenants from each other.

They will offer a back-to-back lease, agreeing to pay the tenant’s rent at their old space until the

expiration of the term, if the tenant will immediately vacate and move to the new space. In a

strong rental market, a landlord may wish to attract a particularly desirable tenant from another

building even though the landlord’s vacant space could easily be filled from current market

demand. In such a situation, the landlord will offer to buy out the entire current lease, paying a

4545

lump sum to the owner of the other building. The other building owner is generally motivated

to accept the lump-sum payment, because he or she anticipates renting the vacant space to a

new tenant fairly quickly and thereby gaining a cash windfall in the form of the buyout price.

backup contract An offer to purchase that is accepted by the seller but is contingent on a prior

contract failing to proceed to closing.

bad title Title to real estate that has some defects or problems that prevent the owner from

conveying the property free and clear of any liens or adverse claims.

bailment A legal relationship is which a person (bailor) surrenders control of personal property to

another (bailee), but with the agreement that the goods will be returned or accounted for upon

request. Bailees are not insurers of goods and are responsible only for their own negligence in carry-

ing out the terms of the bailment agreement, not for any third-party theft or vandalism, unless the

bailees specifically represented they would protect the goods against third parties.Warehouse oper-

ations are typically bailments, as are records storage businesses. Most self-storage facilities, in which

consumers retain their own lock, are not bailments.

balance, principle of In appraisal, the concept that there is an ideal balance of factors for the

development of real estate, such as will produce the greatest value.

Example:

A 10-acre parcel may be capable of being divided into a community of small gar-

den homes with a profit margin of $10,000 each, but the legal fees and time spent for zoning

changes and the costs of street and other infrastructure improvements may decrease the total

project profitability to $250,000, thus affecting the value of the land. The developer may be able

to build three luxury homes, instead, for a total profit of $500,000.

balance sheet A semi-itemized listing of all assets and liabilities of a person or a company in order

to arrive at a net worth, which is the difference between the assets and the liabilities. Most lenders

require a balance sheet as part of the loan application process.Short-term debt,which will be paid off

in one year or less, is treated by lenders in a different manner than long-term debt when calculating

their various ratios to determine loan eligibility. As a result, consumers would be well advised to

separate the two types of debt when completing a balance sheet form provided by the lender.

Example:

Assets:

Cash and equivalents $23,400

Marketable securities 87,300

Real property, nonhomestead 312,000

Primary residence 209,000

Art and collections 19,000

Vehicles 42,000

Furniture and accessories 48,000

Total assets $740,700

back-to-back lease balance sheet

Liabilities:

Line of credit balance $11,000

Credit cards 2,500

Mortgages, nonhomestead 118,000

Mortgage, primary residence 92,000

Accrued and unpaid taxes 13,000

Total liabilities $236,500

Net worth $504,200

Liabilities and net worth $740,700

One of the primary weaknesses of a standard balance sheet is that it does not reflect any contingent

liabilities—matters which may become liabilities in the future,but then again, may simply disappear.

These are things like loans guaranteed for children, the results of pending litigation, and penalties

and interest that may be imposed at the end of a current tax audit. In accounting, such matters are

noted in footnotes. Some mortgage application forms specifically ask about contingent liabilities,

and others do not. Obviously, the rosy picture presented in the preceding example balance sheet

would change markedly if the owner disclosed involvement in a multimillion dollar lawsuit for which

there was no insurance coverage, and which might result in a judgment in the future.

balcony A platform that projects from a wall, usually surrounded by some sort of guard structure

to prevent falls.

balloon mortgage A real estate loan with monthly payments as if the loan would be paid in full

over a period of time, usually 30 years, but the entire principal balance is due in a much shorter time,

usually 5 or 7 years.This is a method for lenders to offer fixed-rate mortgages at rates very competi-

tive with adjustable-rate mortgages, but without the risk that interest rates will rise dramatically in 6

to 10 years or longer, leaving the lender with a low-interest-rate investment in a high-return world.

Balloon mortgages are usually quoted as something similar to “6.5 percent interest on a 30-year am

[short for amortization] with 5-year balloon.” Also called partially amortized loan.

balloon payment The full principal amount due at the end of a balloon mortgage.

BANANA A derogatory term; acronym for Build Absolutely Nothing Anywhere Near Anybody.

Much stronger than NIMBY—Not In My Back Yard.

band of investment An appraisal method used to arrive at a capitalization rate for the valuation

of income-producing property.Appraisers determine the net operating income from a property, and

then divide that figure by a number, called the cap rate or capitalization rate, in order to arrive at a

property value.Conceptually, that value represents what an investor would pay to receive an income

equal to that of the property. (The net operating income is fairly easy to calculate, but what cap rate

do you use? There are no tables or standards.The appraiser must choose a figure that is justifiable.)

The band of investment method considers the interest rates currently available in the marketplace

to finance the particular property. In commercial markets, interest rates may vary significantly

balance sheet band of investment

depending on which lenders are trying to add what particular property types to their loan portfolios

in order to achieve an optimum mix. After deciding on the property loan interest rate, the appraiser

then calculates the amount of equity the purchaser would have to pay at closing, and what reason-

able investors would expect for a percentage return on their equity each year. These two percent-

ages are then blended according to the percentage of debt and percentage of equity typically seen

when financing such properties. The blended number is the cap rate the appraiser will use to help

determine value.

bank An institution empowered by law to receive deposits, cash checks or drafts, discount com-

mercial paper, make loans, and issue promissory notes payable to the bearer, known as bank notes.

American commercial banks fall into two categories: (1) federally chartered and (2) state chartered.

Federally chartered banks come under the regulatory and auditing supervision of the United States

Comptroller of the Currency. State-chartered banks come under the control of the appropriate state

banking authority.Typically the FDIC will audit state-chartered banks and the comptroller’s office will

audit federally chartered banks.

Bank Insurance Fund The new name of the former fund of the Federal Deposit Insurance

Corporation (FDIC).The FDIC is still alive and kicking, only the fund has changed names.

bank partitions Cubicles; floor-fastened room partitions

approximately 5 feet high, so named because they are

common in banks.

bank rate See discount rate.

bankruptcy A common expression used to mean insolven-

cy, being a condition in which one’s liabilities exceed one’s

assets, or in which current cash flow is not sufficient to meet

current debts. As a result of the condition, the debtor may

take advantage of protections afforded by the Bankruptcy Code. Immediately upon filing, the law

imposes an automatic stay which prohibits all collection activities. Over time, the stay may be lifted

so that collection may resume,but the law does allow a breathing spell to allow the debtor and attor-

ney to analyze their options.The Code underwent dramatic changes in November of 2005, with the

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Bankruptcy is now a

much less consumer-friendly place than it used to be, and it places greater demands on bankruptcy

lawyers. Some pertinent aspects of bankruptcy law are noted here.

• Chapter 7 bankruptcy. A case brought under Chapter 7 of the Code, with a goal of liquidat-

ing all assets, paying all liabilities as far as the money will go, and then obtaining a dis-

charge and a fresh start. Some debts cannot be discharged at all, such as judgments for

money damages for fraud, payroll withholding taxes, intentional damage, domestic obliga-

tions, and other items. In addition, because of past credit card abuses with debtors maxing

out their credit cards and then filing for bankruptcy, there is now increased scrutiny of

purchases prior to bankruptcy. Suspect purchases will be denied discharge. Debtors

band of investment bankruptcy

4747

requesting Chapter 7 relief must complete government-approved credit counseling before

filing, and may be forced to enter Chapter 13, rather than Chapter 7, if a “means test”

determines they have the ability to repay some debts over time.

• Chapter 11. Commonly called reorganization, this is designed for businesses or for

individuals who exceed the financial limitations for Chapter 13 eligibility. Businesses will

continue operations and propose a plan to meet their obligations, or a plan to sell the busi-

ness as a going concern rather than liquidate assets. The plans usually contemplate the sale

of some assets, forgiveness of some debt, and a generous repayment schedule over time.

Things rarely work out well for the debtor, and the vast majority of Chapter 11 cases either

result in the largest lender owning the company at the end, or the company changing its

plan to one of liquidation. Just because the goal is liquidation does not mean the debtor

must convert to Chapter 7; they are said to be in a “liquidating 11.”

• Chapter 13. Commonly called wage earners bankruptcy, but this is misleading, because

anyone with regular income from some source may take advantage of the chapter. There

are financial limitations for eligibility that, if exceeded, will result in the debtor taking

advantage of Chapter 11 instead of Chapter 13. The debtor must complete government-

approved credit counseling before being allowed to file. Once in Chapter 13, the debtor

proposes a plan for repayment of debts, with payments stretching over 3 to 5 years. At the

end of the time, if all agreements under the plan have been met, and if the person

completes all required financial education, the debtor receives a discharge.

• Bankruptcy and real estate:

1. Filing stops all foreclosure activities until and unless the lender is able to lift the auto-

matic stay and obtain court approval to proceed. In some states where a debtor may

redeem property after a foreclosure sale, the bankruptcy will enable the debtor to do so

by making payments, rather than by paying the full cash price ordinarily required for a

redemption.

2. Transfers of real estate within the recent past may be reversed if they are for less than

full value and deemed to be a fraud against creditors, even if there was no fraudulent

intent.

3. Listing agreements to sell property may be terminated, or cancelable, depending on the

chapter.

4. Tenants may reject burdensome lease obligations and secure early termination of their

leases.

5. Commercial lenders, who typically require that collateral be held in a single-asset entity,

may be able to successfully argue against a plan of reorganization and force a foreclo-

sure.

6. Other lenders opposed to a Chapter 11 plan of reorganization may be forced to accept it

in a procedure called the cram-down.

bargain and sale deed A deed that contains only the name of the seller, the name of the buyer, a

recital of consideration,a description of the property, and words of conveyance is a bargain and sale

deed. In it, the seller makes no warranties regarding good title or any other matters, but simply sells

bankruptcy bargain and sale deed

to the purchaser whatever interest the seller might have had. Typically used in two situations: (1)

When the seller obtained the property by law and is not in a position to make warranties because of

lack of knowledge and lack of prior control. This would include deeds by administrators of estates,

deeds from the IRS after a tax sale,or deeds from a lender after a foreclosure.(2) The second frequent

instance is when someone is asked to sign a deed in order to clear up title defects that might or

might not have given the seller some rights in the property.The seller is willing to give up any rights

he or she might have but is not willing to issue any warranties that he or she owned anything at all.

See quitclaim deed.

bargain purchase option A right granted to a lessee, typically under a personal property lease

such as for office equipment, but it could be a real property lease.The right, called the option, gives

the lessee the ability to buy the property, at the end of the lease term, for a price substantially less

than fair market value.The inclusion of a bargain purchase option in a lease contract is an indication

that the contract is really a disguised seller-financing arrangement. As a result,“rent” payments pre-

viously written off in their entirety may be disallowed by the IRS because some portion of the rent

was really payment of principal on a loan. In addition, under Sarbanes-Oxley, public companies may

have to post such arrangements as liabilities on the company’s balance sheets,contrary to prior cus-

tom and practices.

base and meridian On May 7, 1785, Congress adopted the rectangular system of surveying prop-

erties, now called the public land survey system. It is based on a rectangular system of imaginary

lines running across the country. The baselines run east and west, and the meridian lines run north

and south.Properties are described by reference to the principal meridian and the baseline that con-

trols that area.

base (expense) year In commercial leases, the year used as a measure of a tenant’s obligation to

pay the pro rata share of ever-increasing building expenses over time. The rent for the first year is

usually calculated by the landlord so as to pay currently known building expenses and provide a

profit. This is usually the base year. As expenses increase over time, the amount they exceed the

expenses of the base year is the figure the landlord uses to calculate the tenant’s pro rata share of

the expenses.

baseline East-west lines in the public land survey system, part of the baseline and meridian line

components. Each principal meridian has a baseline. Properties in the principal meridian’s area are

described by their bearing east or west of the meridian and north or south of the baseline.

base period The point in time that serves as a reference for calculating financial and economic

data. The base period value is usually set at 1.0 or 100, called the benchmark, for purposes of com-

parison, and then all other periods are either greater or less than the benchmark.

base rent The minimum periodic rent specified in a lease. Additions could include the tenant’s

share of common area maintenance (CAM—pronounced as a word), share of building operating

expenses, and percentage rent based on gross retail or food sales.

bargain and sale deed base rent

4949

basis A tax and accounting term referring to the original acquisition cost of a property; used

to determine annual depreciation deductions and eventual gain or loss upon the disposition of

the property. This concept is fundamental to almost all real estate analysis and real property tax

planning, and an important one to master. Some of the key concepts are

• The basis may be increased by adding some acquisition and closing costs. Many taxpayers

would prefer to write off those costs as deductible expenses, but that is not allowed.

• The basis may be increased as you make capital expenditures for the benefit of the proper-

ty. Usually a capital expenditure is something that adds value above and beyond the slight

increase experienced when things are repaired.

• The basis is decreased each year as you deduct depreciation expenses on your taxes.

• Property acquired by gift will have the same basis the donor had, plus any capital improve-

ments made by the donee, plus any gift taxes paid by the donor.

• Property acquired by inheritance will receive a stepped-up basis valued as of the date of

death or a date 6 months afterward, depending on which election is selected. While this

may be good for the heir, it might be bad for the estate to value property at a high value

and be required to pay estate taxes.

• Property acquired by virtue of a 1031 exchange will have the same basis as the property

sold. If this doesn’t make sense, refer to definition for 1031 exchange, which is too long to

include here.

• The basis must be allocated between land and improvements. Land cannot be depreciated

for tax purposes, but improvements can. There is no precise formula, and taxpayers are

expected to use good faith in their allocation rather than setting artificially high improve-

ment values in order to maximize depreciation deductions.

• Most consumers do not currently track the basis in their homes, nor the capital improve-

ments such as a new roof, swimming pool, or new garage. This is because current tax code

provisions allow individuals up to $250,000 in gain ($500,000 for married persons) on the

sale of their personal residence without incurring any tax liability. However, the apparent

large size of this number could easily be eroded by inflation, and Congress could easily

change the tax laws.

basis point A unit of measure used in finance, it is

100

of 1 percent. Commercial lenders will typi-

cally quote rates as a certain number of basis points above an index, such as LIBOR (London

InterBank Overnight Rate) or 10-year Treasury bonds. A fee of 50 basis points for a $3,000,000 loan is

a fee of

100

of 1 percent, or

of 1 percent on $3,000,000, being $15,000.

basket loan Financial institutions are heavily regulated regarding the types of loans they can

make and the mixture of the types of allowable loans in the total portfolio. They are allowed to

make a very small percentage of loans that would otherwise be prohibited for one reason or

another. Such loans are scooped into the miscellaneous basket.The term “basket”is used in a wide

variety of circumstances in law, finance, and general business dealings, and always refers to some

sort of conceptual container filled with small items.

basis basket loan

bay (1) The smallest rentable tenant space in a strip center, usually defined by the front and rear

exterior walls and fire walls at either side. (2) An unfinished area between rows of columns or load-

bearing walls. (3) Loading areas in warehouse or industrial space. Ascertaining the number of bays

necessary and available is usually critically important when working with buyers or potential tenants

of such space.

bay depth Represents the distance from the building’s corridor wall to the outside window of

the building. The bay depth will be a critical limitation when configuring space for the most effi-

cient use. Because of the waste factor when bay depths result in larger than necessary offices, for

example, a building with cheap per-square-foot rental rates but inefficient bay depths may be

more expensive than one with higher rental rates but a more compatible design. In the diagram,

the bay depth is 15 feet.

bay window An arrangement of three or more windows that project outward from the exterior

wall.

bearer instrument A security that does not include the name of the owner or payee. Anyone in

possession of the instrument may present it and receive payment.

bearing wall A wall that helps support the weight of the upper floors and roof. See load-

bearing wall.

bedrock The solid rock under soil.

bedroom community An area consisting primarily of commuter residences and small local estab-

lishments—grocery, laundry, limited dining, and other similar businesses catering to residents—but

no large employers. Also called a dormitory town.

before-and-after rule A rule of damages holding that the measure of damage to a thing is

the difference between the value before the injury and the value after the injury. In a real estate

bay before-and-after rule

5 ft

15 ft

Corridor

Exit

door

Exit

door

Illustration: Bay Depth

context, this often arises in a condemnation case for eminent domain purposes.The government

must compensate a property owner for the value of the property taken, but must also pay

damages if the remaining property has been injured because of the loss of the other piece.

before-tax cash flow The amount of money generated by an investment after collection of all

revenues and payment of all bills, but without any deductions for depreciation or other noncash

items, and before calculation of income tax consequences. An important figure in analyzing any

investment,because properties with high depreciation expenses may show tax losses but positive

cash flows. In the alternative, a property that requires expensive financing for acquisition or oper-

ation may show good net income figures for accounting and tax purposes, but have a negative

cash flow requiring the owner to supplement the property with money from other sources.

below-market interest rate (BMIR) Government-subsidized interest rate concessions offered to

spur development, usually in a particular market segment, such as low-income housing, or in partic-

ular market areas, such as parts of the country heavily damaged by natural disasters. In the housing

industry, the borrower is generally required to pass along the savings to consumers in the form of

lower rents.

benchmark A permanent reference mark, usually set in concrete or iron and used to establish the

elevation above sea level or certain corners in a surveying system. All other measurements in the

area should be checked for accuracy relative to the nearest benchmark, preferably against several

nearby benchmarks to establish redundancy.

beneficiary A person who receives the benefits from something although perhaps not the legal

owner of the thing. In real estate,the term is usually encountered in the context of a trust, in which a

trustee holds what is called bare legal title to the property, but the property itself and all sums gained

from the property are held for the beneficiary. Care should be taken when buying, selling, or leasing

property that involves a beneficiary, and,if at all possible, one should gain the beneficiary’s signature

even though it is not technically required. Otherwise, you could find yourself in the middle of litiga-

tion between the trustee and the beneficiary if the beneficiary claims the actions taken were illegal

and not authorized.

benefit-of-the-bargain rule A rule of damages that says if a person has been defrauded, that

person may recover the difference between the actual value of the property and the value the

property would have if it had been as represented.

benefits In eminent domain cases, the concept of “benefit” comes into play because property

owners may receive an enhancement in the value of their remaining property after the condemna-

tion. If the enhancement is special to them, or only a very few owners, rather than the general bet-

terment enjoyed by the public at large by the anticipated improvements, then any condemnation

award to them may be reduced by the amount of the benefits.

Example:

Ken owns 5 acres of land near an eight-lane city thoroughfare. The only thing pre-

venting him from having valuable road frontage is a 2-foot-deep strip of land still owned by Elsie.

This is the only land remaining to Elsie after successive road widenings over the years. The city

before-and-after rule benefits

decides to widen the road again and takes all the rest of Elsie’s land and a 15-foot-deep strip of

Ken’s land. The city is liable to Ken for the 15-foot sliver, but Ken suddenly has 5 acres of

extremely valuable road frontage property. Ken probably won’t receive a check from the city

because of the special benefits he received from the condemnation.

bequeath To leave personal property to another in a will. The word devise is used when referring

to real property left by will.

bequest A gift of personal property made by will.

berm A small ledge or shoulder of dirt with some type of vegetation, designed to control water

runoff, hide something unsightly such as a power substation, or provide a noise-control buffer

between busy streets and residential areas.

betterment An improvement to real estate.

BFP See bona fide purchaser.

biannual Occurring twice a year. Contrast with biennial, which means occurring every 2 years.

If an adjustable-rate mortgage provides for rate changes biannually or biennially, it’s important to

know the difference.

bid (1) An offer to purchase at a specific price, usually at an auction or foreclosure. (2) An offer to

complete specified work for a certain price, usually presented in the context of a request for sealed

bids to complete government work.

bid bond A type of bond required in some government construction projects. If required, it must

be filed at the same time as the bid.This protects the agency in the event the bidder fails or refuses

to enter into a contract after being offered it or withdraws the bid before the award. The bonding

company will then pay the agency the difference between the defaulting low bid and the next high-

est bid, whose bidder will be given the contract.

bid shopping The practice of a general contractor estimating the cost for subcontractors in order

to prepare a bid for construction work,and then attempting to induce those same subcontractors to

lower their price below the estimate.

biennial Occurring every 2 years. Contrast with biannual, which means occurring twice a year.

(It’s important to know the difference if an adjustable-rate mortgage provides for rate changes

biannually or biennially.)

benefits biennial

5353

big box (1) Large square or rectangular building with ample

parking, suitable for a wide variety of retail tenants. (2) Regular

users of such space, such as Wal-Mart, Target, or Home Depot.

An example of usage is,“I’m working with a big box and need

to find 12 to 16 acres to buy. Do you have anything?”

bilateral contract A contract in which each party promises to

do something in return for the other’s promise. If either party

breaks its promise, the other may sue.This is the most common type of contract. A real estate pur-

chase contract is a bilateral contract—the seller promises to sell, and the buyer promises to buy.

Contrast with a unilateral contract, in which one party has an obligation but the other does not.

Option contracts are unilateral contracts—the seller is obligated to sell if the buyer decides to buy,

but the buyer is not obligated to buy at all.

bill of assurance A name used in some states to describe the total collection of restrictive

covenants that apply to a neighborhood.

bill of sale A written instrument used to transfer ownership of personal property. Many buyers

insist on a general bill of sale, in addition to a deed, to ensure that all property intended to pass in

the sale actually does so. Some states have held that certain real estate–related interests are actual-

ly personal property, and attempted sales via deed were void.

binder (1) Money given as earnest money for an oral contract to purchase real estate, to bind

the parties until such time as they can complete the necessary written contract. (2) A written

instrument giving immediate casualty coverage for property, even though the insured may not

have paid a premium or received a policy. (3) A temporary contract of title insurance in which the

insurer agrees to issue a final policy if certain exceptions, such as prior mortgage liens, are

removed at or before closing.

biometrics Increasingly popular building security system technology that relies on automated

identification of physical characteristics such as fingerprints or retinal scans in order to determine

access rights.The technology and the cost have both reached the point that consumer-level biomet-

ric security devices are available,such as for use in self-storage facilities and residences.Access codes,

keys, and electronic cards are becoming outdated. Developers should bear this in mind when

designing new construction and spend a minor amount of extra money necessary for wiring to

accommodate biometric systems.

bird dog Someone who regularly furnishes sales leads to another, but does not actually handle

any of the selling. Successful real estate agents usually have many bird dogs.

biweekly loan A loan that calls for payments every 2 weeks, rather than once a month.

Blackacre Mythical property used as an example in nearly all explanations of legal concepts relat-

ing to real estate, such as,“If A owns an undivided

interest in Blackacre… .” If more properties are

needed, use Greenacre, and then Whiteacre.

big box Blackacre

black mold Refers to Stachybotrys chartarum,

called stachy for short, a greenish black mold that

can grow in parts of a structure exposed to con-

stant moisture. The fungus can produce toxins

harmful or even fatal to humans and has been

identified in the sick building syndrome. There are

some very dark dematiaceous hyphomycetes that

look very similar; confirmation of stachy must be

made after miscroscope examination.This is an area

of widespread litigation and should be a cause of

concern to both buyers and sellers of real estate.

(For more information, visit the Web site of the

Centers for Disease Control and Prevention at

www

.cdc.gov/mold/stachy.htm.)

Black’s Guide A data source for office buildings in certain major markets, providing tenant and

other information. Its primary competitor is CoStar. (For more information visit the Black’s Guide

Web site at www

.blacksguide.com.)

blacktop The asphalt paving used on many roads, and also the process of paving the road.

blanket A single mortgage instrument covering two or more properties. It is most often encoun-

tered in property intended for development,with partial lien releases given as lots are sold and part

of the sale proceeds used to pay down the loan. Contrast with cross-collateralization, in which two

or more properties, each with their own mortgages, include the other properties as additional col-

lateral.

bleeding a project (1) In construction, charging excessive development and construction over-

sight fees, renting one’s own equipment to the project at inflated prices,and perhaps putting fam-

ily members on the payroll in order to bleed off as much money as possible. (2) In rental property

management, refusing to make ordinary repairs and replacements in order to take as much cash

flow as possible from the project, but with a resulting rapid deterioration of the property. In an

area of limited consumer choices, such as communities with high concentrations of low-income

housing, the landlord almost never suffers the consequences of this type of decision.

blighted area A declining area suffering from seriously decreasing property values and not likely

to recover without some outside intervention.More than simply a market slip,a blighted area can be

identified by deteriorating buildings, increased crime rates, and decreased occupancies.

blind ad An advertisement that does not include the identity of the person placing the ad, only a

phone number or a post office box number. They are popular with employers placing help wanted

ads in order to identify someone to replace a soon-to-be-fired employee.Blind ads are illegal in most

states for real estate brokers or agents, who must not only identify themselves in all ads, but include

enough information to alert the public of their status as a real estate professional.

black mold blind ad

5555

block An area bounded by perimeter streets. Many subdivision descriptions employ a subdivision

name, and then a block number and a lot number to identify particular properties.The numbers are

assigned when the subdivision developer files its plat plan with local authorities.

blockbusting An illegal and discriminatory practice in which someone stampedes another into

selling or granting a listing contract by trading on fears the neighborhood is changing with respect

to race, sex, religion, color, disability, family status, or ancestry of the inhabitants. (For more detailed

information,visit the U.S.Housing and Urban Development Web site at www

.hud.gov and search on

the term “blockbusting.”) See panic peddling.

block numbering area (BNA) A small, relatively perma-

nent statistical subdivision within a county, generally con-

taining 2,500 to 8,000 people and having readily identifiable

borders. Similar to census tracts, but differing only in the

local versus federal source of the data used to create the

maps.Mapped and numbered by the U.S.government,which

provides demographic information at www

.census.gov.

Third-party resellers of demographic information extrapo-

late from the census tract data into more personalized

demographic areas.

Blue book: Any number of pocket-sized reference books on a wide variety of topics.The ones most

relevant to real estate are The Blue Book of Building and Construction (www

.thebluebook.com),The

Apartment Blue Book (www

.apartmentbluebook.com), and The Realty Blue Book.

blue laws Laws that prevent the transaction of certain business on Sundays, prohibit the sale of

alcoholic beverages any day of the week; and/or place severe limitations on the manner and hours

of sale of alcoholic beverages. These laws originated in colonial New England and were printed on

blue paper. It is important to know and understand all local blue laws in a market area because, for

example,many national restaurant chains will not open locations where Sunday liquor sales are pro-

hibited.

blueprint A detailed set of plans used as a guide for construction. Because of the economies of a

very inexpensive method of creating and copying such plans, they were formerly characterized by

white lines on blue paper.

blue-sky laws A popular name for state securities laws intended to protect investors and aid them

in making informed buying decisions rather than taking the word of a smooth-talking salesperson

who “promises the sky.”

blue stake When a utility company (telephone, gas, electric, cable TV, sewer, or water, etc.) comes

to the job site and locates and spray paints the ground and/or installs little flags or blue stakes to

show where their service is located underground. See utility notification.

block blue stake

2.98

3.98

5602

5603.98

5604.98

5601

BIBB COUNTY PIKE COUNTY

blue top In excavating and in road construction, the practice of marking the desired final grade

with a stake topped by blue fibers.The heavy equipment operator continues to move dirt until only

the blue tops show above the ground.

B-note investors In commercial real estate financing, purchasers of the subordinate tranches, or

second and third mortgages. If a borrower defaults, the B-note investors will suffer losses before the

investment-grade tranches.As a result,such investors scrutinize deals more thoroughly,charge high-

er interest rates commensurate with their increased risk,and typically retain powers to protect them-

selves somewhat in the event of default.These rights include

• The right to approve modifications to the agreement

• The right to insist on foreclosure in the event of default

• Certain limited cure rights to keep a loan current and avoid foreclosure

board-foot A measure of lumber 1 foot square by 1 inch thick, being 144 cubic inches. In valuing

timber land, it is usually important to calculate the number of board-feet that can be harvested from

the standing timber. Often, however, timber is now sold by the pound rather than the board-foot.

board of directors The governing body of an organization, charged with establishing policy and

with taking steps to see that the policies are implemented. Except in small corporations or associa-

tions, the board typically does not involve itself in day-to-day business activities, those being more

properly the role of the president. Many corporations have executive boards with true legal respon-

sibilities,and advisory boards of largely ceremonial function designed to reward contributors,create

strategic alliances, or gain expert insights into limited areas on an as-needed basis.

• In the real estate context, a director who acts as a broker in real estate transactions involv-

ing corporate property cannot accept a commission unless the board specifically authorizes

it, even if the president previously granted the approval and would otherwise have had

such authority to hire a third party.

• Lenders have legal limitations on the sizes of loans they can extend to their own directors.

Large developers should consider this before accepting board positions.

• The board of directors in a cooperative apartment enjoys tremendous power in the

approval of new members and in decisions to evict current members.

• The board of directors of a condominium association is charged with making sure the

community always has adequate insurance. Because of the shared nature of ownership in

the common areas, inadequate insurance could result in the imposition of liability on

individual unit owners for an accident in a common area. Failure to maintain the proper

level of insurance could subject board members to liability.

board of equalization A local government board charged with the responsibility of ensuring

equal property tax assessments. Normally, a property owner appeals to the board of equalization if

dissatisfied with the tax assessment notice received for the year.

board of REALTORS® A local association comprised of real estate professionals who are members

of the National Association of REALTORS® (www

.realtor.org and www.realtor.com) and the local or

state board of REALTORS®.

blue top board of REALTORS®

5757

board of zoning appeals A local board empowered to overturn decisions of a zoning authority.

Before embarking on any possibly contested activity in these areas,such as a zoning change request,

it is extremely important to find out the name and requirements of the correct appeals board,should

it become necessary to ask for reversal of a decision. Many boards have very limited and technical

grounds for appeal that, if known in advance, could have been factored into tactical decisions at the

level below. In addition, the time limits for filing appeals are generally short. See appeals board.

Boeckh Building Valuation Manual A reference book that provides guidance for the replace-

ment costs (substantially similar utility, but not identical methods of construction) or reproduction

costs (identical) for various types of buildings. (For more information go to the Marshall &

Swift/Boeckh Web site at www

.msbinfo.com.)

boilerplate A term used to refer to standard language appearing in almost all mortgages, leases,

sale agreements, and other contracts. Important rights can be signed away by language lurking in

the boilerplate; it is important to read all contracts thoroughly and not to skip anything.

boiler room A lead-generating system usually char-

acterized by large groups of people working in cubi-

cles making cold calls to consumers in order to gauge

interest in real estate investments, insurance products,

refinance offers, or any number of other products. The

leads are then sold to professionals for follow-up.

Sometimes, the boiler room operation also engages in

high-pressure sales techniques, which has lead many

states to pass legislation allowing a cooling off period

within which to reject and void any contracts entered

into as a result of such tactics.

bollard A pillar or post, usually consisting of a metal

pipe anchored in concrete and then filled with concrete,placed near building corners,loading docks,

entrance doors, and gas pumps in order to protect them from automobiles; may be left natural,

painted, or covered with plastic bollard covers.

BOMA See Building Owners and Managers Association.

BOMA measurements Standards offered by the Building Owners and Managers Association for

determining leaseable square footage and other such measurements. Many have been adopted by

the American National Standards Institute, Inc. (ANSI).

bona fide purchaser (BFP) One who purchases property in good faith and for a valuable consid-

eration without knowledge, actual or constructive, of the seller’s title defects. Under certain circum-

stances, BFPs may retain the property free and clear of the claims of others. (As a practical matter, it

is difficult to be a BFP of real property because of the constructive notice provided by public filings

of almost all real estate–related claims.)

board of zoning appeals bona fide purchaser (BFP)

bond A certificate that provides evidence of a debt or obligation.

bond for title A method of selling and financing real estate; also called a land sale contract or a

contract for sale.The owner signs a contract agreeing to transfer the property to the buyer after the

buyer makes all required regular payments over a certain period of time.Unlike a mortgage, the sell-

er avoids many problems associated with foreclosure and possibly bankruptcy if there is a default.

The practice is looked upon with disfavor by courts, which typically try to find ways to convert the

relationship in some sort of equitable mortgage, and thus grant the consumer protections afforded

by the law.

bonus depreciation Additional depreciation deductions allowed by the IRS under certain

circumstances and possibly in certain areas. After the devastating effect of the 9/11 attacks, busi-

ness owners were allowed to take a first-year depreciation deduction of up to 50 percent of the

basis of property placed in service between specified dates. This was in contrast to the normal

deduction of 3.63 or 2.56 percent for real property, depending on whether it was commercial or

residential rental. Again, after the 2005 hurricane season, the IRS allowed the same bonus depre-

ciation for property placed in service in specifically named Gulf Opportunity Zone counties in the

affected states.

book cost The acquisition cost of a property as reflected on the books and records of a company.

book depreciation The amount of depreciation expenses deducted for a property on the books

and records of a company. Book depreciation may be charged at a faster or slower rate than allowed

by the IRS, in order to provide management with a realistic view of the gradually diminishing value

of the company’s assets.

book value The value of an asset as reflected on the books and records of a company, taking into

account the original book cost of acquisition and then deducting depreciation expenses charged

over the years and adding capital expenditures. Book value rarely bears any relationship to the true

value of assets.

boomerangers Generation-X aged persons who return home to live with their parents after

being unable to find jobs that will provide adequate compensation to support them as well as

their parents did.

boot (1) Money or other property that is not like-kind and is given to make up the difference in

value between two properties exchanged in a like-kind exchange under Section 1031 of the Internal

Revenue Code. If a gain would otherwise be recognized on the transaction, except for the interven-

tion of the 1031 vehicle, then gain must be recognized and taxes paid to the extent of the value of

the boot. (2) Especially in Texas, it is common among property developers to require some type of

boot to show that more than money is involved in their business transactions.

Example:

A seller might agree to sell prime property for $12,000,000, but only if the buyer

throws in a particularly handsome bronze statue sitting on his desk.

bond boot

5959

bootstrap financing A funding expansion from internal sources,such as reducing expenses in the

budget, collecting rents or other receivables more aggressively, delaying payments to vendors, or

preselling units.

boring tests Tests conducted to determine the soil’s load-bearing ability to support a building or

other improvement, and the size of the footings necessary. Also called compaction tests.

bottom feeder A derogatory term for someone who buys distressed properties; one who profits

from the misfortunes or poor management of others.

bottom-fishing The strategy of offering ridiculously low prices for large numbers of properties

because of the expectation that, statistically, someone is bound to “bite”and accept an offer.

bottomland Lowlands located in a valley or other low area near rivers,streams, or bodies of water

prone to flooding. Bottomland was especially prized by farmers at one time because of the constant

deposit of nutrient-rich soils.

boundary The perimeter of a property as fixed in the legal property description. Boundary line

disputes are common, emotional, and often end up in years of litigation and sometimes mayhem. If

one is buying property in a subdivision, it is advisable to have the seller locate and point out the

markers at the corners of the property. These may or may not be consistent with fence lines, shrub-

beries, driveways, or even structures built on the wrong side of the boundary. If buying nonsubdivi-

sion property, employ the services of a licensed professional surveyor to determine the proper

boundary.

boundary line disputes Probably the most common type of lawsuit involving real estate, because

it is the type least likely to result in settlement before trial. Problems generally arise as a result of

some or all of the following four factors:

1. Formerly unsurveyed property owned by amicable neighbors passes into the hands of an

outsider who orders a survey and discovers the boundary lines are in different places than

previously thought.

2. Formerly amicable neighbors who did not care about a 10- or 20-foot discrepancy in

boundary lines suddenly care when oil or gas is discovered under the land, or the property

becomes so valuable that it is being sold by the square foot rather than by the acre.

3. Advances in surveying technology would have placed a property corner in a different loca-

tion than the original surveyor placed it, and when this is discovered, the neighbors go to

court.

4. Someone mistakenly builds a house or other improvement with a portion located on a

neighbor’s land. Words are exchanged regarding tearing down the trespassing improve-

ment, and the parties resort to the court system to solve their differences.

There are very specific rules for resolving boundary line disputes:

1. Advances in technology make no difference because the property corners are where the

original surveyor placed them according to his or her own state-of-the-art technology for

the time, not at the absolutely accurate location according to today’s technology.

bootstrap financing boundary line disputes

2. If there are mistakes in the description, courts follow a hierarchy of things to consider and

things to ignore if there is a conflict among descriptions within a deed.

3. If someone innocently builds an improvement that encroaches on another’s land, most

courts will figure out a way to either give the property to the encroacher or will order the

other person to sell a minimal amount of land to the encroacher.

B-paper Home mortgages for consumers with poor credit or other disabilities that prevent them

from obtaining the best possible interest rates, percentage of financing, or other terms.The promis-

sory notes are generally at high rates of interest commensurate with the higher risk of default

assumed by the lender. The B-paper industry was largely unregulated for many years, but has now

come under increasing scrutiny and even class action litigation because of widespread predatory

abuses. On the other hand, the industry is predominantly honest and does fill a void in the home

mortgage market,enabling millions of responsible persons to enjoy the benefits of homeownership.

branch office Any secondary or ancillary place of business. Most states require branch offices of

real estate companies to have their own broker-in-charge or qualifying broker,legally responsible for

activities at that branch.

breach of contract A violation of some or all of the terms of a contract. Most contracts spell out

specific remedies in the event of breach, but include a basket granting any and all other remedies

allowed at law or equity.Some states have statutes making defaulting parties liable for the attorneys’

fees of the other side; other states do not have such laws and attorneys’ fees are recoverable only if

that right is granted in the contract.

• In a real estate context, some purchase contracts provide that a breaching buyer will lose

his or her earnest money but not be responsible for any other damages. If not so specified

as a limitation on damages, then a breaching buyer is fully responsible for all the seller’s

damages, which could include losses when the property is sold for a lesser amount, costs

of remarketing the property, attorneys’ fees, and possibly even consequential damages

such as the seller’s loss of opportunity to purchase something else. In extremely rare cir-

cumstances, the seller can obtain an injunction forcing the defaulting buyer to proceed

with the purchase.

• If the seller defaults, the buyer may apply for an injunction to order the seller to proceed

with the sale. This unusual remedy is because the law says that real property is so unique

that money damages can never compensate one for its loss—only the property itself will

suffice. Despite that, buyers may waive this remedy of specific performance and seek dam-

ages instead. Under some circumstances they may receive both.

breakdown method In appraisal, the process of dividing depreciation into separate components,

assigning a weight to each one, and then arriving at a depreciated value of the property. This has

nothing to do with book depreciation or tax depreciation, but is instead intended to calculate the

true current value of the improvements.The three types of property depreciation are:

1. Physical depreciation. What is the condition of the improvement?

boundary line disputes breakdown method

6161

2. Functional obsolescence. Loss of value because of physical factors other than deterioration,

such as a poor floor plan, a one-car garage instead of a two-car garage, or high ceilings and

multiple windows creating heating and cooling problems.

3. Economic obsolescence. Loss of value because of factors outside the property, such as noise

pollution from nearby highways or an airport.

break-even point In any project,the point at which revenue will be sufficient to pay all required

expenses and debt service. Most industries have generally recognized rules of thumb for the

appropriate break-even point. For apartments, it might be 80 percent occupancy, for self-storage

it might be 55 percent occupancy, and for business center space it might be 75 percent occupan-

cy.Most construction lenders require that a project at least reach the break-even point before con-

struction lending can be converted to fixed-rate and lower-rate permanent financing.If preparing

a pro forma for a project and your break-even point is dramatically different from the rule of

thumb for your industry, it may be time to check your assumptions or your math.

bricks and mortar A popular expression for a physical location,as opposed to intangible assets or

even cyberspace.

bricks,clicks,and flips Retail stores that have physical locations,Internet sale sites,and strong cat-

alog sales. (A variant of “bricks and clicks” and “clicks and mortar.”)

bridge loan A short-term loan intended to bridge the gap between other transactions. (1)

Temporary financing obtained at the end of a construction loan period but before permanent

financing can be arranged. (2) A loan obtained by a home buyer when the equity from an existing

home is necessary to provide the down payment for a new home,but the buyer has been unable to

sell his or her old home as of that time (frequently offered by employers who transfer employees to

new cities).

bring-down search An additional title search to make sure nothing adverse has been recorded in

the real estate records since the time of the original search and the recording of the deed or mort-

gage.This time period is known as the gap.

British thermal unit (BTU) A unit of measure of heat, used in rating the capacity of air condition-

ing and heating equipment. One BTU is the amount of energy necessary to raise the temperature of

1 pound of water by 1 degree Fahrenheit.

broker An agent employed to make bargains and contracts for compensation. In the real estate

industry, a broker does not make contracts and bind his or her principal but, instead,acts as an inter-

mediary between buyers and sellers.

• The broker-in-charge or qualifying broker in an office is responsible for setting office poli-

cies, supervising agents in the execution of their legal responsibilities, and complying with

all regulatory requirements. All contracts with consumers are with the broker, who is the

only one legally permitted to enter into such relationships. The broker may then delegate

breakdown method broker

some responsibilities to agents or other licensed salespersons, but does not thereby relieve

himself or herself of liability.

• Brokers have fiduciary responsibilities to their principals, called clients. They must exercise

honesty, integrity, care, and skill in carrying out their duties. All other persons, called cus-

tomers, are owed the duty of honesty.

• The broker must submit all written offers to the principal as soon as received and may not

hold any offer while waiting for a more attractive one.

• All earnest monies coming into the possession of the broker must be deposited into an

escrow account as soon as possible according to the instructions of the offer, but it may

hold a check, undeposited, in a file if the offer states the check may not be deposited until

the offer is accepted.

• All client monies, such as from property management activities, must be maintained in an

escrow account and cannot be comingled with the broker’s other funds.

brokerage A real estate activity devoted to assisting buyers and/or sellers in the purchase of

real property. In smaller communities, brokerage activities are conducted on a type of general prac-

titioner basis. In larger communities, brokers generally specialize in certain price ranges or types of

residential properties; or some combination of office buildings, retail space, food service, industrial,

warehouse, farms and lands, or development land.

broker-in-charge See broker.

broker price opinion (BPO) In most states, only a licensed appraiser is authorized to offer a

professional opinion as to the value of a property. Often, though, a real estate broker will be asked

to offer an opinion regarding the price to ask when marketing a property. This is a fine distinction,

but perfectly legal, as long as labeled as such. BPOs are frequently obtained by out-of-state lenders

seeking to work out a sale of a distressed property.

broom clean Containing no debris. Most apartment leases require that the premises be left

broom clean.

brownfields According to the Environmental Protection Agency, “a brownfield is a property, the

expansion, redevelopment, or reuse of which may be complicated by the presence or potential pres-

ence of a hazardous substance, pollutant, or contaminant.”The EPA’s Brownfields program (initiated

in 1995) supplies local grants to support revitalization efforts by funding environmental assessment,

cleanup, and job-training activities.

brownstone A row house built of reddish-brown sandstone; usually refers to one built in the

nineteenth century, in a large city, with a narrow profile facing the street.

BTU See British thermal unit.

BTXE Toxic chemicals typically found as soil contaminants at former gas station or other

petroleum-handling sites. Short for benzene, toluene, xylene, and ethylbenzene.

broker BTXE

6363

bubble A period of rapid expansion and price increases, followed by a market slowdown and

contraction. Many analysts claim a real estate bubble exists in some cities characterized by a price

growth of more than 30 percent per year. Other analysts disagree. (For housing cost information in

various states and cities, see the Office of Federal Housing Oversight Web site at www

.ofheo.gov,

and click on House Price Index.)

budget (1) An itemized list of expected income and expenses over a period of time. (2) An esti-

mate of particular monetary needs, such as a capital budget for construction or a development

budget for construction and business ramp up to break even.

budget mortgage Typically a residential mortgage, one that requires monthly payments for real

estate taxes and insurance in addition to principal and interest payments.

buffer zone (1) A transitional area between two areas of different zoning or characteristic land use.

(2) Green space or other open or natural areas providing privacy and noise pollution control for a

subdivision.

builders and sponsors profit and risk allowance (BSPRA) An amount above the cost of con-

structing apartments that is allowed to be included in the project costs for purposes of determining

the maximum loan amount in certain government-sponsored programs; generally calculated as 10

percent of the project development cost, less the cost of the land.

builders risk insurance Fire,liability,and extended coverage protection to cover the risks encoun-

tered when a building is under construction.

builder warranty A guarantee offered by the builder on the quality of construction.

building codes Regulations established by local governments to specify minimum building

standards for foundations, structural support, electrical and plumbing systems, fire retardation,

accessibility, safety for small children and others, fire escapes, numbers of exits, numbers of

parking places, and many other areas concerned with the health and safety of the population.The

most widely employed building code is the standard known as the International Building Code.

Some local governments still employ the Southern Building Code.(For more information go to the

International Code Council Web site at www

.iccsafe.org.)

building efficiency ratio The proportion of leasable space in a building to the total space.

Building Energy Conservation Code As a part of the National Energy Policy Act of 1992,Congress

required that states incorporate energy-efficient requirements into their building codes for commer-

cial buildings. Details regarding model codes may be obtained from United States Department of

Energy Web site at www

.energycodes.gov or a local building inspection office.

building height The total height from the bottom of the ground floor to the highest structure or

decoration on the roof. Local building codes or airport avigation easements may place restrictions

on building height.

bubble building height

Example: The Washington, D.C., building height restriction

states that no building may be more than 20 feet taller than the width

of the street in front of it, but exceptions may be granted for spires,

towers, domes, minarets, pinnacles, and engineering structures such

as ventilation shafts.

building inspection A physical review of a property in the various

stages of construction, to ensure the builder has complied with all

requirements of the local building codes. Failure to pass a particular

inspection may halt progress until the condition has been corrected.

For example, no construction may proceed on a building until it has

passed its foundation inspection. The local inspections department will not issue a certificate of

occupancy (C/O) until the property has passed fire marshall review and any other inspections that

may be required in the locale. In order to provide de facto enforcement of the rule prohibiting occu-

pancy without a C/O, many utility companies will not provide permanent service without proof that

one has been issued and will disconnect temporary service at the end of the originally anticipated

completion date.

building line A setback line; the closest a building may be allowed to come to the property

boundary line.Building lines may be set by local government or by subdivision building restrictions.

building loan agreement A loan to finance construction. Funding is made either at preestab-

lished stages or at completion, or upon submission and approval of invoices evidencing

construction bills.

Building Owners and Managers Association (BOMA) This professional organization

(www

.boma.org) is made up of persons who own or manage buildings,primarily office buildings.

building permit Written permission from local government to proceed with construction,

substantial repair, demolition, or sign erection on real property.The permit process serves sever-

al purposes:

• Revenue generation through permitting fees

• Early identification of potential problems, such as the need for historical district

approvals

• Entry of the project into a tracking system to ensure code compliance through periodic

inspections

• Estimation of the anticipated cost of the project, in order to assist local government with

analysis of building and development trends

• Initiation of steps that will ultimately ensure all subcontractors have business licenses and

correctly report their income for the year

(Developers typically include contingencies in their purchase contracts to allow for difficulties in

obtaining building permits. Especially with large projects, which require extensive plan review

before issuance of a permit, the permitting process can take many months.)

building height building permit

6565

building restrictions Zoning or subdivision restrictions on the size or type of building that can

be erected.

building standard A particular style and quality of building materials, finishes, and accessories

used in a specific commercial building. Office leases will generally include a construction allowance

or build-out allowance to complete space according to a tenant’s space design and using building

standard materials.If the tenant desires a better quality, the tenant may usually pay for the difference

in cost and obtain it.The phrase also comes into play in circumstances when the landlord has agreed

to be responsible for replacing all building standard lightbulbs in the leased space. If building stan-

dard is fluorescent,and the tenant has incandescent bulbs in spaces such as conference rooms,then

the tenant will have to pay for replacement of those bulbs.This can be a significant expense.

build-out Improvements to leased space to make it usable for a particular tenant’s needs.

built-ins Appliances, machinery, and other equipment installed as part of a building rather than

left freestanding. Built-ins are considered fixtures, and fixtures are considered real estate. A contract

to sell real estate automatically carries with it an obligation to leave all fixtures in place and includ-

ed in the sale. There is usually a great deal of controversy over the exact nature of something as a

built-in or not, such as a high-end refrigerator surrounded by custom cabinetry and with matching

door insert panels.If in doubt, specifically list all appliances, machinery, and other such questionable

items in the purchase contract.

built to suit An arrangement in which a property owner agrees to construct a building accord-

ing to a tenant’s exact specifications, and then to lease the property to the tenant, preferably on

a long-term basis.

bulk sale Transfer of all or substantially all the assets of a business. Some states have bulk sales

laws requiring notice to creditors before any such sales, so that a debtor may not liquidate all assets,

pocket the money, and leave creditors holding the bag.

bulk zoning Zoning designed to control density and overcrowding.

bullet loan A loan with a 5- to 10-year term,no amortization, and the entire principal balance due

at the end.

bundle A package of shingles. Normally, there are three bundles per square and 27 shingles per

bundle. Most roofing contractors charge by the square or by the bundle.

bundle of rights theory A concept describing all the rights capable of ownership in real proper-

ty. The bundle may be broken, and only some of the rights transferred and others retained, or they

may be transferred to different people.

burden of proof In court, the responsibility to come forward with credible evidence that a thing

happened or did not happen. Normally, the party who complains about a wrongdoing has the bur-

den of proof. In some circumstances, primarily under federal laws related to discrimination, the

aggrieved party need only make an allegation of wrongful behavior and the defendant has the bur-

den of proof that his or her behavior was reasonable under the circumstances.The burden of proof

may be set at different levels for various types of litigation. For example:

building restrictions burden of proof

• When contesting a property tax valuation, the owner must generally prove that the assess-

ment was manifestly excessive, clearly erroneous, or confiscatory. This burden of proof is

very high, much more than required to show the assessment was simply inaccurate.

• Housing discrimination cases involve a three-step process that moves the burden of proof

back and forth. Under what is called the McDonnell Douglas test, plaintiffs have the bur-

den of showing they are a member of a protected minority; they applied for and were qual-

ified to rent or purchase property; and they were rejected and the housing or rental oppor-

tunity remained available afterward. That creates a presumption of discrimination, which

shifts the burden to the defendants to prove they had legitimate, nondiscriminatory reasons

for their actions. If successful, the burden shifts back to the plaintiffs to prove by a prepon-

derance of the evidence (meaning, “more likely than not”) that the offered reason was a

pretext and there really was a discriminatory purpose.

Bureau of Land Management An agency of the U.S. Department of the Interior, charged with the

care, custody, and management of all land owned by the U.S. government, comprising approximate-

ly 261 million acres. It also maintains current and historical information regarding land ownership

and use, maintains a geospatial (GIS) data clearinghouse, and manages and provides access to the

public land survey system, also called the rectangular survey system employed in surveying real

property. (The Bureau of Land Management Web site is at www

.blm.gov.)

burned-out tax shelter An investment that has exhausted most of its tax-sheltering benefits. For

properties taking advantage of bonus depreciation of up to 50 percent for the first year placed in

use, the shelter can be burned out by year 2.

business center An office arrangement providing individual offices for local representatives of

large companies, professionals, and small-business persons, with sharing of lobby space, conference

rooms, support staff, telecommunications services, office equipment, and other amenities. Formerly

called executive suites and shared offices. The industry trade organization is the Office Business

Center Association International (www

.obcai.org).

business day A standard day for conducting business,excluding government holidays and week-

ends. Various notices required in real estate contracts, leases, or other agreements may have dead-

lines based on the passage of a certain number of days, or of business days.To count days, you start

with the day after the triggering event, and count that as day 1.

business interruption insurance Insurance that provides benefits if business is interrupted while

repairs are conducted after an insurable loss.

business park A development designed for warehouse, office or light-industrial use, with gener-

ous landscaping and open spaces.

business value The intangible value of a business, over and above the value of the land, improve-

ments, fixtures, receivables, and cash. Intangibles may consist of goodwill, franchise value, and

proprietary systems and procedures.

burden of proof business value

6767

buyback agreement A provision in a contract requiring the seller to buy the property back for a

stated price if certain conditions are met within a specified period of time. One wishing to purchase

an existing automobile dealership may purchase the land first, with a buyback agreement requiring

seller repurchase if the purchaser is unable to obtain manufacturer approval for transfer of the

dealership itself.

buy down To reduce the interest on a mortgage loan by paying discount points in order to buy

down the rate. For residential loans, it rarely makes sense for borrowers to buy down their rate. In

order to evaluate,ask for the amount of the monthly principal and interest payments with and with-

out the reduced rate. Subtract the lower number from the larger number.This is the amount of your

monthly savings. Divide your monthly savings into the price for the buy down. This provides the

number of months you must pay on the mortgage before you will have saved enough money to pay

for the discount points. Finally, ask yourself, “Do I realistically think I will own this property for that

length of time?” If not, then do not pay the points.

buyer’s broker An agency relationship in which the broker represents the buyer rather than the

seller.This is typical in commercial real estate transactions,but relatively rare in residential real estate

brokerage. For residential brokerage, most agents “working with” buyers are actually subagents of

the seller.

buyer’s market A market with more properties for sale than can reasonably be expected to be

purchased by the available demand. As a result, sellers will have to compete against each other to

attract buyers and will usually do so by lowering prices.

buyout (1) Securing the removal of tenants from a building by paying cash incentives for the early

termination of their leases. Owners may desire to buy out tenants in order to rehab the property to

attract a better quality of tenant at higher rates; in order to sell the property to an owner-occupier;

or to remove an objectionable tenant causing problems but not technically in default. (2) Securing

the release of a tenant from lease obligations in another building so the tenant can rent in the

owner’s building.The other building’s owner may permit the buyout if he or she believes the depart-

ing tenant can be replaced fairly quickly, thereby gaining a large windfall profit from the buyout

payment.

buy-sell agreement An agreement among partners or shareholders describing the circum-

stances and terms of sale if one or more wish to exit the arrangement or wish to sell their shares to

an outsider.

bylaws Regulations by which an organization conducts its governance activities. They typically

provide for the timing and method of elections and regular meetings,number of directors and other

officers, methods and notice necessary for special elections or meetings, number of votes required

for different types of actions, establishment of standing committees, and a grant of authority to

organize other committees, powers of the board, officers, and various committees.The developer of

buyback agreement bylaws

a subdivision or condominium project typically creates the first set of bylaws and appoints the

initial board of directors.

by operation of law A method of acquiring rights in real estate without any specific intention or

even knowledge on the part of the owner. Spouses may gain rights through homestead, dower

(widow’s rights), curtesy (widower’s rights), or community property statutes.

bylaws by operation of law

6969

707070

CAD (1) See cash available for distribution. (2) See central appraisal district. (3) See computer-aided

design.

cadastral (1) A legal map for recording ownership of the various parcels of land within a jurisdic-

tion. (2) The United States Cadastral System program within the U.S. Department of the Interior

Bureau of Land Management, responsible for surveying and related activities.(For more information

go to the Bureau’s Web site at www

.blm.gov.)

CAI See Community Association Institute.

caisson A casing or cylinder used to sink shafts into wet or unstable ground,or a watertight struc-

ture within which construction is conducted under water. Often used in bridge building; sometimes

used in commercial construction.

call option See call provision.

call provision A clause in a loan instrument that gives the lender the right to accelerate the debt

upon the occurrence of certain conditions.These might include filing for bankruptcy (illegal, but it’s

in all the promissory notes anyway), reduction in value of the collateral, occupancy levels dropping

Cut way view of

interior of cassion

below certain minimum levels in income-producing properties, or the catchall clause “whenever the

lender deems itself insecure.”As a practical matter, it would be an unwise lender who relies solely on

the “deeming itself insecure”clause, because such action almost always results in litigation in which

a jury, usually of the borrower’s peers,gets to decide if it was reasonable under the circumstances for

the lender to panic.

CAM See common area maintenance.

cancellation clause A clause in a contract or lease that allows one or either party to cancel it upon

the happening of certain named events other than a default. It is most often encountered: (1) in the

lease for a single-tenant commercial building or house, allowing the landlord to cancel the lease

upon sale to another owner who wishes to occupy the property rather than use it as an investment,

and (2) in a commercial lease for a small-space user who might stand in the way of expansion by a

larger tenant.Well-negotiated leases include a provision for some sort of compensation to the tenant

if this happens.

cantilever A beam or overhanging architectural element that is supported at only one end.The

most common examples are bay windows and swimming pool diving boards. The most famous

example is a balcony that seems to be suspended in the air above a waterfall at Frank Lloyd

Wright’s architectural masterpiece, Fallingwater, in Pennsylvania (www

.paconserve.org/

fallingwaterhome.htm).

cap A ceiling on the adjustments that can be made in the payments or interest rate of an

adjustable-rate loan.

capacity The legal ability of parties to enter into contracts.

• Full capacity. Having unlimited ability to enter into binding contracts of all types.

• Limited capacity. Having the ability to enter into binding contracts for certain things, such

as a minor’s contracts for necessities, but also having the ability to disaffirm other contracts

upon reaching legal age, for example.

• No capacity. Having no ability to enter into contracts, such as one who has been adjudicat-

ed as mentally incompetent.

capital (1) In architecture, the top part of a column. (2) In finance: (a) All

the accumulated goods, possessions, and assets used for the production

of income and wealth. (b) The amount invested in business.

capital asset (1) All property held by a taxpayer except inventory or

goods in process. (2) All property except that held for resale to others in

the ordinary course of business.

capital calls A call for additional equity investment by shareholders or

partners in order to fund cash shortfalls in development or operations, or

to compensate for the falling value of noncash assets and the need to

increase cash so that liabilities do not exceed assets.

call provision capital calls

7171

Corinthian capital.

capital expenditure Money spent on capital improvements, being those that change the nature

of property, extend its useful life, or otherwise improve it beyond the natural improvement to be

expected with routine repairs and maintenance.This is an important concept because capital expen-

ditures must be added to the basis and depreciated slowly over time,while noncapital expenditures

for repairs may be deducted entirely in the current year on one’s taxes.

capital gain The taxable gain recognized from the sale of a capital asset. It is the difference

between the sale price of the property and the adjusted basis. Tax laws routinely offer preferential

treatment for long-term capital gains on property held for a certain period of time before sale.

Capital gains may be offset by capital losses.

capital improvement See capital expenditure.

capitalization rate Usually called a cap rate, it is a number used in order to estimate the value of

an income-producing property.There are no cap rate tables, no firm standards,and no universal for-

mulas for arriving at one. Cap rates change frequently, depending on market demand for particular

types of properties, lender appetite for particular types of loans, and prevailing interest rates. Most

commercial real estate brokers, appraisers, and lenders know a range of cap rates for different types

of properties. One divides the annual net operating income by the cap rate to arrive at a value.High-

quality multi-tenant medical offices might sell for cap rates of 7 percent, and rundown apartment

buildings with high turnover might sell for a cap rate of 13 percent. If both of them had gross rents

of $300,000 per year with operating expenses of $60,000, then each would have a net operating

income (NOI) of $240,000. By dividing the cap rate into the NOI, the medical offices would have a

value of $240,000  0.07, or $3,428,571. Using the same formula for the apartments, but the higher

cap rate, $240,000  0.13 gives a value of $1,846,153. It seems counterintuitive at first, but the

higher the cap rate, the lower the value.

capitalize (1) In finance: (a) To add an expenditure to the basis of property. (b) To provide funding

to an enterprise. (c) To book something as an asset and depreciate it rather than writing off the

money spent as an expense. (When one “cooks the books”for a business, extensive repairs might be

capitalized as improvements in order to make the enterprise appear more valuable than it is in real-

ity.This approach runs counter to the normal taxpayer desire to treat all repairs as expenses in order

to gain maximum tax deductions in the current year.) (2) In appraisal, to estimate the present value

of an income stream from a business or property.

capitalized closing costs A taxpayer may write off as deductible expenses some of the

closing costs associated with the purchase of property or the acquisition of a loan. Others must

be deducted proportionately over the term of the loan, so that if the loan is for 30 years,

may

be deducted each year. Still others must be capitalized, meaning treated as additional money

spent on the purchase price when it comes time to calculate the gain on a later sale of the same

property.

7272

capital expenditure capitalized closing costs

Tax Deductions for Home Purchase Expenses

Deduct in Amortize over Capitalize

Current Year Loan Term

Loan origination fee for primary home purchase 

Buyer-paid loan discount points for primary 

home purchase

Seller-paid loan discount points for primary home 

(but only if the seller doesn’t deduct them also)

Any of the above three, but for secondary home 

Prepaid interest 

Property tax prorates 

Title insurance for owner 

Survey 

Legal fees for closing 

Recordation fees and transfer taxes 

Normal seller expenses you agree to pay, like real 

estate commission, back taxes, and unpaid

assessments or dues

For more information, consult IRS Publications 530 (Tax Information for First Time Homeowners), 523 (Selling Your

Home), 587 (Business Use of Your Home), and 936 (Home Mortgage Interest Deduction) available at www

.irs.gov or

by calling 800-829-3676.

capitalized value of future income The value today of the right to receive income in the future.

The concept rests on the principle that no one would pay $120 today for the right to receive $120

one year from today. Neither would anyone pay $120 today for the right to receive $10 per month

over the next 12 months. Add to that the idea that relative risk affects a person’s decision making.

You might place $120 in an FDIC-insured savings account today,in order to receive $140 in one year.

But, would you pay $120 to an out-of-work student, in exchange for her promise to pay you $140 in

one year? Probably not.These two concepts—the time value of money and the evaluation of risk—

are at the heart of discounting.Discounting is the basic tool for reaching a capitalized value of future

income. See present value or discounted cash value.

capitalized value of property The acquisition cost of the property, plus expenses of acquisition

and improvement.The choice between adding an item to the capitalized value or writing it off as

an expense in the current year is one of the critically important decisions of any business or invest-

ment property. It is important to have a grasp of the hard-and-fast rules and an understanding of

the gray areas.

capital loss A loss recognized upon the sale of a capital asset.It is the difference between the sale

price of the property and the adjusted basis. Just like capital gains, capital losses can be either short

7373

capitalized closing costs capital loss

term or long term. Long-term capital losses may be set off against long-term capital gains. Short-

term capital losses may be set off against short-term capital gains; one may not recognize a capital

loss on the sale of a personal residence.

capital markets The markets in which equity is raised and long-term loans (over one year) are

originated and traded.These include the stock market, the bond market, and the primary market.

The primary market is any market in which the original issuer receives money, such as an invest-

ment house that purchases all securities for an original issue and then resells them on the stock

market. Short-term debt instruments, for one year or less, are sold in the money markets, not the

capital markets.

capital recapture Return of the principal invested in a property, normally expressed as a dollar

amount over a period of time.

capital recovery See recapture rate.

capital stack A description of the totality of capital invested in a project, including pure debt,

hybrid debt,and equity.The stack is described as containing the most risk at the top, traveling down

the stack to the position with the least risk. Higher positions in the stack expect higher returns for

their capital because of the higher risk. Lenders and equity stakeholders are highly sensitive to their

position in the stack.Typically, the stack is arranged as follows.

1. Sponsor equity

2. Preferred equity

3. Mezzanine investors (hybrid debt and equity)

4. Second and other junior mortgages

5. Investment-grade first mortgages

capital structure See capital stack.

cap rate See capitalization rate.

capture rate The sales or leasing rate of a project, which is usually compared to similar projects

in the marketplace.There are various measurements,depending on the size of the units being sold

or leased. When referring to commercial real estate space for lease, the capture rate might be

expressed as an average number of square feet leased per month, quarter, or year. When referring

to small space with short rental terms, such as self-storage or business center space, the expres-

sion is also used to communicate the number of units rented versus the number of inquiries

per month, or sometimes the number of units rented versus the number of physical visits to

the property per month. All these measurements allow management to compare its success to

others in the marketplace and to make adjustments in pricing, advertising, or possibly even sales

personnel as a result.They also allow management to make decisions about future development,

in order to accurately anticipate the length of time it will take a project to reach stabilized

occupancy or, the alternative, to break even.

7474

capital loss capture rate

Sponsor

equity

Preferred

equity

Mezzanine

investors

Junior debt

Investment grade debt

Capital stack.

Example: The following table shows capture rates of square feet of space rented in each of the

quarters of the past year, for three different buildings.

Square Feet of Space Leased, per Quarter, in Three Different Buildings

Quarter Building A Building B Building C

1st 5,000 0 500

2nd 10,000 0 10,000

3rd 18,000 42,000 12,500

4th 2,000 0 500

A quick glance at the chart shows that tenants seem to sign the most leases in the third quarter,

although the negotiating process probably starts much earlier.

caravan A group inspection tour of newly listed properties by local real estate agents; a field trip

to view the competition’s listings.

carport/car porch An open-air roofed structure used to house vehicles at a residence. Contrast

with a garage, which must be completely enclosed.

carry-back financing Seller financing through the vehicles of a second mortgage, a wraparound

mortgage, or a bond for title.

carrying charges Costs incurred in owning property up until completion of a development, as

opposed to the actual development expenses themselves.Carrying charges must be capitalized and

7575

capture rate carrying charges

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

then amortized, or expensed, over the next 10 years as tax deductions. Examples include interest

accrued on development loans, and property taxes.

carryover basis In tax accounting, the retention of an earlier basis (adjusted acquisition cost) in

property even though the property has changed hands. This happens most often in two instances:

(1) Someone acquires property by gift. The basis is the same as it was in the hands of the donor,

adjusted upward for any gift taxes paid by the donor.(2) In a 1031 exchange,in which like-kind prop-

erty is exchanged for other like-kind property in a sort of perfectly legal accounting sleight of hand,

the basis in property acquired is the same as the basis in the property given up, even though both

might currently have substantially different fair market values.

carve-out An area of personal liability in an otherwise nonrecourse loan. A lender may be willing

to accept property as sufficient collateral for a loan, without requiring personal liability on the part

of the corporate or individual borrower in case there is a default and the collateral is insufficient to

pay the debt.The exceptions,or carve-outs, are for things outside the ability of the lender to analyze

during underwriting, such as borrower fraud or environmental claims.

cash available for distribution (CAD) Encountered in REIT (real estate investment trust) and large

corporation accounting, it is cash from operations after payment of all expenses and a reserve for

taxes, repairs, and reasonably anticipated capital expenditures.

cash equivalent (1) In finance, assets easily converted to cash. Lenders like to see large percent-

ages of assets held in cash and cash equivalents rather than tied up in real estate or stock in small

corporations. (2) In appraisal, the conversion of a sales price with favorable or unfavorable financing

terms into the equivalent price if the consideration had been all cash. A seller might demand an

above-market price for a property but be willing to hold the financing at below-market rates, for

example. Such a transaction would require analysis for the cash equivalent sales price.

cash flow (1) Noun: The cash available from an investment after receipt of all revenues and after

payment of all bills.(2) Verb:The process of creating cash flow, as in “I think that property will start to

cash flow in about a year.”A property can have positive cash flow (good) or negative cash flow (usu-

ally bad).Cash flow is not the same thing as profitability. A property can be profitable,meaning gross

income less expenses, depreciation, and interest on debts results in a positive number. That same

property can have a negative cash flow because of the need to pay principal payments on loans or

expend money for something that represents a capital expenditure, like a new roof.

cash flow mortgage A loan workout tool in which all, or nearly all, of the cash flow from a proper-

ty is used to service the debt for some period of time,even though this amount may be less than the

amount originally expected by the lender.

cashier’s check An official check issued by a bank with itself as the drawer. Contrast with a

certified check, which is one drawn on the bank customer’s account, with the customer as drawer,

but certified as good by the bank. Closing companies usually require a cashier’s check for the

purchaser’s portion of all closing costs and purchase money. A cashier’s check can be the subject

7676

carrying charges cashier’s check

7777

cashier’s check caveats

of a stop-payment order. Because of widespread forgery of cashier’s checks, many closing compa-

nies will not complete closing until funds are actually collected and in the closing company’s

escrow account.

cash method An accounting method employed by individuals for preparation of their taxes, and

often used by small businesses. Income is counted when the money is actually received by the tax-

payer,and expenses are counted during the period in which they are actually paid.Contrast with the

accrual method, in which income is counted when it is earned, whether or not it results in money

during that period, and expenses are counted when they are incurred, regardless of when they are

actually paid. Cash method accounting can dramatically skew financial statements, making proper-

ties appear profitable solely as a result of holding bills and not paying them until another period.

cash-on-cash A tool for investment analysis, being a comparison of the cash flows taken from a

property over some period, usually a year, as compared to the original cash investment.

cash-on-cash return See cash-on-cash.

cash out To liquidate an asset.

cash-out refinance To refinance a property in an amount sufficient to pay off existing debt and

provide cash to the owner. Because this is not a taxable event, it is a widespread way for investors to

realize benefits from the growth in their assets without having to sell them.

cash purchase A property acquisition with no financing. Even without a financing contingency, it

is important for real estate contracts to specify if there will be a cash purchase or a financed purchase,

because the two represent vastly different responsibilities on the part of the closing company.

cash throw-off Same as the noun version of cash flow, but rarely used. It is common, however, to

say that a property is “throwing off cash.”

castle, man’s home as A concept rooted in English common law, from the case of Anonymous,

King’s Bench, 1506, reported at Year Book, 21, H.VII 39, pl. 50, holding that a person was entitled to

defend his premises against intruders because “a man’s house is his castle and his defense,and where

he has a peculiar right to stay.”

categorical taking A government regulation that deprives a property owner of all economically

beneficial use of his or her property, and, as a result, constitutes a regulatory taking such as would

justify requiring the government to pay the property owner for the loss.

caveat emptor Means “buyer beware.” The legal doctrine followed in some states that sellers of

real property are not required to disclose any defects except those inherently dangerous and not

easily discoverable by the purchaser.Contrast with seller disclosure states that affirmatively mandate

written disclosure of a wide variety of named deficiencies, plus anything else that might be deemed

a property defect.

caveats Warnings. Frequently encountered in real estate disclosures or contracts with the words

“to the best of the Seller’s knowledge”or “but without aid of a structural engineer.”

7878

CBD central business district (CBD)

CBD See central business district.

CCA chromated copper arsenate; a pesticide that is forced into wood under high pressure to

protect it from termites, other wood-boring insects, and decay caused by fungus.

CCIM See Certified Commercial Investment Member.

C-corporation A typical corporation that pays taxes on its income at the corporate level and then

the shareholders are taxed on dividends distributed to them.Contrast with S-corporation, which has

no taxes at the corporate level.

CCR See conditions, covenants, and restrictions.

CD See certificate of deposit.

cease and desist An order from a government authority requiring one to stop engaging in some

activity, such as construction without a proper permit. If issued from a court, it would be called an

injunction.

ceiling (1) The uppermost surface of a room or space. When a lease makes all improvements

“below ceiling” the responsibility of the tenant, one must ask if “ceiling”means the concrete bottom

of the floor above, or if it means the suspended grid system with ceiling tiles.The space in between

the two is called the plenum. All the wiring, plumbing, and ductwork go through the plenum, so the

choice of which surface is the “ceiling”could mean a substantial difference in tenant responsibilities.

(2) An upper limit on something, such as the IRS ceiling of $1,000,000 worth of home mortgage debt

for which one can deduct mortgage interest.

cemetery lots A special land use designation authorized by statute. In many states, cemetery lots

are exempt from real property taxes.

census tract A small, relatively permanent statistical subdi-

vision within a county, generally containing 2,500 to 8,000

people and readily identifiable borders. Similar to block

numbering areas (BNAs), but differing only in the local versus

federal source of the data used to create the maps. Mapped

and numbered by the U.S. government, which provides

demographic information at www

.census.gov. Third-party

resellers of demographic information extrapolate from the

census tract data into more personalized demographic areas.

central appraisal district (CAD) Employed when multiple entities are entitled to assess taxes

based on the value of real property located within their shared borders. In order to avoid inconsis-

tencies in appraisals and duplication of expenses, the multiple entities will organize and share the

expenses of a central appraisal district.

central business district (CBD) Typically the downtown section of a city, generally containing the

finance, real estate, insurance, and legal headquarters for the city.

2.98

3.98

5602

5603.98

5604.98

5601

BIBB COUNTY PIKE COUNTY

7979

Century 21 page certificate of satisfaction

Century 21 page A slang expression derived from the real estate franchise firm Century 21;

describes a Web site that exists for no other purpose than to redirect you to another site. Web sites

are often referred to as “real estate.”

CERCLA See Comprehensive Environmental Response Compensation and Liability Act.

certificate of completion A document issued by an architect, engineer, or other qualified

inspector attesting that the project has been completed in conformity with all plans and specifi-

cations; usually required before the construction lender will fund the final payment due under a

construction loan.

certificate of deposit (CD) A receipt for money deposited in a financial institution.

certificate of discharge Also called a waiver of tax lien. An IRS release of tax lien so that property

can be sold or foreclosed. (For more information go to the IRS Web site www

.irs.gov and see Form

4422, “Application for Certificate Discharging Property Subject to Estate Tax Lien”; Form 783,

“Instructions on How to Apply for a Certificate of Discharge of Property from Federal Tax Lien” (non-

estate tax); and Form 786, “Instructions for Preparing Notice of Non-judicial Sale of Property &

Application for Consent to Sale.”)

certificate of eligibility A certificate issued by the regional Department of Veterans Affairs in

order to indicate a person’s eligibility for a VA loan.

certificate of estoppel See estoppel.

certificate of insurance A document issued by an insurance company to certify the extent and

limits of coverage. Usually required by landlords as evidence a tenant is in compliance with lease

requirements to maintain certain minimum levels of property and liability insurance. Also required

by general contractors as proof the subcontractors have adequate insurance.

certificate of no defense Same as estoppel certificate. See estoppel.

certificate of occupancy (C/O) Almost always referred to simply as a “C.O.” A document issued

by a local government certifying that a structure has passed all required inspections and is ready

for occupancy. It is always required at the completion of any construction when repairs require a

construction permit. It is also often required when a property changes character from residential

to commercial, even if no construction takes place, and is sometimes required before issuance of

a new business license when a property changes hands. As a de facto method of enforcement,

many utility companies will not permit service until receipt of a valid certificate of occupancy.

certificate of reasonable value (CRV) A document issued by the Department of Veterans Affairs

as a prerequisite for a VA loan;it is based on an approved appraisal.It establishes the maximum value

of the property for VA purposes and, as a result, the maximum size of the VA loan.

certificate of satisfaction A document filed in the public records certifying that a recorded lien on

real property has been paid in full.

8080

certificate of title change order

certificate of title A document issued by an attorney or title company certifying the status of title

to real property and the absence or presence of title defects, liens, and adverse claimants.This is not

the same as title insurance,because the preparer is liable only for negligence in the event of mistakes.

certified check A check drawn on the bank customer’s account, with the customer as the drawer

and the check certified by the bank as payable.

Certified Commercial Investment Member (CCIM) A designation awarded by the Commercial

Investment Real Estate Institute after a member completes education, experience, and testing

requirements. (For more information go to the Web site of the CCIM Institute at www

.ccim.com.)

Certified General Appraiser An appraiser qualified to appraise any type of property, under rules

adopted by the Appraisal Foundation (www

.appraisalfoundation.org).

certified historic structure As defined by the IRS for purposes of the rehabilitation tax credit

(popularly known as the historic preservation tax credit), any building, portion of a building, bridge,

ship, railroad car, dam, or any other structure that is either listed in the National Register of Historic

Places or located in a registered historic district and certified by the U.S. Department of the Interior

as being historically significant to the district.

certified home inspector A home inspector certified under state licensing or certification

programs.

Certified Property Manager (CPM) A professional designation awarded by the Institute of Real

Estate Management (IREM) (www

.irem.org), which is affiliated with the National Association of

REALTORS®.

Certified Residential Appraiser A state certification for residential appraisers.

Certified Residential Broker (CRB) A designation awarded by the Council of Real Estate

Brokerage Managers (www

.crb.com), which is affiliated with the National Association of REALTORS®.

Certified Residential Specialist (CRS) A designation awarded by the Council of Residential

Specialists (www

.crs.com), which is affiliated with the National Association of REALTORS®.

cestui que trust (pronounced “seh tee kuh trust”) The beneficiary of a trust.

chain A unit of measurement formerly used in surveying and still seen in deeds with old property

descriptions. One chain equals 66 feet.

chain of title The history of all owners and lien holders of real property, together with the dates

of their acquisition and the nature of their title, going all the way back to the first deed out of the

government.

change order A written order from the owner,architect,engineer,or other authorized person to

depart from previously agreed upon plans and specifications for construction. Change order

8181

change order cistern

management is a critical aspect of any construction job, as change orders frequently change the

cost of the job, usually in an amount in excess of what might otherwise be expected. Many sub-

contractors bid jobs at break-even prices in order to secure the work, confident that numerous

change orders will provide the profit necessary.

Example:

An electrician might contract to perform all wiring and electrical work for a home

for $2,000. Additional outlets added by change order might be billed at $65 each, even though

the additional labor and materials might amount to only $5 each.

charge off To discontinue accounting for some or all of a promissory note and its accrued interest

as an asset of the lender.If a loan is partially or totally uncollectible,then it is partially or totally worth-

less and cannot constitute an asset. This is an accounting function only; the lender may still pursue

collection activities and then rebook the money as a cash asset when and if there is a recovery.

chattel Tangible personal property.

chattel mortgage A security interest in tangible personal property.

Check 21 Shorthand for the Check Clearing for the 21st Century Act; legislation that allows

faster processing of checks by financial institutions by allowing them to process images rather

than physical pieces of paper. The law also allows the creation of substitute checks that are

processed immediately.

checkerboard development A traditional subdivision

design with straight streets at right angles to each other

and houses on evenly sized square or rectangular lots.

Contrast with cluster development.

choice of law clause Frequently employed by a national

company with real estate relationships in many states, the

clause will state that the law of the company’s headquarters

will control any disputes between the parties.This is because

the lawyers back at headquarters know their own law and

know how to write contracts to protect themselves.If all their

nationwide contracts were interpreted under the laws of the

different states, it could be chaotic. Choice of law clauses are usually accompanied by forum

shopping clauses, which specify which state’s courts will hear disputes between the parties.

chronologic age The actual age of a thing, rather than its effective age.

circulation Areas in an office space that are used to travel between offices, cubicles and the like;

hallways and corridors.

cistern A container for the collection of rainwater. Many historic homes had gutters and

downspouts that routed all water into a cistern beneath the house to be used as a water source

for cooking, cleaning, and in the event of fire.

Main Street

1st Avenue

Alley

8282

civil law class (building)

civil law A system of laws with its origins in Roman and French statutes rather than the judicial

decisions of English common law. See common law.

Civil Rights Act of 1866 Passed after the Civil War, this Act declared that all persons born in the

United States were citizens of the United States without regard to race, color, or previous condition

of servitude.All citizens were entitled to enter into and enforce contracts,and to buy,sell,lease,inher-

it, and pass by inheritance real and personal property. It prohibited discrimination in housing, but

provided no enforcement mechanism other than private lawsuits. It was not until 102 years later,

with the passage of the Civil Rights Act of 1968, that antidiscrimination laws could be truly enforced

through federal actions.

Civil Rights Act of 1964 On November 27, 1963, newly sworn-in President Lyndon Johnson

called for the passage of a new civil rights bill, as a tribute to the late President John F. Kennedy,

who had been assassinated only weeks earlier. The resulting bill was signed into law on July 7,

1964, with a stated purpose: “To enforce the constitutional right to vote, to confer jurisdiction

upon the district courts of the United States to provide injunctive relief against discrimination in

public accommodations, to authorize the Attorney General to institute suits to protect constitu-

tional rights in public facilities and public education, to extend the Commission on Civil Rights, to

prevent discrimination in federally assisted programs, to establish a Commission on Equal

Employment Opportunity, and for other purposes.” It has come to be identified with halting

discrimination in public accommodations—restaurants, hotels, and other public facilities.

Civil Rights Act of 1968 Expanded upon prior civil rights acts, especially the Civil Rights Act

of 1866 and the Civil Rights Act of 1964. The Act was passed one week after the assassination of

Dr. Martin Luther King. One improvement was the provision of federal solutions to aid in stopping

discrimination. Title VIII of the Civil Rights Act of 1968 is also known as the Fair Housing Act.

Additional information is available at the Web site of the U.S. Department of Justice, Civil Rights

Division, www

.usdoj.gov/crt/crt-home.html.

claim A demand, as of right.

Claritas A commercial provider of market research and demographic data (www

.claritas.com).

When marketing commercial real estate,it is common for the agent to obtain 1-,3-,and 5-mile-radius

demographic information regarding population density, median household income, and median

home price for the most recent census survey with estimates of current data and projections of

future data.

class (building) Subjective evaluation of the desirability of an office building based on its age,

amenities, maintenance, and design. There are no hard-and-fast rules, and evaluations may change

for a virtually identical building in two different markets.The classification is independent of the loca-

tion; one commonly encounters comments such as “It’s a class B property in a class A location,”

meaning a less desirable building happily situated at a great location and thus able to command

higher rents than might otherwise be expected.

8383

class A building close corporation

class A building A building of high-quality and well-designed with above-average finishes and

features and the ability to attract first-class investors and tenants. New tenants typically offered a

build-out allowance to customize their space.

class B building A building of good quality but without any extras; may have been designed as a

no-frills building or may be a former class A building that has become dated in its design and finish-

es but is still well maintained. New tenants may be offered a build-out allowance, but it is typically

sufficient only to repaint walls and replace floor coverings.

class C building An affordable office space with average to below-average maintenance.New ten-

ants typically take space “as is,” although carpets might be shampooed before occupancy.

Clean Water Act Legislation originally enacted in 1972, and amended several times since then,

that establishes comprehensive national policies for water quality management. The laws are

enforced by the Environmental Protection Agency (www

.epa.gov).

clearance letter Also called a wood infestation report, provided by a licensed termite inspection

company and attesting the absence of any evidence of active termite infestation. (This letter is a

requirement of most lenders before closing may take place.)

clear-cutting The process of removing all vegetation from a site when harvesting timber, rather

than cutting only the marketable trees.Some states require immediate reforestation of clear-cut tim-

ber lands. Purchasers of timbered land should be careful to word contracts so as to include the tim-

ber. In many states,once an owner signs a contract to sell timber, it ceases to become part of the real

estate, is converted to personal property, and is not automatically covered under a sale contract for

real property.

clearing and grubbing The stage of development in which vegetation is cleared from land (clear-

ing) and a root rake or similar device employed to remove roots remaining in the soil (grubbing).The

next stage is cutting and filling.

clear span The horizontal distance between supporting pillars, columns, or walls, being the maxi-

mum possible distance clear of obstacles. Especially when working with industrial properties, it is

important to know the existing or required clear spans for clients.

clear-span facility A building, most often a warehouse or airplane hanger, with vertical columns

on the outside edges of the structure and a clear span for the entire interior area.

clear title Good title; marketable title; title to real property without any defects, liens, mortgages

or adverse claimants.

client The person to whom an agent owes duties of integrity, confidentiality, loyalty, and hard

work. Contrast with customer, who is owed the duty of honesty.

close corporation A corporation comprised of a small number of individuals who contribute to

the success of the business operations. Also called closely held corporation. Stock in close

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close corporation closing costs

corporations is typically sale-restricted, so that shares must be first offered to the corporation or

to the other shareholders before they can be sold to outsiders. Sale restrictions must be noted on

the face of stock certificates, putting buyers on notice that an attempted sale may be void if all

requirements have not been met.

closed-end mortgage A mortgage loan in which all sums have been funded at closing. Contrast

with open-end mortgage, in which the principal balance may increase over time. A home loan is

typically a closed-end mortgage; a construction loan is typically an open-end mortgage.

closely held corporation See close corporation.

closing The process of obtaining all necessary signatures, making all required disclosures, and

collecting and disbursing all monies in order to transfer title to real estate, execute a mortgage, or

both. Closings are regulated by the Real Estate Settlement and Procedures Act.

closing agent The person who performs a closing. The closing agent is typically not an agent of

either party or of the lender, but simply the person entrusted to carry out all nonconflicting instruc-

tions from all parties.

closing company A company or firm that conducts real estate closings,also called settlements.The

closing company does not represent any party to the transaction, but merely ensures that all docu-

ments are properly signed and all monies collected and disbursed according to the parties’contract.

closing costs Technically, only those fees and expenses necessary to close a sale or a mortgage,

such as document preparation, the fee for the actual closing itself, and perhaps overnight delivery

charges.In common language, though, the phrase has come to mean all expenses associated with a

closing with the exception of the actual purchase price of the property and any lender fees. Rather

than specifying that a buyer and seller will share closing costs equally, the better practice would be

to spell out all anticipated expenses and the allocation for payment.

Examples of potential expenses include

• Preparation of closing documents

• Deed preparation

• Expenses associated with clearing title defects, such as preparation of affidavits or quit-

claim deeds

• Title inspection

• Owners’ title insurance

• Lender’s title insurance

• Lender-required policy endorsements

• Deed recordation fees

• Mortgage recordation fees

• Transfer taxes (which can be sizable in the case of the New York mansion tax, for example)

• Closing agent fees

• Transfer fees imposed by condos, homeowners associations, or co-op boards

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closing costs cluster development

• Listing agent’s commission

• Selling agent’s commission

• Cost of wood infestation report and clearance letter

• Cost of survey

• Cost of appraisal

• Cost of required inspections

• Escrow fees

• Prepayment penalties

• Prorated real estate taxes, insurance, and/or dues

closing date The date on which the seller delivers the deed to the buyer and the buyer pays the

agreed-upon consideration.Purchase contracts typically specify a closing date no later than a certain

number of days or no later than a certain date. If closing does not take place on or before the desig-

nated date, then the party causing the delay is in default. As a practical matter, unless the contract

recites specifically that “time is of the essence,” then closing may usually be delayed several days

without penalty or loss.In a seller’s market,however,the better practice is to ensure that closing takes

place by the agreed-upon date, or the buyer will risk loss of the property and sale to someone else.

closing protection letter Additional title insurance coverage insuring the lender against losses

caused by errors or infidelity of the closing attorney or the closing agents in the handling of the

transaction.

closing statement Written itemization accounting for all funds changing hands at a real estate or

mortgage loan closing.

closure In a metes-and-bounds legal description of land,

the necessity that the various calls and distances culminate at

the point of beginning, so the shape described is “closed.” If

the shape is not closed and the property description is inac-

curate in some regard, then the transaction violates the

statute of frauds and the transfer is void. The drawing to the

right is of a property description without closure.

closure document A document written by a state environmental protection agency certifying that

a previous environmental hazard no longer bears further scrutiny because it has been remediated.

cloud on title Something that appears on its face to constitute a defect in title or a claim

against property, but which may be cleared through the execution of affidavits, quitclaim deeds,

or corrective deeds, or by means of a lawsuit called an action (or bill) to quiet title.

cluster development A subdivision planning design in which housing is clustered together on

relatively small lots with a larger amount of common area shared by all;also called open space devel-

opment and conservation subdivision. Requires some sort of homeowners association with the abil-

ity to assess dues in order to maintain the common area. Contrast with checkerboard development.

Point of

beginning East 105 feet

Ending point

West 105 feet

Sout

eet

North 45 feet

This property description has no closure.

8686

cluster zoning cold canvass

cluster zoning Zoning that specifies housing

density for an entire area overall, leaving a devel-

oper free to use some space for high-density hous-

ing such as apartments or garden homes, and

other space for low-density estate-sized lots.

Contrast with traditional zoning ordinances that

specify the same density for each and every lot

within an area.

CMA See comparative market analysis.

CMBS See collateralized mortgage backed

securities.

CMO See collateralized mortgage obligation.

CMO REIT A real estate investment trust that

specializes in collateralized mortgage obligations.

C/O See certificate of occupancy.

cobroker See cooperating broker.

code (1) Any systematic collection of laws,regulations,or rules.(2) Shorthand for any of the various

building codes, such as, for example,“This historic property has been updated and meets all current

code requirements.”

code of ethics Any written system of standards and ethical considerations for the persons bound.

All state real estate licensing organizations have their own codes of ethics; most are based on that of

the National Association of REALTORS®, which is available at www

.realtor.org/mempolweb.nsf

/pages/code?opendocument.

COFI See cost of funds index.

coinsurance A method of dividing financial responsibility for a loss between the owner and the

insurance company. Coinsurance clauses exist within insurance contracts as a type of penalty for an

owner who decides to gamble about the size of any potential loss and insure property for less than

the full value in order to keep premiums low.They usually provide that an owner may not collect full

policy limits for a loss unless the property has been insured to at least 80 percent of its value.

COLA (pronounced like the beverage) See cost-of-living adjustment.

cold call To make unsolicited contact with persons for the purpose of making a sale. In real estate,

new agents will often cold call entire neighborhoods in an attempt to obtain listings.

cold canvass See cold call.

Main Avenue

1st Street

Community Park

8787

collapsible corporation collateralized mortgage backed securities (CMBS)

collapsible corporation A former tax-planning tool allowing conversion of ordinary income to

capital gains through the vehicle of a corporation set up and then quickly “collapsed” by a sale or

exchange of the stock or a liquidation.Today, the vehicle has been largely penalized out of existence

by the IRS.If the corporation is collapsed and the stock sold within 3 years of formation,sale proceeds

will be treated as ordinary income although such a holding period would otherwise qualify for

capital gains treatment. See also thin corporation.

collateral Security for a debt.

collateral heir An heir who is not in a direct line from a decedent, but born from a collateral line,

such as brothers and sisters, aunts and uncles, or cousins.Relevant in the context of intestate succes-

sion,being the order of distribution of property when one dies without a will. Contrast to lineal heirs.

collateralized mortgage obligation (CMO) A security or bond backed (collateralized) by a pool

of mortgages.The issuer of the security segmented the cash flow in such a manner that it could cre-

ate bonds with maturities at differing dates and appeal to a broad spectrum of investors.Today, the

CMO has largely been replaced by the REMIC—real estate mortgage investment conduit—although

the terms are often used interchangeably.

collateralized mortgage backed securities (CMBS) Derivative investments created by aggre-

gating mortgage loans into pools and then selling interests, much like bonds, which entitle owners

to payments over time until the debt is finally retired. (Note: Commercial mortgage backed securi-

ties, a specialized type of collateralized mortgage backed securities, are also known as CMBSs.) The

concept is best understood by reference to the various parties involved:

• A loan originator, such as a commercial bank, mortgage banker, or insurance company

originates mortgage loans.

• An investment bank acts as an intermediary and sponsors the conduit by purchasing the

commercial mortgage loans and warehousing them until they are ready to be converted to

securities.

• A rating agency rates the underlying mortgages as AAA, AA, A, BBB, and so on down to

CCC, with AAA to BBB being classified as investment-grade and BB downward classified

as below investment grade.

• The same investment bank previously mentioned now separates the mortgages into tranch-

es, or classes, of bonds depending on their ratings. The tranches are then offered for sale as

securities backed by the entire mortgage pool. One might buy investment-grade tranches,

but they are backed by all the loans, not just the investment-grade loans.

• Investors purchase the securities. Investment-grade tranches are usually purchased by

insurance companies, pension funds, mutual funds, money managers, and commercial

banks. Below-investment-grade tranches are sold to real estate investment funds or CMBS

servicing entities.

• A servicer collects mortgage payments, monitors delinquencies and defaults, engages in

workout procedures or initiates foreclosure, and handles all accounting and reporting,

paying over monies periodically to the trustee for distribution to the investors.

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collateralized mortgage backed securities (CMBS) commercial bank

• The trustee, who represents the trust that holds legal title to the mortgages for the benefit of

the certificate holders, pays out money to investors according to the terms of their securi-

ties. The most common arrangement is the “waterfall” payment, in which class A bond

holders receive principal and interest payments in the early years, while class B and class C

holders will receive only interest. After a fairly short predetermined period of time, the

class A bond holders will have been paid in full, and their bonds will be retired. At that

point, the class B holders will begin to receive principal in addition to interest, but the class

C holders will still receive only interest. When class B holders have been paid in full, class

C holders will begin receiving principal payments. As a result, the class C holders will suf-

fer if there are significant defaults and not enough money to pay everyone in full. For that

reason, class C holders generally receive a higher return on their investment.

colonia Residential areas along the United States side of the border with Mexico and that may lack

some of the most basic living necessities,such as potable water and sewer systems,electricity, paved

roads,and safe and sanitary housing.The Environmental Protection Agency estimates there are more

than 1,300 colonia in Texas and New Mexico alone.

color of title The appearance of title to real property,such as a deed that turns out to be defective.

Important because those with color of title are given more rights than those who have no color of

title, but a mere possessory or other such claim.

Color of Title Act This act, 43 U.S.C. §1068, authorizes the secretary of the interior to issue a

patent—original deed from the government—to a person who has occupied a certain area of land

for at least 20 years with color of title, under circumstances that would otherwise constitute adverse

possession if it were not for the rule prohibiting adverse possession against the government. The

occupier is able to tack his or her possession on to that of his or her ancestor or grantor, in order to

arrive at a cumulative time of 20 years or more.

commencement of work The readily observable date on which work commences on a construc-

tion project. This date is important in the context of mechanics’ and materialmen’s liens for unpaid

construction bills, because the date of the lien is effectively backdated to the date of commence-

ment of work, even though there may not have been a failure to pay bills until many months later. In

many states,if there is a lien filed,and the commencement of work occurred before the construction

mortgage was recorded, then the lienholder is in a first lien position and the construction lender is

in second place, comparable to having a second mortgage rather than a first mortgage.

commerce clause of the constitution Article I, Section 8, Clause 3 of the United States

Constitution. This clause empowers Congress “to regulate Commerce with foreign Nations, and

among the several States, and with the Indian Tribes.”The commerce clause has provided the most

powerful tool available to the federal government for spreading its legislative and regulatory reach

into the lives of everyday Americans.

commercial bank A financial institution authorized to receive both time (savings accounts,CDs)

and demand (checking accounts) deposits, to make loans of various types, to engage in trust

8989

commercial bank commission

services, to issue letters of credit, to accept and pay drafts, to rent safety deposit boxes, and to

engage in similar activities and ventures.

commercial creep The gradual encroachment of commercial real estate into residential areas.

Commercial Investment Real Estate Institute A professional organization,which is an affiliate of

the National Association of REALTORS®; specializing in commercial real estate and offering the des-

ignation CCIM—Certified Commercial Investment Member.The name of the institute has now been

changed to the CCIM Institute (www

.ccim.org), but the old name is still frequently encountered.

commercial lease A lease of space for nonresidential purposes.

commercial leasehold insurance Insurance to cover the payment of rent in the event a tenant

defaults.

commercial lender An entity that routinely loans money as part of its core business.Contrast with

a seller who loans money as part of a real estate transaction, or private investors who loan money

sporadically as a good opportunity presents itself.

commercial mortgage backed securities (CMBS) Collateralized mortgage backed securities

with an underlying pool of commercial (non-residential) loans. See also collateralized mortgage

backed securities.

commercial mortgage banker A banker who specializes in originating commercial

mortgage loans.

commercial mortgage loan A loan secured by a mortgage on real estate that has a business or

investment purpose.

commercial property Property designed for use as offices, retail space, or wholesale, hospitali-

ty, or similar uses. Contrast with multifamily residential (apartments), residential development, or

industrial property.

commercial real estate Typically refers to office or retail space, or multifamily residential proper-

ties such as apartments. May include industrial real estate, but sometimes the phrase is meant to

exclude industrial properties and must be read in context.

Commercial Real Estate Women (CREW) A national organization (www

.crewnetwork.org)

founded in 1989 with the goals of “advancing the success of women in commercial real estate”and

“achieving parity in opportunity, influence and power in the industry.”

commingle (also spelled co-mingle) It is illegal for real estate brokers to combine (or commin-

gle) clients’funds with the broker’s business funds in one account, even if all monies are accurate-

ly accounted for and there have been no other improprieties. Client funds do not have to be

separated from each other, but can all be commingled in one escrow account.

commission The compensation paid to a real estate broker for services rendered in connection

with a sale, exchange, or lease of property. In order to be entitled to a commission, the broker must

9090

commission common area maintenance (CAM)

have a written contract for the services and must be licensed in the state. Generally the commission

is fully earned if the broker produces a buyer who is ready, willing, and able to close at the terms

specified in the listing agreement. This is true even if the seller elects not to accept the offer and

withdraws the property from the market or increases the price.

Commission rates. Commissions are negotiated independently between the parties. Setting

commission rates in advance by local real estate boards or other organizations is a violation

of federal law. Most listing agreements now contain a disclaimer advising that commissions

are separately negotiated on a case-by-case basis.

Sales commission amounts. Typically expressed as a percentage of the gross sales price of the

property, usually ranging from 6 to 10 percent, although higher and lower percentages may be

negotiated.

Leasing commissions. Compensation paid to an agent upon lease execution. It is usually cal-

culated as a certain percentage of the total anticipated rent payments, up to a 5-year term.

Example: If the leasing commission is 4 percent on a 5-year lease at $12,000 per month, then

multiply $12,000 by 60 months to arrive at $720,000 and the broker is paid 4 percent, or

$28,800. The parties may negotiate a lesser percentage for a term longer than 5 years, to be paid

at the 5-year anniversary date.

Leasing commissions—lump sum. Sometimes negotiated to be equal to one or two month’s

rent, or even a certain amount per square foot. The drawback to this method is that the

broker is compensated the same for a 3-year lease as for a 10-year lease.

Leasing commissions—payment over time. Occasionally, leasing agents prefer to receive their

commissions as each payment of rent is made, rather than in a lump sum at lease signing. The

effect is to provide a guaranteed income for many years.

commissioner An officer charged with the administration of laws or regulations pertaining to a

particular subject matter, such as a real estate commissioner. A directory may be found at the Web

site of the Association of Real Estate License Law Officials (ARELLO) at www

.arello.com.

commission rates See commission.

commission splits Listing brokers will typically split their commission with the selling broker—

the person who provides the buyer for the property. One should always inquire, however, because

some brokers refuse to split commissions, preferring to find their own buyers and keep 100 percent

of the commission rather than work with other brokers in the area.

commitment (loan) An agreement by a lender to extend a loan on certain terms and conditions

and by a certain date. Language making the “commitment” subject to credit approval or underwrit-

ing are not true commitments at all, but merely quotes.

common area maintenance (CAM) (“CAM”is pronounced as a word) Costs required for a tenant’s

pro rata share of the upkeep of common areas and amenities such as the parking lot, external light-

ing, trash removal, and street cleaning. When obtaining quotes for retail space or office space, one

9191

common area maintenance (CAM) Community Reinvestment Act (CRA)

should always ask about tenant CAM expenses, because a lower per-square-foot rental rate at one

location may be offset by high CAM expenses.

common areas (1) In leaseholds, the area over which the landlord retains exclusive control and

liability, such as stairwells and hallways. (2) In condominiums, all property except for the specific

condominium units themselves. Common areas are owned by all condo owners in common with

each other, except that access may be restricted for plumbing, electrical, and other such areas, or

it may be semirestricted so that all condo owners own a portion of your balcony, but you are the

only one entitled to use it.

common enemy rule A rule of water management and rights followed in some states.It holds that

excessive rainwater is a common enemy that damages property at random. Uphill property owners

can take any steps to protect their land from the water, even if it causes damage to the property of

others further down the hill.The downhill property owners are supposed to protect their own land,

because water is the common enemy and everyone has to provide their own protection.Today, most

states have modified rules that require everyone to act reasonably under the circumstances in order

to protect their own property and avoid damaging the property of others.

common law A law derived from common usage, ancient customs, or the pronouncements and

interpretations of courts.Contrast with code law,or civil law,which relies on statutory enactments for

the articulation of rights and responsibilities, and then judicial interpretation of those statutes.

English law, and almost all American law, is based on common law.The law in France is based on the

Napoleonic code,and the law in Louisiana is based on that code also.(Because of the completely dif-

ferent underpinnings of Louisiana law, it is rare to find a lawyer or real estate agent outside the state

who will offer an opinion regarding real estate law within the state.) When reading definitions of

words, one should pay attention to whether the definition recites “at common law” or “at civil law.”

Community Association Institute An umbrella association for condo associations, homeowners

associations,and other community groups,providing information on management,governance,and

legal issues. It estimates that 57 million Americans lived in association-governed communities in

2006.The Web site of the Community Association Institutes is at www

.caionline.org.

community property Property owned by a husband and wife, each owning an undivided one-

half interest by virtue of the marital relationship and not by virtue of any deed or other document of

specific intent. There are exceptions for family property inherited from one side or the other. The

community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and

Washington.

Community Reinvestment Act (CRA) An act passed by Congress in 1977 to encourage financial

institutions to meet the credit needs of the communities in which they operate, including low- and

moderate-income neighborhoods. Compliance is monitored via regular audits, and a poor record of

CRA compliance is taken into consideration when the financial institution applies for deposit

facilities, including mergers and acquisitions.

9292

Community Reinvestment Act (CRA) comparative negligence

One may find a financial institution’s rating for CRA compliance by visiting the Web sites of the

various regulatory agencies that track compliance. A financial institution may appear on one list but

not others,depending on which agency has responsibility for that bank and its CRA compliance.The

possibilities are

Federal Reserve Board (www.federalreserve.gov)

FDIC (www.fdic.gov)

Office of Comptroller of the Currency (www.occ.treas.gov)

Office of Thrift Supervision (www.ots.treas.gov)

community shopping center A shopping center of approximately 100,000 to 300,000 square

feet and 20 to 70 retail spaces, designed for a mixture of retailers and food service establishments

with a high convenience factor for a market area radius of 3 to 6 miles. Usually situated on 10 to

40 acres,with at least one anchor tenant; anchor(s) typically comprise 40 to 60 percent of the gross

leasable space.

compaction The process of compressing soil used to fill the low areas in a parcel of land.

Developers typically obtain soil compaction reports before beginning development, but care must

be taken to test more than the typical 6-foot depth. It is a common practice for excavating compa-

nies and unscrupulous landowners to use substandard fill material, such as tree trunks and other

vegetation that will eventually decompose and reduce volume,and then properly compact only the

top 6 feet of fill. Over time, the property will settle, possibly resulting in severe structural problems.

compaction tests See boring tests.

comortgagor An additional borrower with some interest in the real property that is the subject of

the mortgage.

comparables In an appraisal, recently sold or leased properties similar to the property under

analysis, such that a review of the sales prices of the comps will assist in determining a value of the

subject property.The properties need not be identical, as long as they are reasonably similar and the

appraiser can make adjustments for features that differ. These may include property amenities, age

of the improvements, traffic counts and market area, time and conditions of the sale, and anything

else recognized by the market as having value.

comparative market analysis (CMA) An analysis of the value of property by taking only a very

few market indicators, such as price per square foot for land or price per unit for apartments, and

then extrapolating to the property under analysis.This does not constitute an appraisal,but may give

prospective sellers a basis for setting a sales price for listing purposes.

comparative negligence A legal theory in some states that evaluates the negligence of a wrong-

doer against any negligence of the injured party that contributed to its injuries, and then assigns a

pro rata responsibility for the harm suffered.

Example:

If a property owner allows a loose step to remain unrepaired, and a guest loses

his or her balance and falls, the property owner has been negligent. If, however, the guest was

9393

comparative negligence completion bond

intoxicated, a jury might decide the guest was 25 percent responsible for the injuries. In such a

case, the jury will calculate a dollar value for the injury and associated expenses and will then

reduce it by 25 percent in order to arrive at an award.

Contrast with contributory negligence, which denies any award at all if the injured party was at all

negligent under the circumstances.

comparative unit method An appraisal technique in which direct and indirect costs are totaled

and then divided by an appropriate unit to obtain a cost per unit.

Examples include

• Land compared on a value per square foot

• Land compared on a value per front-foot

• Self-storage facilities compared on a value per unit

• Hotels compared on a value per room

comparison method See market comparison approach.

compensation (1) Payment for goods or services.(2) Damages necessary to restore an injured party

to his or her position before the wrongdoing.(3) In eminent domain, payment to property owners for

the value of the property taken and any damage caused to the value of the remaining property.

compensatory damages Damages intended to compensate the injured party for the harm suf-

fered. Contrast with punitive damages to punish the wrongdoer, and nominal damages awarded to

recognize that a right was violated or a duty breached, but no harm done.

competent (1) Duly qualified; having sufficient ability or authority. (2) Having the legal ability to

testify about a particular subject. In real estate, the concept is important because property owners

are usually competent to testify about the value of their property before a loss and the value of their

property after a loss.In other words,it is not legally necessary to hire an appraiser to testify,although

it is prudent as a practical matter.

competitive market analysis See comparative market analysis.

complete appraisal An older term rendered obsolete by the July 1, 2006, changes to the Uniform

Standards of Professional Appraisal Practice,but still frequently encountered.The term used to mean

an appraisal that did not resort to using any of the departure provisions of the old rules. Previously,

all clients had to be provided with a complete appraisal unless the client signed off and approved a

limited appraisal noting specific appraisal methods not employed because they were perhaps not

relevant to the specific property. Today, the new scope of work rule allows the appraiser to choose

the analytical methods necessary to meet the client’s objectives and the scope of work,but the client

does not have to approve the methodology.

completion bond A fidelity bond posted by a contractor or developer to guarantee that a partic-

ular project will be completed according to plans and specifications, on time, and without any liens

incurred as a result of unpaid bills to subcontractors and suppliers; usually required as a condition of

9494

completion bond compound interest

performing government work. It provides more coverage than a simple performance bond, which

ensures that one party will perform if the other will perform, usually by payment. The completion

bond is independent of any underlying contracts and any defenses to those contracts.

compliance inspection (1) An inspection by a government official to ensure that a building or

project complies with all relevant building codes and zoning regulations. (2) An inspection by the

representative of a lender to ensure that all lending institution requirements have been met as a

prerequisite to a loan or as a condition of funding advances on a construction or development loan.

component building A building made of prefabricated components that are then delivered to

the construction site and assembled. In housing, the modular home is an example, although a man-

ufactured home that is assembled elsewhere and delivered to the site would not be a component

building. Components could include tilt-up concrete walls popular with commercial construction,

and structural insulated wall and roof panels (providing rigidity, sheathing, insulation, wire chases,

and sometimes even outside and inside finishes all in one product) for residential construction. The

ultimate component building is an apartment building of self-contained apartment rectangles built

elsewhere and then stacked together like children’s building blocks.

component depreciation A former practice of separating a building into its various compo-

nents—walls,roof,etc.—and then depreciating each component separately,some more rapidly than

others, in order to generate large tax deductions. (This is no longer allowed by the IRS, except in a

modified form called cost allocation.)

compound interest The process of charging, or earning, interest on interest. Interest accrued in

prior periods is added to the principal,and then interest in the current period is calculated on the total.

Example:

If you saved $100 per month, starting at age 25, at an earnings rate of 5 percent

per annum, you would have $144,959 by age 65, only $48,000 of which would be money you

contributed. To perform your own calculations, use the following formula to create a Microsoft

Excel spreadsheet:

FV(Interest Rate, Number of Years, Savings per Year)*–1

For Interest Rate enter the cell address where you will note the interest rate you expect to earn; for

Number of Years enter the cell address where you enter the number of years you expect to save the

same amount each year; and for Savings per Year enter the cell address where you will enter the

amount you expect to save each year.

1 0.05

2 40

3 1,200

4 FV(A1,A2,A3)*–1

9595

CERCLA computerized loan origination (CLO)

Comprehensive Environmental Response Compensation and Liability Act (CERCLA) Federal

laws passed in 1980 and known commonly as the Superfund. The law imposes strict liability for

cleaning up environmentally contaminated land—one’s liability does not depend on any fault or

responsibility, but simply on one’s status as any of the following:

• A past or current owner of a facility

• A past or current operator of a facility (such as a tenant or property manager)

• A generator of hazardous substances

• A transporter of hazardous substances

Because of potential cleanup liability for the actions of previous owners, it is essential that any pur-

chaser of commercial property investigate a property history for evidence of manufacturing

processes, petroleum-related businesses such as gas stations, dry-cleaning plants, transmission

repair shops, and any number of other activities. In the alternative, one may order a Phase I

Environmental Report from a licensed engineer. As a practical matter, most lenders will require the

report as a condition of providing funds for purchase.

At one time, there was some confusion over a mortgage lender’s potential exposure to liability by

virtue of possibly being considered an “operator”when involved in management decisions during a

loan workout. There was also great fear about lender liability after foreclosure, when the financial

institution became an “owner.”This has largely been cleared up through CERCLA amendments pro-

viding limited lender immunity provided there is appropriate due diligence before credit extension.

Due diligence is usually resolved through requiring a Phase I Environmental Report from a licensed

engineer, and then a Phase II report if the Phase I report indicates any suspicious evidence. After

foreclosure, the lender can avoid liability if it takes steps to sell the property as soon as possible.

When selling or buying property, it is important for the sales documents to include a provision allo-

cating financial responsibility in the case cleanup is necessary in the future. Parties may not disclaim

responsibility under CERCLA, but they may contractually agree regarding who will bear the ultimate

cost of a cleanup.

For more information regarding this complex subject, visit the Superfund pages of the Environmen-

tal Protection Agency Web site at www

.epa.gov/ebtpages/cleasuperfund.html.

comps Shorthand for comparable properties, used in appraisal.

computer-aided design (CAD) The use of computer software to assist in performing standard

architectural and engineering design services. Products range from the most basic shareware

home design and landscaping software to sophisticated systems with three-dimensional flyover

and walk-through capabilities, project budgeting, and timeline creation.

computerized loan origination (CLO) A computerized network of major lenders that uses

artificial intelligence to evaluate loan application data entered online by agents and determine

loan eligibility and terms.HUD has approved the procedure as long as there is full disclosure of the

fee, multiple lenders are displayed on the screen to give borrowers freedom of choice, and the fee

charged is a dollar amount rather than a percentage of the loan.

9696

concession condemnation

concession (1) A discount, rebate, or abatement. Lease concessions may consist of free rent,

below-market rent, a larger than normal build-out allowance, reserved parking, 5-year anniversary

renovation allowance, or any number of other economic incentives to induce one to lease in a par-

ticular building. When investigating the purchase of an income-producing property, one should

examine each and every lease in its entirety to determine the existence of any lease concessions

that would adversely affect an economic analysis of the property,and one should also obtain estop-

pel certificates from tenants so that there are no agreements outside the terms of the written leas-

es. (2) A business that operates within the confines of another business or on another property, but

usually without a lease. Examples include a shoe-shine concession at the airport, the hot-dog

concession at the ball park, or the designer fragrance concession in a department store.

concession burnoff The process of rent concessions becoming less frequent, smaller, or both, so

that the market sees growth in overall rental rates because of the discontinuance of temporary

concessions, not because of a true increase in market rates.

conciliation agreement A settlement or compromise agreement between a regulatory agency

and an individual or entity charged with violating rules, regulations, or laws. The agreement evi-

dences an acknowledgment of past wrongdoing and an intention to correct the consequences of

the past actions and to desist from future violations.

concurrent ownership Ownership by two or more parties at the same time. The most common

examples of concurrent ownership are

• Tenants in common

• Joint tenants with right of survivorship

• Tenants by the entireties

• Community property interests

• Tenants in common with cross-contingent remainders

condemnation (1) A proceeding to obtain private property for public use through the exercise of

the government’s rights of eminent domain. Historically considered possible only for public

improvement projects such as roads, schools, and courthouses, the landmark U.S. Supreme Court

case of Kelo v. City of New London, 125 S.Ct. 2655 (June 23, 2005) held that local government could

condemn land belonging to one private party in order to convey it to another private party as part

of an economic development plan to increase government revenues, add jobs, and improve the

quality of life in a depressed area.

In a condemnation case, the government will order an appraisal of the property and then offer the

owner the appraised price,or perhaps a negotiated amount in excess of the appraisal but taking into

account the savings realized by not having to litigate the issue.If the property owner does not accept,

the government must escrow the amount of money determined by its appraisal and may then pro-

ceed with condemnation of the property.The parties may then go to court to contest the amount of

the required award, but the contest will not prevent or delay condemnation of the property.

9797

condemnation conditional offer

Specialized tax rules apply whether property is condemned, sold to the government under threat of

condemnation, or sold to a third party under reasonable fear of impending condemnation (see IRS

Publication 544 at www

.irs.gov). Taxpayers may defer income realized in a condemnation award by

purchasing replacement property within 2, 3, or 5 years,depending on the particular circumstances.

Payments to cover the costs of relocating are not part of the condemnation award and are not tax-

able income. Severance damages awarded because of damage caused to the remaining property

are not part of the condemnation award. The amount of damages will reduce the basis in the

remaining property. If it reduces the basis to $0, then any excess must be reported as gain, but

taxation can be deferred.

(2) A decision by local government that property owned by another is no longer safe and must be

repaired or demolished.It is not a defense that the owner is making no use of the property and is not

exposed to any danger, so long as the public at large may be exposed to danger. If the owner fails to

make the necessary repairs or take any other action, the government authority may conduct the

demolition itself and place a lien upon the property for the costs of demolition.

condemnee One whose property is condemned.

condemnor One who condemns property.

condition A future and uncertain event that determines whether or not there will be a contractu-

al obligation or liability. Conditions may be express or implied, possible or impossible, lawful or

unlawful, affirmative or negative, precedent or subsequent, positive or negative, and, finally, single,

copulative, or disjunctive. Each type of condition has different legal consequences.

Examples of the most common types encountered in real estate are

• Express. If the purchaser cannot obtain financing, the purchaser may cancel the contract.

• Implied. If the seller burns down the house the day before closing, the purchaser may can-

cel the contract.

• Lawful. If the broker produces a buyer willing and able to pay the asking price, the seller

will pay a commission of 6 percent of that price.

• Unlawful. If the broker produces a buyer willing and able to pay at least $125,000, the bro-

ker will be paid all the purchase price in excess of $125,000.

conditional commitment An agreement by a lender to extend a loan with specified terms, but

only if certain conditions are met, such as retention of occupancy rates at a certain level until

the time of closing, securing of key man insurance for an important manager-owner, release from a

contingent liability that might impair the borrower’s financial condition, or any number of other

conditions.

conditional offer An offer to buy real estate conditioned on the occurrence of one or more things

before the purchaser is obligated to buy. Examples include zoning changes or the ability to secure a

contiguous property.

9898

conditional sales contract condominium conversion

conditional sales contract (1) A sales contract in which the buyer is given possession and use of

the item sold, but the seller retains legal title until all payments have been made in full. Equipment

leases for a term of years,at the end of which the buyer pays $1 to buy the property,have been char-

acterized by the IRS as conditional sales contracts rather than true leases. As a result, the taxpayer is

not allowed to deduct the full lease payments each year, but only an amount equal to the deprecia-

tion available if the property had been purchased for cash, plus an allocation for interest. This

amount is usually less than the annual lease payment. (2) If pertaining to real estate, commonly

called a bond for title, land sale contract, or contract for deed.

conditional use permit (CUP) (pronounced “cup”) A permit granted to a property owner to make

use of real property in a manner allowed under current zoning regulations, but only in accordance

with conditions to be applied by the zoning authority. Houses of worship may be allowed in areas

zoned for residential use, but the applicant may be required to obtain a conditional use permit that

can be predicated on size, off-street parking availability, indirect nighttime lighting, and other such

factors determined on a case-by-case basis. Contrast with variance, in which the property owner is

given permission to use the property in a manner inconsistent with current zoning regulations.

conditions, covenants, and restrictions (CC&Rs) Rules incorporated by reference into the deeds

of condominiums and individual lots in subdivisions with homeowners associations and/or restric-

tive covenants. The CC&Rs set out restrictions on the use of property, and even on the behavior of

residents.

condo cowboys A derogatory term among condominium developers used to refer to inexperi-

enced persons with little training, experience, or capital, but who decide to engage in condo

construction or conversion. Such people often ignore established methods and principles of devel-

opment and marketing, frequently encounter financial difficulties requiring additional financing at

high interest rates, and then dump units on the marketplace with little or no profit margin but with

the net effect of forcing down prices in the entire market.

condominium A system of ownership in a multiunit development allowing individual ownership

of some areas and common ownership of all other areas. The identifying feature is the legality that

common areas (entrance, hallways, elevators, swimming pool, parking, etc.) are owned by all mem-

bers of the community in common with each other, rather than being owned by a separate

corporation or association. Residential condominium projects may be multistory apartment-style

residences or may resemble traditional detached housing or garden home communities.

condominium conversion The process of converting a building with tenants, or a cooperative

building with tenant-shareholders, into a community of individual owners of specified units and

common owners of all common areas. Many states have laws protecting tenants in a building

scheduled for conversion. Protections may include lengthy notice periods regarding the plans to

convert, prohibitions against drastic rent increases designed to force tenant flight from the build-

ing, an exclusive period during which only the tenant may purchase the unit before exposure to

the general market, and special protections for the elderly and disabled.

9999

condominium declaration confirmation of sale

condominium declaration The document that establishes the legal existence of the

condominium project and the ability to divide airspace into horizontal layers of ownership. The

condominium declaration must be filed with the designated public official for the state or county

where the land is located.

condominium owners association An association that automatically includes as members all

persons who own condominium units in a defined project. Unlike subdivisions, in which the home-

owners association often owns the common lands, the condominium owners association does not

own the common areas—the unit owners own them in common with each other. The association

does enforce the provisions of the covenants,conditions,and restrictions and manages the financial,

legal, and maintenance business of the community.

condotel A relatively recent concept involving a melding of a resort hotel with condominium

ownership. Initially became popular after September 11, 2001, when it became difficult to obtain

financing of more than 50 percent of the cost of acquisition or development of a hotel property.To

raise the additional necessary capital, developers sold individual units to investors and users, with

the promise to rent the units to hotel guests and pay over profits to the individual owners. In recent

years the practice has become less common with regular hotels, but remains strong with resort

developments. The Securities and Exchange Commission, and several plaintiffs’ law firms, have

recently taken the position that such relationships involve the sale of securities, thereby requiring

registration, disclosure, adherence to strict accounting standards, and many other requirements.

conduit A metal pipe through which electric wiring is run. Building codes often require that all

electric wiring for commercial buildings must be in conduit and securely attached to the ceiling, not

suspended from dropped-ceiling supports or other building components.

conduit financing A method of providing loan money through a debt instrument that blends fea-

tures of a traditional pass-through mortgage security and a bond.Traded on Wall Street as securities

known as REMICs—real estate mortgage investment conduits. For real estate borrowers, the single

most important feature of conduit financing is the very large prepayment penalty imposed on all

such transactions. The success of the entire securitization process depends upon trustee receipt of

regular monthly income for distribution to bondholders according to a prearranged schedule. If a

borrower pays off the loan early, that loan will no longer earn any interest, which affects the money

available for payment to investors. In order to compensate, the trustee will have to go out into the

marketplace and purchase an investment to replace the mortgage paid off. That investment may

cost a premium price, so the prepayment penalty is used to offset the premium.

conduit tax treatment Income passing through an entity without taxation at that level, but only

at the recipient’s level. A subchapter S-corporation, a partnership, and a limited liability company

are all examples. Contrast with a C-corporation, which pays income taxes on profits and then uses

after-tax dollars to pay dividends to shareholders, who pay taxes on the dividends.

confirmation of sale A court approval of a sale by a trustee, executor, administrator, guardian, or

bankruptcy trustee. Sales contracts by such persons are always specified as contingent on court

approval.

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confiscation conservation easement

confiscation Seizure of private property by the government without compensation to the owner,

usually as a consequence of the owner being convicted of a crime.

conflict of interest A situation that presents the possibility of having to choose which side in a

transaction will receive the better service, deal, terms, or representation. The conflict may be choos-

ing between two other parties, such as an agent attempting to represent both buyer and seller in a

particular transaction, or it may be between the party and another, such as a real estate broker wish-

ing to purchase property listed with that same broker. Rules regarding handling conflicts of interest

generally provide a solution through full disclosure to all parties involved or withdrawal from the

situation entirely.

conforming loan A loan that meets the underwriting requirements necessary for sale to Fannie

Mae (FNMA—Federal National Mortgage Association) or Freddie Mac (FHLMC—Federal Home Loan

Mortgage Corporation). There is nothing derogatory about a nonconforming loan; it may be too

large, it may be for a property flipped within the prior 90 days, or any number of other disqualifying

reasons besides creditworthiness or value of collateral.

conformity principle An appraisal principle holding that the more a property’s components are

in harmony with the surrounding properties or components, the more they contribute to value.

Example:

A 5,000-square-foot home with a three-car garage and an inground pool is more

valuable in a neighborhood filled with similar properties than it would be in a neighborhood of

2,500-square-foot homes with two-car garages and no pools.

congregate housing Also called supported housing, with private living quarters and shared din-

ing and social areas. Housing for the elderly and disabled is generally congregate housing, as are

dorm rooms for students.

consent decree A judgment in which the defendant agrees to take some action, or to cease doing

something the plaintiff deemed objectionable, but without admitting any wrongdoing.

consequential damages (1) Damages that do not flow directly from some wrong,injury,or taking.

A buyer who refuses to proceed to closing for no legal reason may be liable for the seller’s direct dam-

ages of the difference between the agreed-upon purchase price and the price ultimately obtained

for the property, or the interest on the money if the sums are identical, plus any additional costs of

marketing.The buyer might also be liable for the seller’s consequential damages consisting of its loss

of earnest money on another property, but only if the buyer knew the seller was depending on the

closing to fund money for the seller’s new home. (2) In a condemnation award, consequential dam-

ages are those suffered when the remaining property is injured because of the loss of the con-

demned property. A farmer’s fields may be too small for efficient cultivation by large machinery after

the county condemns enough land for roads to cross through the fields. A storekeeper’s business

may suffer as a consequence of its parking lot being taken for construction of a fire station.

conservation easement A voluntary restriction on land preventing development on the property

in order to retain its natural condition.The restriction will remain on the property for all subsequent

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conservation easement consolidated metropolitan statistical area (CMSA)

property owners unless it can be successfully removed by court order or by agreement of all

affected parties. See easement.

conservation subdivision A housing development where homes are clustered together on

smaller lots to preserve the surrounding natural area or farmland, which is often then owned and

managed by the community.

conservator A guardian, receiver, or other protector appointed by a court to manage the assets of

someone suffering from a permanent or temporary disability that prevents the person from manag-

ing his or her own affairs.A person need not be adjudged mentally incompetent to have a conserva-

tor appointed, and the appointment does not disqualify the person from entering into contracts,

making or changing wills, or any other such legal rights.

consideration An act or a promise given by one person in exchange for an act or a promise from

the other. The values do not have to be equal, and it has been said that one may promise to give a

barleycorn in exchange for the promise to deed a castle, and it will be sufficient. It is a common mis-

perception that earnest money is the component that makes a real estate contract enforceable. In

reality, the promise to buy, and the promise to sell, is sufficient consideration. Consideration is an

essential element for contract enforcement.

Consideration substitutes. Sometimes the law will permit enforcement of a contract even though

one side or the other did not give consideration, if there was an allowed consideration substi-

tute. The most common one is detrimental reliance, in which one person promises to do a thing

gratuitously and another worsens his or her position in reliance on that promise. Under ordi-

nary circumstances this would be a mere promise to make a gift, and unenforceable. Because of

the detrimental reliance, however, it may become an enforceable contract.

Adequate consideration. If this is required by law, the consideration must be reasonably close

to the value of the thing promised or exchanged.

Good consideration. The consideration is based on natural duty and affection or a moral obli-

gation, such as property sold for “love and affection.”

Consideration of support. It is not uncommon for elderly parents to transfer property to their

children “in consideration of care and support.” In most states, such transfers are voidable if the

care and support are not forthcoming.

consideration of support See consideration.

consignment The practice of accepting possession of goods for another with the intention of

selling the goods and remitting payment to the owner, less any agreed-upon fees.Ownership of the

goods remains at all times in the consignor, not in the shopkeeper (consignee). Landlords may not

obtain liens in the goods,and lenders may not gain security interests under blanket liens,if they have

been put on notice that the party engages in the sale of consigned goods.

consolidated metropolitan statistical area (CMSA) See metropolitan area.

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consolidation loan constant

consolidation loan A new loan that pays off two or more existing loans or indebtednesses,

usually resulting in lower payments. Home equity lines of credit are often marketed as consolida-

tion loans, urging consumers to pay off high-interest-rate credit cards and automotive debt for

lower-interest-rate, tax-deductible, mortgage debt. While the practice does reduce monthly pay-

ments significantly, it replaces relatively short term debt with long-term debt and results in

higher total interest payments over time.

constant The annual payment required to pay the principal and interest due on a $1 loan for a

specified repayment term at a specified interest rate. Before the widespread availability of comput-

ers and extremely affordable financial calculators, it was common to use mortgage constant tables

to calculate monthly payments. One would refer to the table for the proper loan term, such as 30

years, and then within that table find the loan constant for the anticipated interest rate. See the

following example. The constant is the monthly payment on $1. To find out your own monthly

payment, you multiply the constant by the number of dollars in your loan, and the answer is what

your monthly payments would be.

Example:

Monthly Loan Constants for a 30-Year Mortgage Loan

Interest Rate (%) Constant

5.00 0.00537

5.25 0.00552

5.50 0.00568

5.75 0.00584

6.00 0.00600

6.25 0.00616

6.50 0.00632

6.75 0.00649

7.00 0.00665

7.25 0.00682

7.50 0.00699

7.75 0.00716

8.00 0.00734

8.25 0.00751

8.50 0.00769

8.75 0.00787

9.00 0.00805

9.25% 0.00823

9.50 0.00841

9.75 0.0085

102

If the loan is $145,000 for 30 years at

6.75 percent interest, then

0.00649  145,000  $941.05

103103

constructed wetlands constructive eviction

constructed wetlands A system of artificially created marshy-type areas of vegetation with

frequent flooding, designed to treat wastewater through natural biological processes. The

Environmental Protection Agency is a strong proponent of this method of cleaning water and has

many additional resources on its Web site at www

.epa.gov; search on “constructed wetlands.”

construction allowance As a leasing incentive, an amount budgeted for a tenant to spend on

improvements to the space leased. When one is engaged in negotiations, care should be taken to

define the tenant’s obligations and the landlord’s obligations with reference to the construction

allowance. Also called tenant improvements allowance or TI for short.

Example:

If the lease gives the tenant responsibility for all improvements “below ceiling,”

then the considerable cost of adding or replacing ceiling tiles and light fixtures must be borne by

the landlord and will not be deducted from the construction allowance. One should also negoti-

ate the disposition of any unused construction allowance dollars and provide for their use as a

credit against future rent or for them to be retained by the landlord in the account of the tenant

and used at some point in the future for rehab expenses such as replacing worn carpet or repaint-

ing internal corridors.

construction contract A contract for construction services. A good one should contain the

following information:

• The names of the parties

• The contractor’s registration number

• A general description of the work to be performed

• A statement of the quality, such as “standard practices of the trades”

• A set of blueprints and engineering plans

• A set of specifications

• A description of responsibilities for oversight and management

• A timetable

• A fixed price for the work or a formula such as time and materials

• Definitions of terms, such as “time to exclude/include commuting time”

• The process for pricing and approving change orders

• Payment schedules

• The process to be used for dispute resolution

• Remedies in the event of default

• The terms of any warranties

construction loan A loan originated for the purposes of providing payment for construction work

or subdivision development. See also building loan agreement.

construction to permanent loan A construction loan with provision for automatic conversion to

a fully amortizing permanent loan upon completion of construction.

constructive eviction The circumstance arising when, through no fault of the tenant,the premises

are rendered unusable for the purposes for which they were leased, resulting in the de facto

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constructive eviction contiguous

equivalent of an eviction.The concept is available as a defense for consumer tenants breaking their

leases and vacating the premises as a result of claimed constructive eviction. It is not generally

available to commercial tenants.

constructive fraud A breach of some duty that results in a tendency to deceive others, with no

requirement of a showing of intention to deceive or moral wrongdoing.A broker may be charged

with constructive fraud if that person had a duty to disclose a known dangerous defect and failed

to do so.

constructive notice Notice that is deemed to have been received by a person, whether or not the

person actually received it.

• All citizens are presumed to have constructive notice of the law.

• All persons have constructive notice of the contents of documents recorded in the public

real estate records.

• The owner of property has constructive notice of any persons in actual possession of the

property and claiming adversely to the owner.

constructive possession Legally considered to be in possession of property even though not

physically occupying it or using it in any manner. If one has a house on 40 acres of land, but rarely

ventures outside the house and yard, one is in actual possession of the house and yard and in con-

structive possession of the remainder of the 40 acres.

constructive receipt An IRS concept that the unrestricted right to receive money is the same as

actually receiving it for purposes of calculating income.This has nothing to do with accrual methods

of accounting versus cash methods of accounting, but, rather, with timing of depositing checks and

similar concepts.

Consumer Credit Protection Act See Truth-in-Lending Act.

consumer mortgage Usually a home mortgage loan, but sometimes also refers to mortgages on

rental houses.

consumer price index (CPI) A Bureau of Labor Statistics’ (www

.bls.gov/cpi/) inflation calculator; it

is the most widely known index for measuring economic performance and inflation in the United

States. The CPI measures and compares the total cost of a statistically determined “typical market

basket”of goods and services consumed by U.S.households against the cost for the same goods and

services consumed in the base period 1982–1984. The contents of the “market basket” are deter-

mined by the Consumer Expenditure Survey of about 10,000 families and their spending habits over

a period of time.

contamination A condition of impurity resulting from mixture with a foreign substance.

contiguous Next to, actually touching, at something greater than a point. The identification of

contiguous parcels is important in the following circumstances:

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105

contiguous continuous operations clause

105

• In adverse possession, a party in actual possession of property

that has a defective deed is considered in constructive posses-

sion of the remainder of the parcel, but not of contiguous

parcels, even if described in the same deed.

• Bankrupt debtors may claim homestead rights in contiguous

parcels of land and are not limited to the single parcel on

which their home sits, assuming other legal requirements

are met.

• Under the Uniform Land Security Interest Act (model legisla-

tion not necessarily passed by all states) a mortgage lender’s

after acquired property clause is unenforceable except as to

contiguous property.

Parcel C is contiguous to parcels A and D, but only adjacent to parcels B

and E. But, in some jurisdictions, if the corners of the properties touch,

this is sufficient to make the properties “contiguous.”

contingency clause A clause that allows cancellation of a contract without penalty if a certain

described thing happens (e.g., an inspection report reveals necessary repairs estimated to cost in

excess of $1,000) or fails to happen (e.g., failure to obtain satisfactory financing). A contingency

clause contains a condition for contract performance.

contingent liability A liability that is not currently a liability but may become one upon the hap-

pening of some future event.If a father guarantees the student housing lease of his son,then the son

is liable for the rent but the father may become liable if the son defaults. Other common contin-

gent liabilities are guarantees of the debts of others,potential adverse judgments in litigation,and

currently contested tax liabilities or audits. Lenders sometimes request a list of all contingent lia-

bilities when evaluating a borrower’s financial strength.

contingent offer See conditional offer.

continuing care retirement community See life-care facility.

continuous occupancy clause A clause frequently contained in the lease of a shopping center

anchor tenant requiring it to remain open and in business for the entire term of its lease.The anchor

is important not just because of its own rent payments, but also because it attracts customers who

will shop at the other retail establishments in the center. If the anchor goes dark by moving out, all

the remaining tenants will suffer, causing a possible domino effect of defaults.

continuous operations clause Similar to a continuous occupancy clause, but with better

drafting. The continuous operations clause in the lease of a shopping center anchor tenant

requires the tenant to remain open at a contractually defined level of operations sufficient

to generate the traffic flow necessary to attract ample customers for the other shopping

center tenants.

105

Elm Street

106106

contour map contract price

contour map A map that displays the hills and dales of

a site as determined by a topographical survey. The

contours of the land are represented by curved lines

along which the height above sea level is relatively con-

stant. The map will contain a linear scale indicating the

dimensions of the site, and a contour scale indicating the

elevation difference between contour lines, such as 5 feet.

Lines that are widely spaced indicate a slow change in

elevation; lines that are closely spaced indicate a rapid

change in elevation.

contract A legally enforceable agreement. Its require-

ments are

• Competent parties

• Subject matter

• Legal consideration

• Mutuality of agreement (also called “meeting of the minds”)

• Mutuality of obligation

As a general rule, oral contracts are enforceable unless they relate to real estate or are incapable of

performance within one year, guarantee the debts of another, or are evidenced by some writing

signed by the person sought to be charged (“This is to confirm our agreement…”) There are other

exceptions, but they are not relevant here. It is often difficult to enforce oral contracts because the

parties usually have differing recollections of the exact terms of the agreement.

contract for deed See bond for title.

contract for purchase or sale A contract for the sale of real property.There is no one form for this

purpose, although local boards of REALTORS® typically draft model contracts for customization and

use by their members.

contractor One who supplies labor and materials to provide services in connection with the

construction of an improvement on real estate. General contractors must typically be licensed by

the state. An exception is made for property owners who act as their own general contractors or for

general contractors of projects below a certain dollar limit.

contractor grade Usually an inexpensive quality of building materials; it is generally equated with

the cheapest components possible.

contract price A tax term used in the calculation of gain realized on an installment sale. It is the

selling price, minus any mortgage debt assumed by the buyer, plus the excess of any such liens

collected in addition to the seller’s equity in the property.

106

9600

8800

ROA

107107

contract rate controlled business arrangement (CBA)

contract rate The face rate of the interest on a promissory note; typically the interest rate quoted,

as opposed to the federally mandated calculation of annual percentage rate (APR) which treats

certain prepaid loan costs as additional interest.

contract rent The rent stipulated in a lease. Contrast with economic rent.

contribution (1) An appraisal principle that says the value of an improvement is the amount it adds

to the value of the property as a whole, not the value of the improvement standing alone in a void.

A backyard workshop in a prestigious neighborhood might not add any value at all and could be

considered an eyesore detracting from value, but might be worth $10,000 in a different neighbor-

hood. (2) A legal principle holding that if a judgment is collected against one who was held guilty of

negligence,assault,defamation,fraud,or some other tort,then that person may obtain a contribution

from others against whom the same judgment was rendered, for their proportionate share of the

judgment. Likewise, persons jointly liable for a debt, such as partners or cotenants, are responsible to

pay their share to the other if one pays the entire amount.

contributory negligence A legal theory of negligence followed in some states (often called

“contrib.” for short). Under this theory, if someone was guilty of negligence that caused injury to

another person, but the injured person was also negligent in any manner at all that contributed to

his or her injuries, then there will be no recovery.

Example:

If a contractor built a deck with supports in the soil instead of in concrete, the

contractor would be guilty of negligence. If the homeowner routinely left a hose dripping at the

base of one of the supports, leaching out the soil and rotting the wood, the homeowner would also

be guilty of negligence. If the deck collapsed, then in a contributory negligence state the home-

owner would not be allowed to recover any damages at all from the contractor. In a comparative

negligence state, the homeowner’s recovery would be reduced, but not eliminated.

controllable expenses Real estate expenses one may manage and keep as low as practical under

the circumstances. For an office building, controllable expenses would be things like janitorial serv-

ices,office personnel,and,to a limited extent,electricity.The most common noncontrollable expense

is real estate taxes. Most contracts or leases will define what they mean by controllable expenses,

without regard to what the common understanding of the phrase might be.The phrase is important

because many commercial leases require tenants to pay their pro-rata share of increases in building

expenses each year. Wise tenants will negotiate an upper limit on the contributions; wise landlords

will insist that the “cap”apply only to controllable expenses.

controlled business arrangement (CBA) A business arrangement recognized under the Real

Estate Settlement and Procedures Act (RESPA) allowing a real estate brokerage office to provide

financing, title insurance, and hazard insurance through the vehicle of subsidiary companies that

operate within the brokerage office. Restrictions include the requirement that written disclosure of

the affiliation be made to consumers,an estimated charge for the services is provided,consumers are

free to obtain the services elsewhere,and referral fees are not charged among the various subsidiary

companies.

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control premium co-op

control premium An amount paid to gain enough ownership interest to control a corporation or

other entity.This would typically be an amount in excess of the simple fair market value of the shares

sought to be purchased; used in business valuation calculations.

convenience center An open shopping center with fewer than half a dozen stores offering day-

to-day necessities, such as basic groceries, dry cleaners, liquor stores, and video rental stores.

convenience store (C-store) A retail store that sells daily purchase items such as milk and

beverages and impulse purchase items such as snacks and small gifts, usually in conjunction with

gasoline sales. Convenience stores are attractive investments because the IRS allows rapid depre-

ciation over a 15-year time period rather than the normal 39-year period required of typical

commercial real estate.

conventional home Also called a stick-built home; a home built on-site, as opposed to a

manufactured home (built elsewhere) or a modular home (components built elsewhere and

assembled on-site).

conventional loans A mortgage loan without government participation in the form of insurance

(such as the FHA) or guarantee (such as the VA).

conversion (1) The process of changing a property into condominium ownership. (2) Wrongfully

taking property of another, or denying that person access to his or her property.If a self-storage facil-

ity overlocks a tenant unit in the mistaken belief the rent is past due, when in reality the rent was

credited to the wrong person’s account, then the facility is guilty of conversion.

conversion clause (1) A clause in a mortgage loan that allows the borrower to convert from an

adjustable-rate mortgage to a fixed-rate mortgage,or that allows the borrower to convert from inter-

est-only construction financing to a lower interest rate and usually fully amortizing permanent

financing. (2) A clause sometimes seen in leases and real estate sales contracts providing that any

personal property left on the premises after lease expiration or after real estate closing may be dis-

carded or retained, as the real estate owner desires, and will not constitute a conversion. (In other

words, the owner has no responsibility to keep the property in a safe place and/or attempt to return

it to the former occupant.)

convertible ARM An adjustable-rate mortgage loan that the borrower may convert to a fixed-inter-

est rate during a predetermined time period, at an interest rate calculated according to a formula set

out in the note.

convey To transfer title to real estate to another.

cooling off period A time period within which a person may change his or her mind about a con-

tractual agreement and cancel it without penalty.The right must be granted within the contract itself

or by virtue of consumer protection statutes because it does not exist at common law.

co-op (1) Short for cooperative apartment, being a method of owning real estate in which a corpo-

ration owns a building and related facilities and persons who buy stock in the building are entitled

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co-op corporation

to rent a particular unit, called a proprietary lease, at rates significantly below market rents. (2) An

arrangement between two real estate agents for the sale of a property and splitting of the commis-

sion, usually as a result of one agent having the listing with the owner and another agent bringing

the buyer to the closing table.

cooperating broker A broker who agrees to split a real estate commission with another broker in

return for services rendered in connection with a particular piece of real property.

cooperative apartment See co-op.

core-based statistical area (CBSA) A concept developed by the federal Office of Management

and Budget in order to standardize geographic and population descriptions so that data from one

federal agency may be reliably related to data from another federal agency without having to

recheck definitions used by each agency. In the Year 2000 census definitions by the United States

Census Bureau, a core-based statistical area is a functional region based around an urban center of

at least 10,000 persons. These definitions replace the Year 1990 census definitions of metropolitan

area, metropolitan statistical area, and consolidated metropolitan statistical area, although the older

terms are still used in common parlance. CBSAs are further grouped as follows:

• Metropolitan statistical area. Contains at least one urbanized area of 50,000 people or more.

• Micropolitan statistical area. Contains at least one urbanized area and a population of

10,000 to 50,000 people.

• Metropolitan divisions. Divisions in metropolitan statistical areas with a single core of 2.5

million people or more.

• New England city and town areas (NECTAs). Geographic areas defined by cities and towns

in New England, but still segregated according to the 50,000 people per size cutoff.

core factor In an office building,the percentage of common area space such as lobbies,restrooms,

and corridors as compared to the total net rentable square footage in the building. See loss factor.

CORENET Global An association of corporate real estate executives and related professionals,

organized in 2002 by the merger of the International Development Research Council (IDRC) and the

National Association of Corporate Real Estate Executives (NACORE).The Web site for CORENET Global

is at www

.corenetglobal.org.

core space In an office building,the common area space such as lobbies,restrooms, and corridors.

corner influence The effect on the value of real estate by its proximity to the intersection of two

streets.

corner of Main and Main The most important intersection in a community or in a downtown

office area. Some drug store chains have a simple site-selection preference for the “corner of Main

and Main,” no matter what the cost.

corporation A legal entity created by filing documents with the local secretary of state, commis-

sioner of corporations, or similar official. It may have as few as one shareholder, must begin life with

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corporation correlation

some minimal amount of assets gained as a result of the shareholder(s) paying for shares of stock,

may be stipulated as having a limited life span or perpetual existence until formally dissolved, and

may be designated as having the powers to do only limited types of things or anything allowed by

law. The entity thus created will enjoy all the rights and responsibilities of natural persons, including

owning and renting real estate, and suing or being sued in the courts.The IRS allows corporations to

be segregated into three main types for tax accounting purposes:

1. S-corporation. A small corporation that is allowed to file information returns only. It pays

no taxes on its income but, instead, sees all income taxed to the shareholders according to

their pro rata share of the corporation.

2. C-corporation. Any corporation that does not meet the limitations for an S-corporation,

or one that otherwise qualifies for S-corporation status but elects to be treated as a C-cor-

poration. The corporation files its own tax returns, pays taxes on income, and then dis-

tributes dividends to shareholders who pay taxes on the dividends.

3. 501(c)(3) corporation. A not-for-profit corporation authorized by Section 501(c)(3) of the

Internal Revenue Code, which files an information tax return but pays no taxes.

corporeal Tangible real or personal property; things you can touch. Contrast with incorporeal

property such as easements (a right to use, but not a right to, property) and goodwill.

correction deed A deed executed to correct some defect in the original, such as the misspelling

of a name or a mistake in a property description. Correction deeds are usually exempt from transfer

taxes imposed by the recording authority.

correction lines Provisions in the public land survey system made to correct for the curvature

of the earth; one cannot have perfect rectangles over a curved surface. Every fourth township line

(24 miles apart) is used as a correction line on which the spaces between the east and west range

lines are corrected to a full and proper 6 miles.The effect is that the grid lines do not match up until

they meet at the principal meridian.

correlation A former appraisal term, replaced by reconciliation.

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31N01E

31N02E

31N03E

30N02E

30N03E

30N04E

24 19 20 21 22 23 24 19 20 21 22 23 24 19

26 25 30 29 28 27 26 25 30

29 28 27 26 25 30

35 36 31 32 33 34 35 36 32 33 34 35 36 31

16 5 4 3 2 1 6 5 4 3 2 1 6 5 4

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910 111278 9

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14 19 20 21 22 23 24 19 21 22 23 24 19 20 21

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correlative water right cost-benefit analysis

correlative water right A theory of riparian rights—water rights—that holds an owner who has

rights in a common source of water is entitled to take only a reasonable amount of water for the ben-

eficial use of the land. Contrast with appropriative rights, in which the owner has the exclusive right

to take all the water for the beneficial use of the land.

cosigner A person who signs a promissory note in such a capacity that he or she has equal and

primary liability with another. Contrast with a guarantor, who is liable only if the original obligor

defaults. A cosigner must list the promissory note as a liability on financial statements; a guarantor

has only contingent liability which may never ripen into full liability.

cost allocation depreciation A tax method of depreciating property by separating a functional

unit—such as an office complex—into allowable components that may be depreciated over a short-

er time period than otherwise permitted for the whole. For example, nonresidential real property

improvements must be depreciated over 39 years. One may allocate the cost of some components,

such as fencing, lighting, security systems, and carpet into categories that can be depreciated over

5 or 7 years, providing larger tax deductions.

cost approach An appraisal method that estimates the cost to reproduce or replace an

improvement and then subtracts an amount for depreciation to reach the current condition of the

property. Of the three approaches—comparison to comparable properties, capitalization of

income, and cost—cost is the one deemed least reliable overall, but most necessary in the case of

unusual properties with no realistic probability of a tenant.

CoStar A commercial provider of information about commercial real estate in most major markets

across the United States and the United Kingdom. The information provided includes the ability to

take a virtual drive down a designated street; to see street-level views of all the properties; and to

click through to obtain information regarding ownership, management, vacancy rates, tenant infor-

mation,lease expirations,and asking rents.Other information includes a property listing service,data

regarding sales prices of properties,and advertising services for real estate firms.The CoStar Web site

is at www

.costar.com.

cost basis The original cost of a property. After increases for capital improvements made over the

years, and decreases for depreciation deductions or involuntary conversions such as condemnation,

the number becomes one’s adjusted basis.

cost-benefit analysis A decision-making tool that evaluates all the hard-dollar and economic

consequence costs associated with pursuing a course of conduct against all the hard-dollar and eco-

nomic consequence benefits reasonably to be expected from that decision, and comparing the two

to see if they make economic sense.

Example:

Riverdale Apartments is experiencing increased competition because of the

abundance of new apartment projects being built nearby. In order to compete more effectively, it

is considering adding a sophisticated security system with Web cameras allowing residents to

monitor gate access; areas around the buildings; and common areas such as the laundry room,

swimming pool, and playground. The hard costs of $270,000 can be partially defrayed by

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cost-benefit analysis cost recovery

charging rental rates $15 per month higher than other properties. Spread across 200 apartments,

this results in an additional income of $36,000 per year. In addition, the system is anticipated to

result in the ability to retain occupancies at 95 percent rather than an expected short-term drop

to 75 percent until the new apartment buildings fill up and begin charging market rents in about

2 years. Calculations may attach a value of $36,000 per year to this consideration. Finally, the

security system will result in significant insurance premium reductions amounting to $20,000

per year. The total short-term economic benefit is $92,000 per year for 2 years and $56,000 per

year each year afterward (without adjusting for inflation or the cost of money). As a result, the

initial $270,000 investment can be recouped in about 3

years and will show a profit afterward.

After completing this cost-benefit approach, management will probably decide to spend the

money for the improvements.

cost of funds index (COFI) A yield index based on the cost of funds to savings & loan institutions

in the San Francisco Federal Home Loan Bank district. It is one of the indexes commonly used to set

the rate of adjustable-rate mortgages.

cost-of-living adjustment (COLA) A change in payments, such as rent in subsidized housing,

based on a change in the index that measures inflation.

cost-of-living index An indicator of the current price level for goods and services as compared to

a base year. The base year is always set at a value of 1.0 or 100. As the cost of living increases (infla-

tion), the number will increase, so that a cost of living index of 150 means things cost 50 percent

more than they did in the base year. As the cost of living decreases (recession or depression) the

number will decrease, so that a cost of living index of 93 means things cost only 93 percent of what

they cost in the base year.The consumer price index is one such cost of living index.

cost-plus-percentage contract A compensation method for a construction project, in which

the contractor is paid a specified percentage over and above construction costs. This percentage

may be pure profit to the contractor, or it may be the contractor’s gross compensation from which

must be paid general overhead expenses such as clerical help, phone lines, and general business

insurance. It is important to determine the difference, because if the contractor expects the per-

centage to be pure profit, then normal business operating expenses will have to be accounted for

somewhere in the construction contract as expenses.

cost recovery A tax concept commonly called depreciation, but technically different in ways that

don’t matter to most taxpayers. The explanation is that depreciation is a calculation determined by

starting with the acquisition cost of a property and then subtracting the anticipated salvage value

when the property’s useful life is over.That number is then divided by the number of years one can

reasonably assume the property will have a useful life.The resulting figure is the annual depreciation

for the property. Because of constant arguments, audits, and litigation over the correct salvage value

and the correct useful life for various properties,the IRS replaced the whole depreciation system with

the cost recovery system that assigns a useful life to various classes of property, assumes the proper-

ty will be worthless at the end, and then allows deductions over the course of the useful life.

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cost to cure coupon book

cost to cure The amount of money necessary to remedy something that is depressing the

value of real property. If the cost to cure a parking lot filled with potholes is $12,000, but the

current parking lot condition depresses the value of the property by $20,000, then the defect is

said to be curable.

cotenancy A form of property ownership in which two or more persons or entities own undivided

interests.The interests do not always have to be in equal shares.

Council of Real Estate Brokerage Managers An affiliate of the National Association of REAL-

TORS®; it confers the Certified Real Estate Brokerage Manager (CRB) designation.The Web site of the

Council is www

.crb.com.

Council of Residential Specialists An affiliate of the National Association of REALTORS®;it confers

the designation Certified Residential Specialist (CRS). The Web site of the Council is www

.crs.com.

counseling A relatively new career within the real estate industry that involves providing

independent and unbiased advice on a variety of real estate–related issues. Membership in the

Counselors of Real Estate (www

.cre.org) is by invitation only. Another trade organization is the

National Association of Counselors (http://nac.lincoln-grad.org/).

counselor One who provides counseling services.

Counselors of Real Estate (CRE) See counseling.

counteroffer An offer that differs from the previous offer in some significant detail.A counteroffer

rejects the prior offer by operation of law, and instead makes a new offer that must either be

accepted or rejected by the other party.

Example: A seller offers to sell her home “as is” for $250,000.

• A buyer offers to buy the home for $240,000, but the seller must replace the roof and recar-

pet the house (counteroffer)

• The seller replies that she will sell for $235,000 “as is” (another counteroffer).

• The buyer replies that he will pay $210,000 “as is” (another counteroffer).

• The seller sees things going downhill and says, “Wait, wait, I accept your first counteroffer

of $240,000 and I will repair the roof and carpet.” However, the seller cannot do this,

because that offer no longer exists and cannot be accepted.

county A political subdivision within a state. It is usually the largest government body within the

state. In Louisiana, the equivalent is called a parish.

coupon book Formerly, a booklet given to investors with coupons that were clipped out and

mailed in to receive that period’s income. This was the source of the expression “coupon clipper,”

meaning a person of leisure with investment income. Today, a coupon book is the booklet given to

mortgage borrowers, containing coupons with account and payment information, to be mailed in

with monthly mortgage payments.

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court credit

court An organ of government belonging to the judicial department and charged with resolving

disputes among parties.Courts generally have jurisdictional requirements providing that only certain

disputes among described parties for certain amounts of money may be heard. If you file your griev-

ance in the wrong court, you may be prejudiced when the case is dismissed for lack of jurisdiction

and the time period during which to file in the proper court has expired.

covenant An agreement. For example, one can make a “covenant not to compete”a provision of a

business sale, or one can write a restrictive covenant regarding the use of real property into the real

estate records, which binds all owners whether it is contained in their specific deed or not.

covenants, the usual The use of this expression in a real estate contract refers to the seller’s

obligation regarding the type of deed the seller will execute. The three usual choices are a general

warranty deed, a special warranty deed, or a quitclaim deed.The general warranty deed gives assur-

ances and promises regarding the quality of the title being transferred; a special warranty deed

merely promises that the seller has not done anything to injure the title, but makes no promises

about other parties and their possible claims;while a quitclaim deed merely transfers any interest the

seller might have, not that the seller is saying he or she owned anything at all.As a general rule,courts

have construed contract language requiring execution of a deed “with the usual covenants”to mean

a general warranty deed with the covenants of seisin, right to convey, against encumbrances, quiet

enjoyment, warranty, and further assurances.

CPI See consumer price index.

CPM See Certified Property Manager.

CRA See credit reporting agency and Community Reinvestment Act.

cradle-to-the-grave management A phrase used to describe the Resource Conservation and

Recovery Act, which is a federal law establishing a system for managing hazardous wastes in an

environmentally sound manner from the point of origin to the point of final disposal.

cram down A bankruptcy tool used by debtors to force creditors to agree to a plan of reorganiza-

tion in Chapter 11. If the requisite minimum number of votes have been obtained to approve a plan

of reorganization, and if the plan provides better protections or payments to the nonconsenting

creditors than they would receive in a liquidation, then the court may “cram down” the plan and all

will be bound by its terms.

CRE See Counselor of Real Estate.

creative financing Any financing arrangement other than the traditional one of obtaining a loan

from a commercial lending institution.

credit (1) In finance, the availability of money. (2) In accounting, a liability or equity entered on the

right side of the page in double-entry accounting. The concept is confusing to most consumers

because an accounting “credit” does not mean more “stuff” such as property or money; it merely

indicates the side of the page on which the entry is posted.The other entry is called a debit.

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credit bid credit union

credit bid The amount a lender can bid at a foreclosure sale under one of its mortgages,

representing the total of all amounts due under the promissory note.

credit bureau See credit reporting agency.

credit enhancement A method of reducing the risk of extending credit to a borrower. It can

include requiring collateral, a stand-by letter of credit, a comaker, a guarantor, or any other means.

credit history An individual’s history and experience regarding repayment of loans and use of

revolving credit such as credit cards.

credit life insurance Insurance that pays to a lender the full principal balance of a loan in the

event of the death of the borrower. It is illegal for a lender to require credit life insurance (or credit

disability insurance) as a condition of making a loan.

credit limit The maximum loan amount a person may receive on a particular instrument or from a

particular lender. A revolving line of credit might have a credit limit of $50,000. Banks have limits on

the amount of credit they can extend to single borrowers, based on the size of the bank, and limits

on the credit they can extend to officers and directors.

creditor One who is owed a debt.

credit rating service See credit reporting agency.

credit report A history of all information on file at a credit reporting agency about a

particular individual or business. By law, consumers are entitled to receive one free credit report

per year from each of the three major credit reporting agencies—Experian, Equifax, and

TransUnion, but may request and pay for as many as they choose. Requesting one’s own credit

report does not decrease the score.You may obtain a copy of your report by going to the official

Web site at www

.annualcreditreport.com or calling 1–877–322–8228. (Beware: The Web site

www

.freecreditreport.com is not the official, federally mandated Web site.)

credit reporting agency (CRA) An organization that maintains credit history information and

sells reports and scores to authorized credit grantors. Regulated by the Federal Trade Commission

under the requirements of the Fair Credit Reporting Act.

credit scoring The process of rating potential borrowers based on their overall credit history,

current debts, and frequency of application for credit. The most commonly used score, by far, is the

FICO score.

credit tenant A national or large regional tenant with excellent credit.Although local tenants may

also have excellent credit, oftentimes better than their national counterparts, only the larger compa-

nies are called credit tenants. A lender will offer more attractive financing terms for a development

with a certain amount of space preleased or currently leased to credit tenants.

credit union A nonprofit organization in which qualified persons may make deposits and obtain

loans. Formerly, membership was strictly defined so as to limit it to persons in a particular industry

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credit union culvert

or trade organization, but those rules are now largely obsolete. Bankers believe that credit unions

enjoy an unfair advantage in the marketplace by virtue of paying no income taxes as a result of their

nonprofit status. The lack of any income tax expenses allows the credit unions to offer somewhat

higher rates on deposits and somewhat lower rates on loans.

CREW network See Commercial Real Estate Women.

crib Slang for one’s dwelling place.

cross-collateralization The process of tying two or more mortgages together so that the securi-

ty of one note stands as security for the other notes. A step often taken in a debt workout after

default so that the creditor may enhance the amount of collateral available for a debt and also

increase the hostage value of property, thereby discouraging any plans the debtor might have to

simply turn in the keys and abandon mortgaged property to the creditor.

cross-defaulting clause A provision in many mortgages that a default in any mortgage on the

property, or any loan by the same lender to the same borrower, will constitute a default in the one

containing the clause, even if all note payments are current on that particular mortgage. Used as a

method for early triggering of remedies before things are allowed to deteriorate to a point that

could seriously impair the value of the collateral.

Example:

A borrower may default on a second mortgage but not suffer foreclosure because

the second mortgage holder believes the property has insufficient equity to make it worthwhile.

Technically, this does not affect the first mortgage lender, but is a good indication of worsening

financial conditions and possible cessation of routine property maintenance by the borrower, pos-

sible insurance cancellations, potential lawsuits from other creditors which might force a bank-

ruptcy, and other matters generally unpleasant to contemplate by the first mortgage holder. It

may be preferable to declare a default immediately and proceed to foreclosure rather than wait

until the borrower misses payments on the first mortgage.

CRS See Certified Residential Specialist.

CRV See certificate of reasonable value.

C2P See construction to permanent loan.

CTL Shorthand for credit tenant lease. See credit tenant.

cubic yard A measurement used to measure concrete, gravel, or earth. It measures 3 ft  3 ft  3

ft, which is equivalent to 27 cubic feet. Usually shortened to simply “yard,” as in “It will take 12 yards

of dirt to fill that hole.”

culvert A waterway for rainwater or other runoff; may be a ditch or a pipe. If ditches along the side

of a road channel runoff, then property owners must install culverts under driveways in order to pre-

vent the formation of dams. One must usually obtain highway or road department permission to

install a culvert because the location will generally be in a road right-of-way.

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curable depreciation Depreciation that can be cured at a cost less than the value that will be

added.

curb appeal The subjective evaluation of the aesthetic appeal of a house or other building, as

viewed from the street.

cure rights In bankruptcy, the right to fix a default so that a creditor cannot pursue its remedies.

For example, a debtor may file for bankruptcy moments before foreclosure, stop the foreclosure,

and then propose a plan to cure the default and past due sums. Usually the plan involves small

monthly payments over the course of several years. Of course, it is not enough to cure the default,

the debtor must also stay current on future obligations, but bankruptcy will sometimes allow for

a renegotiation of those obligations.

current use See highest and best use.

curtail schedule See amortization schedule.

curtesy The right of a husband to some interest in his deceased wife’s real estate, even if the wife

died without a will or left all property to another in her will. The same rights granted to a widow in

her deceased husband’s property are called dower. As a result of these rights,mortgage lenders may

require a spouse to sign a mortgage instrument giving security in the real estate, even though the

spouse has not signed the promissory note and so has no personal liability to repay the debt. Many

states have abolished the ancient rights of dower and curtesy.

curtilage The enclosed space of ground and buildings immediately surrounding a dwelling, or

a conceptual amount of space reasonably attached to the use of a dwelling. This is an important

concept in law enforcement in determining whether (a) an area is within the curtilage and thus

searchable under a search warrant for the dwelling, (b) an officer’s presence in an area for surveil-

lance purposes is within the curtilage and thus an unlawful entry, and (c) despite the determination

of (a) and (b), there is no expectation of privacy in garbage left within the curtilage for pickup, so it

may be searched without a warrant.

cut and fill The process of contouring land to more easily develop it, accomplished after clearing

and grubbing.

cyberpark A large area of land where computer and technology companies are concentrated,

or that has been constructed with a high-tech communications infrastructure such as loop redun-

dancy, fiber optics, and perhaps even belowground network bunkers of reinforced concrete.

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curable depreciation cyberpark

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damages Compensation for an injury for which the law provides a remedy. Following are

highlights of some of the law of damages as it relates to real property:

• The measure of damages to property is the difference in the value of the thing before

the injury and after the injury. The cost to make repairs is usually not a valid measure

of damages.

• Parties may not contractually agree to a penalty for default, such as late completion of a

construction project. Penalties are illegal. Parties may, however, agree that the damages for

default will be difficult to measure exactly, so they will agree to liquidated damages in a

certain agreed-upon amount. This is the reasoning behind contracts that allow retention of

the earnest money if the buyer defaults.

• In breach of contract cases, injured parties are required to take such actions as are reasonable

to minimize their damages and will be denied any damages at all if they do not take such

mitigation steps. If a tenant breaches a lease, the landlord must try to release the premises to

another, and the value of any damages will be diminished by the value of the new lease.

• Consequential damages, which are damages not as a direct result of the wrong, but flowing

from some of the consequences of the wrong, are recoverable only if the wrongdoer had

some reason to know of the consequences. A person who allows something unsafe to

remain on the premises (such as a wet floor) may be responsible for the injury to a guest

who slips and falls. However, the person may not be liable for the consequential damages

when the guest becomes addicted to pain medication.

• Punitive damages are intended to punish the wrongdoer and deter future similar conduct.

Because of the preponderance of multimillion-dollar punitive damage jury verdicts in

recent years, the United States Supreme Court has recently held that excessive punitive

damages are a violation of the “cruel and unusual punishment” clause of the Constitution,

and so may be reviewed in the federal court system and set aside even though the original

lawsuit was brought in a state court system.

• Treble damages are allowed under many federal statutes rather than allowing the jury to

calculate punitive damages.

• Damages received for personal bodily injury are not income and not taxable; other types of

damages may be taxable depending on what they represent.

• Damages are recoverable for emotional distress. The addition of a claim for emotional dis-

tress is often enough to trigger an insurance company defense of a lawsuit. Although there

may not be insurance coverage for an award, it will pay for the lawyers.

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Davis-Bacon Act A federal law requiring certain minimum levels of wages for all workers involved

in construction on federal projects or federally funded projects. The purpose was to give local

contractors an opportunity to participate in government contracts, even though out-of-town con-

tractors might have access to cheaper labor and would therefore enjoy a competitive advantage in

bidding.The other purpose was to prevent contractors from paying lower wages than currently pre-

vailing in the local marketplace, thereby reducing wages for the entire area. The Act is looked upon

as one favoring unions, although that was not the intent. In fact, the Act had an unsavory beginning,

introduced by Representative Bacon in 1927 as a reaction to a contractor who hired poor black

laborers from Alabama to build a veterans hospital in Bacon’s district of Long Island.The Act does not

require payment of union wages, merely payment of wages consistent with those prevailing in the

community. Today, the Act is still alive and well, and garnered tremendous public support when

President Bush attempted to temporarily suspend it for contractors working in hurricane-damaged

parts of the country.

d/b/a (Also written as “dba.”) Means “doing business as.” Some states require dba registration with

a central office, and others do not.

DBH Means “diameter breast-high”; the diameter of a tree at a point 4

feet above the ground.

Many homeowners associations prohibit cutting trees of a certain DBH on one’s own land,

unless the property owner receives prior approval.

When selling timber, purchasers generally need to know the average DBH for the trees. The

information is also necessary to calculate tonnage of timber, which is the more modern way

of pricing, rather than calculating board-feet.

DCR See debt coverage ratio.

DDA See demand deposit account.

dead load The weight of a building, not counting the occupants and furnishings.

dead man’s statute A law of evidence employed in many states. One version says that a witness

may not testify about oral statements made by a decedent (someone who has died) if the effect of

the testimony would be to make the decedent’s estate larger or smaller, even if the witness would

not benefit one way or the other. Another version says witnesses cannot testify about statements

made by a decedent if the witness would benefit from those alleged statements. (Be sure to clearly

understand which is being used in a specific case.)

dealer In tax law, persons who buy and sell property for their own account, whether that proper-

ty consists of silver spoons,trading cards,or real estate.Investors want to avoid dealer status because:

• Gains on sales are treated as ordinary income rather than the more favorably treated capital

gains, no matter how long you hold a particular piece of property.

• Dealers have to pay self-employment taxes on their income.

Davis-Bacon Act dealer

119

• Dealers cannot take advantage of installment sales provisions that allow others to pay taxes

over time, as they receive installment payments from the purchaser. Dealers must pay

income taxes on the entire profit, even if they receive payments over many years.

dealer status See also dealer. Determined by the intent of the party. The courts have arrived at

several areas they will examine in order to determine intent.The most significant are

1. Taxpayer’s purpose for the acquisition and sale

2. Number and frequency of real estate sales

3. Duration of ownership

4. Time spent by taxpayer in promoting the sale

5. Use of outside brokers in making the sale

6. Extent of taxpayer improvements to the property

debenture An unsecured note or bond.

debit (1) On a closing statement for a real estate sale, an item that is charged to a party. (2) In

accounting,an entry that appears on the left side of the page.It is the opposite of a credit.In account-

ing,a credit does not necessarily indicate more money and a debit does not necessarily indicate less

money or an expense.

debt An obligation to pay another.

debt capital Money borrowed on a long-term basis and used to purchase an investment such as

real property.

debt coverage ratio (DCR) The ratio of net operating income compared to annual debt service,

which includes principal and interest payments. The ratio is used by lenders to evaluate loans on

income-producing property. A ratio of 1.2 or better will usually support the extension of credit.

Example:

Annual revenues  $100,000

– Annual operating expenses  50,000

____________________________________

 Net operating income  50,000

Annual debt service on proposed loan  11,000

$50,000 ÷ $11,000 = DCR of 4.54

debt/equity ratio The ratio of mortgage debt to the owner’s equity in the property. Typical home

mortgage lenders require a debt/equity ratio of 80 percent—meaning they will loan up to 80 percent

of the value of the home. Higher ratios can be obtained by purchasing private mortgage insurance.

Commercial lenders have varying requirements depending on particular market circumstances at

the time.

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dealer debt/equity ratio

120

debtor decedent

121

debtor (1) One who owes a debt.(2) In bankruptcy,the person who requests protection under the

bankruptcy laws.

debtor in possession (DIP) (To pronounce the abbreviation always say each letter; it is not

pronounced as a word.) In bankruptcy, a Chapter 11 debtor who remains in possession of his or her

property and continues to operate a business or sell the property. The DIP must still obtain court

approval for nonroutine transactions but is able to conduct business, receive monies, and pay bills,

including a reasonable salary for the debtor. Contrast with the situation in which a bankruptcy

trustee is appointed; in this case the trustee is then in control of all assets of the debtor.

debt relief The forgiveness of a legal obligation, in whole or in part. In real estate, it occurs most

frequently when a mortgage lender agrees to accept a deed to the property rather than go through

a foreclosure, and further agrees to accept the property as full payment for the loan, even though

it is not worth the full amount of the loan. In such a situation the borrower has received debt relief

and must report that as income for tax purposes. There is a loophole: if the debtor was insolvent

immediately before the debt relief, and insolvent immediately after the debt relief, then he or she

need not declare income to the extent of the insolvency.

Example:

The debtor owes $125,000 on his home and 20,000 on credit cards. The debtor’s only asset is his

home, which is worth $110,000.

Netting assets and liabilities before the debt relief results in the debtor being insolvent by $35,000.

After giving the home to the bank and receiving forgiveness of the balance of the mortgage loan,

the debtor now still has credit card debt of $20,000 and no assets at all. The debtor is insolvent

by $20,000.

Because the debtor is still insolvent, and the debt relief did not cure his condition of insolvency,

there is no taxable income.

See also Publication 17, “Your Federal Income Tax,” Chapter 12, “Other Income,” available at the IRS

Web site, www

.irs.gov.

debt service The amount necessary to make principal and interest payments on a loan.It does not

include amounts collected each month as a reserve for insurance or real estate taxes and does not

include payments for private mortgage insurance.

debt service constant See mortgage constant.

debt service ratio The ratio of debt payments to disposable income; used in evaluating one’s

eligibility for a mortgage loan. National averages, calculated quarterly for every year since 1980,

are provided at the Web site of the Federal Reserve Board, www

.federalreserve.gov/releases/

housedebt/default.htm.

debt to equity ratio See debt/equity ratio.

decedent One who has died.The legal subject “decedent’s estates”deals with all the law related to

the collection, preservation, and disposition of property formerly belonging to a decedent.

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declaration The legal document a condominium developer must file in order to create the

vehicle for condominium ownership. All states have fairly similar laws setting out the requirements

for what must be in the declaration. They are sometimes called uniform condominium acts or

horizontal property acts.

declaration of condominium ownership See declaration.

declaration of homestead A document signed by a homeowner and filed with the tax assessor’s

office in order to take advantage of homestead exemptions reducing real estate taxes.

declaration of restrictions A document filed in the real estate records of the county where prop-

erty is located, and incorporated by reference into the deeds of every property located within the

described area, setting out the rules and regulations pertaining to those properties. It is commonly

used to spell out restrictive covenants in neighborhoods, such as minimum building size, setback

lines, prohibitions against home-based businesses, and restrictions against boats or motor homes

parked in view of the street.

declaration of trust A written statement that one who holds the legal title to property does so

in trust for another, being the beneficiary.

decree Technically, the judgment of a court of equity.Today, states have abolished the distinctions

between courts of law, which followed fairly strict rules of law and awarded damages to injured par-

ties, and courts of equity, which generally tried to do what was fair and just (equitable) and issued

decrees to people ordering them to do something,or to stop doing something. Causes of action are

grounded in law or equity, but the same court and same judge now hear everything.

decree of foreclosure and sale An announcement by a court establishing the amount of a mort-

gage debt and ordering the foreclosure of the property to pay the debt; employed in states that

must follow judicial foreclosure in order for a lender to sell mortgaged property.

dedicated circuit An electric circuit that serves only one appliance (e.g., a dishwasher) or a

series of electric heaters or smoke detectors. It is an important point of lease negotiations to agree

upon the number and size, in amps, of dedicated circuits to be provided to a tenant. Most leases

of large and modern office buildings contain restrictions on the electrical load a tenant can place

upon the building.

dedication An owner’s gift of land,or an interest in land such as a right-of-way, for the public’s use,

coupled with the public’s acceptance of the gift by making use of it. A dedication may be express,as

when the owner specifically states an intention of dedicating land for a park. Alternatively, a dedica-

tion may be implied because of the owner’s conduct and the reasonable conclusions to be drawn

from that conduct.When one sees news stories about protestors attempting to block development

of a valuable vacant lot previously kept clean and mowed by neighbors and used by children as a

park, one is seeing an attempt to have a court declare that the owner made an implied dedication

for the public use.

deed A written document properly signed,acknowledged,and delivered,and bearing a description

of specific property and words of conveyance for that property.

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declaration deed

122

deed books de facto

123

deed books Records containing copies of recorded deeds and other instruments affecting title to

land located within the jurisdiction.

deed indented See indenture deed.

deed in lieu of foreclosure An instrument transferring title to real property to a mortgage

lender without the necessity of going through the foreclosure process. Called the deed in lieu

(pronounced “loo”) for short, the procedure is attractive to lenders because of the speed, lack of

any defenses, and removal of anxiety about last-minute borrower bankruptcy. It is attractive to

borrowers because there is no foreclosure to appear on the credit records.There is some risk to the

lender if there are intervening liens,because a deed in lieu transfers title to property subject to the

effect of any junior liens. Usually a foreclosure destroys other liens, if they were recorded after the

mortgage or deed of trust.

deed of reconveyance A method of extinguishing lender’s rights in real property in a state that

uses the deed of trust procedure rather than the mortgage procedure.

deed of trust A security instrument used to grant rights in real property to a lender. It is used

in some states; other states use mortgages to accomplish the same goal. With a deed of trust, title

to the property is transferred to a trustee, who holds it in trust for the borrower’s benefit until such

time as the loan has been paid in full. At that time, the trustee will transfer legal title back to the

borrower by way of a deed of reconveyance.If there is a default and foreclosure,it is the trustee who

conveys the property to another.

deed poll A deed signed only by the grantor.This is the typical type of deed, but one rarely hears

it called a poll deed or deed poll. Contrast with a deed indented, also called an indenture deed,

which contained promises, representations, or warranties by both the seller and purchaser and so

required both signatures. The documents were distinguished because the deed poll had a “polled”

or clean-cut edge, while the deed indented had an indented or jagged edge.

deed restriction A provision placed in a deed restricting or limiting the use of the property in

some manner. It may include subdivision or similar restrictions common to many properties in

the neighborhood, or it may be something personal to the grantor such as a requirement that the

purchaser resell to the seller before offering to anyone else.

deed to secure debt A type of mortgage used in a few states; the title to the property is trans-

ferred to the lender until the debt is paid in full. Contrast with deed of trust which is employed in

states called title theory states, and with true mortgages which are employed in states called lien

theory states.The deed to secure debt is a hybrid of the two theories.

de facto In fact,in actuality, as things are really done.The phrase is used to express a state of affairs

or condition that might not be technically legal,but which has the same effect as the legal condition.

Here are two examples:

• When an apartment complex allowed the power to be disconnected for nonpayment and

failed to secure a reconnection, it amounted to a de facto eviction of all the tenants (also

called a constructive eviction).

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• The IRS has ruled that a long-term lease of property with the right to purchase for $1 at the

end of the term is not a true lease, but a de facto installment sale.

defamation of title Wrongfully causing some cloud—problem—to be placed on the title of

another, such as a lender failing to satisfy a mortgage that has been paid in full.

default The failure to meet one’s obligations in a timely manner. There are several important

concepts relating to defaults in the real estate field:

• Leases and mortgages often differentiate between monetary defaults, such as failure to

pay money when due, and nonmonetary defaults such as a failure to provide proof of

insurance or copies of monthly financial statements. If so, there will be different notice

provisions and grace periods for each.

• Unless a sale contract contains language that “time is of the essence,” or one party has

made the other aware that time is critical, then a court will ordinarily award a purchaser

a reasonable amount of time to complete closing, even if it is past the contract date.

• Some states have statutes allowing collection of attorneys’ fees when there has been a

default in the contract. Other states require specific language in the contract allowing for

collection of attorneys’ fees.

default point The total revenues necessary from a project to pay all the bills with nothing left

over—the point at which $1 more in revenues creates a profit and $1 less forces one to default on

paying creditors unless additional capital is injected into the project. See break-even point.

defeasance The process of legal title being transferred back to a borrower once all payments

and other requirements in a mortgage loan have been completed.

defeasance fee A prepayment penalty; in a commercial loan, money that must be paid to the

lender when a mortgage is paid off earlier than the specified maturity date.

defeasible fee A real property title that can be revoked or undone upon the happening of a

named event.(The whole area of real estate law, regarding things that might happen in the future to

grant or take away title to property, is called future interests.The rules are exceptionally complex and

not often encountered in the real world.)

defect in title A recorded instrument that would prevent a grantor from giving good or clear title

to property.

defendant The party sued in an action at law. Contrast actions in equity, in which the party sued

is called a respondent.Today, these distinctions are largely irrelevant, but they may be encountered

when reading old legal decisions.

deferred charges An accounting and tax concept in which nontangible costs that are expected

to provide value over a number of years are booked as assets and then reduced each year by a pro

rata amount as they are charged to expenses.

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de facto deferred charges

124

deferred charges deficiency judgment

125

Example:

Acme Inc. pays a broker $75,000 to negotiate a 10-year lease on very favorable terms.

Year 1, day 1: Acme writes a check for $75,000 and books an asset for $75,000.

Year 1, day 2: Acme enters an expense for $7,500 (one-tenth of the total amount) and reduces

the asset by $7,500. The net result is that, at the end of year 1, Acme has $75,000 missing from

its bank account, but this is balanced by an asset of $67,500 and an expense of $7,500.

Years 2 through 10: Continue the same process as year 1, day 2 until the deferred charge is

finally $0 and the last $7,500 is expensed.

If you do not properly account for such deferred charges on your taxes, you risk an audit,

disallowance of expenses, penalties, and interest.

deferred commission A real estate commission paid at a later date or over time. See residual.

deferred exchange The correct name for a real estate transaction which is often erroneously

called a tax-free exchange. See 1031 exchange.

deferred gain In a tax-deferred exchange, the amount of gain that escapes current taxation and

is deferred until a later date, when the replacement property is sold. See 1031 exchange.

deferred maintenance A physical deterioration of a property due to lack of periodic repairs,

routine maintenance, and necessary replacements. Commenting that a property has deferred

maintenance issues is a polite way of saying it appears shabby and needs work.

deferred payments Payments to be made at some point in the future. Some leases have

deferred payment provisions rather than free-rent concessions. With deferred rent payments,

the tenant pays no rent for the first 3 to 12 months, but then will pay higher-than-market rent

for the balance of the lease term as the tenant makes payments on the rent that accrued in the

early months.

deficiency The amount due on a mortgage loan after adding all expenses of foreclosure and

accrued interest to the principal balance of the loan and then deducting the sale price or lender-bid

price for the property. The balance remaining, if any, may be collected by the lender by means of

taking a deficiency judgment, unless prohibited by law or contract. Deficiency judgments may be

collected just like any other judgment, through seizure of other assets or garnishment. There are

two circumstances when a lender may not collect any deficiency:

1. In states with consumer protection statutes that outlaw deficiencies on first mortgages on

a borrower’s principal residence.

2. With mortgage loans designated as nonrecourse, meaning the lender and borrower

agreed in advance that the property would stand for the debt and there would be no

deficiency allowed in the event of foreclosure.

deficiency judgment A lawsuit and judgment against a debtor for the remaining balance due on

a promissory note after giving credit for any repossessed or foreclosed collateral.

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Example: Sarah has a mortgage for $200,000 on her home. She defaults on her loan, and the

bank forecloses. The bank sells the home at a foreclosure auction to a third party who bids only

$160,000 because the home has been allowed to deteriorate and needs many repairs. Sarah still

owes the bank $40,000 unless she lives in a state that does not allow deficiencies on home loans.

The bank may sue Sarah and obtain a judgment for $40,000, called a deficiency judgment.

definition of value In a formal appraisal, the bottom line—the statement with the appraiser’s

estimate of value, after all calculations, comparisons, and reconciliations.

delayed (tax-free) exchange See 1031 exchange.

delinquency rate The number of loans with delinquencies divided by the total number of loans;

also calculated alternatively as the total principal balances of loans with delinquencies divided by

the total principal balances of all loans.Commercial lenders look at historical and current delinquen-

cy rates for differing types of properties—apartments, office buildings, warehouses, and others—as

part of the analysis for the interest rates and terms they will offer on a particular loan.

delinquent Past due.

delivery The transfer of possession from one person to another. Deeds and leases require delivery

before they are effective. Delivery does not depend on manual transfer, but does depend on the

intent of the parties. Deeds are delivered when placed within the possession or control of the

grantee in such a manner that the grantor cannot regain possession or control.

demand deposit account A checking account. One may demand payment of the money on

deposit without penalty.Contrast with a certificate of deposit, in which one must pay a penalty if the

money is withdrawn early.

demand loan A loan that states it is due upon demand, rather than on any certain date or upon

the happening of a certain event. For purposes of calculating the statute of limitations within which

to sue on a demand loan, it is treated as if demand were made and default occurred on the very first

day the loan was made, even if that did not truly happen in fact.

de minimis PUD A planned unit development (PUD) in which the common areas have minimal

value; a no-frills project.

de minimis settlement A settlement agreement between the Environmental Protection Agency

(EPA) and a property owner who may be technically liable for cleanup under the strict liability provi-

sions of the Superfund, but who did not create nor contribute to the contamination and who

acquired the property without knowing or having reason to know of the earlier contamination.

Although a de minimis settlement is always a possibility, the EPA is by no means required to offer

such a deal, so it is truly “buyer beware.” See CERCLA.

demise A transfer of an interest in real property for a certain number of years, for life, or at will.This

is why leases often refer to “the demised premises.” The use of the word demise in an instrument

automatically triggers the grantor’s liability for the warranty of quiet enjoyment.

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deficiency judgment demise

126

demised premises Department of Housing and Urban Development (HUD)

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demised premises The property leased. See demise.

demising partition or wall A wall separating two tenants or separating a tenant’s space from a

corridor or other common area space.

demographic Pertaining to characteristics of the population, such as race, age, household

income, median home price, and number of inhabitants per household. The U.S. Census Bureau

(www

.census.gov) collects a wealth of demographic data.

Example:

Families without insurance, 2003 and 2004:

2003 2004

Number Number

Total Uninsured Percent Total Uninsured Percent

Family Income (in millions) (in millions) Uninsured (in millions) (in millions) Uninsured

All 288,280 44,961 15.6% 291,155 45,820 15.7%

Less than 73,881 19,603 26.5 73,012 19,437 26.6

$250,000

$25,000 to 74,278 13,221 17.8 73,791 13,565 18.4

$49,999

$50,000 to 53,672 6,018 11.2 54,982 6,373 11.6

$74,999

$75,000 or more 86,449 6,119 7.1 89,371 6,445 7.2

demography A study of the characteristics of people living in an area.

demolition A destruction and removal of some or all of an existing structure. The process of

demolishing something is usually shortened to the verb demo,as in,“We’re going to demo that space

next week to prepare it for the next tenant.” A demolition usually requires a permit from the same

local government agency that issues construction permits.

demolition clause A clause that allows landlords to cancel a lease in the event they decide to

demolish the building.

density In zoning, the number of things allowed per unit of land, such as number of houses,

occupants, or families per acre.

Department of Housing and Urban Development (HUD) Created as a cabinet-level agency in

1965, the stated mission of HUD (www

.hud.gov) is “to increase homeownership, support communi-

ty development and increase access to affordable housing free from discrimination. To fulfill this

mission, HUD will embrace high standards of ethics, management and accountability and forge new

partnerships—particularly with faith-based and community organizations—that leverage resources

and improve HUD’s ability to be effective on the community level.”

127

The most common HUD-related activities are

• Acquisition and sale of all FHA-insured homes that are foreclosed on

• Involvement in moderate-income and low-income housing

• Removing barriers to minority ownership of homes

• Community planning and development

• Native American housing

Department of the Interior (DOI) A department of the federal government, established in

1849 to take charge of the country’s internal affairs. Lightheartedly referred to as the “department

of everything else” at one time, it was originally responsible for all affairs not handled by the

Department of Foreign Affairs (now the State Department), Treasury Department, and War

(now Defense) Department. Today, it is responsible for Indian affairs, national parks, wildlife

management, and surface mining, to name a few areas. More information is available at its

Web site, www

.doi.gov, which includes Webcams for several national parks and the city of

Washington, D.C.

Department of Veterans Affairs (VA) Established on March 15, 1989, to replace the former

Veterans Administration,it is currently the second largest of the 15 Cabinet departments and is head-

ed by the secretary of veterans affairs. It provides a wide variety of programs, including guarantees

of mortgage loans received by eligible veterans.

departure provision An older term rendered obsolete by the July 1,2006, changes to the Uniform

Standards of Professional Appraisal Practice (USPAP), but it is still frequently encountered. It refers to

the ability of an appraiser to render less than a complete appraisal in certain limited situations and

only if the person reading the appraisal would not be misled or confused. Omissions might include

particular appraisal methods deemed unreliable or impractical under the circumstances.

depletion An accounting and tax term referring to deductions made to account for land becom-

ing less valuable because of the removal of natural resources, including timber and geothermal

deposits of hot water or hot rocks.

Examples of items eligible for the IRS depletion allowance under 26 U.S.C. §613(b) are

Borax Marble Carbon dioxide

Mollusk shells Clay Oil and gas

Coal Potash Copper

Sand Gold Silver

Granite Shale Gravel

Slate Iron Stone

Iron ore Sulfur Limestone

Timber

For more information, see Publication 535,“Business Expenses,” Chapter 10,“Depletion,” available at

the IRS Web site, www

.irs.gov.

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Department of Housing and Urban Development (HUD) depletion

128

deposit depreciation

129

deposit Money paid to ensure performance under a written or oral contract. Many states require

that lease and other such deposits be maintained in escrow accounts and earn interest which must

be paid to the party when the deposit is refunded. All real estate brokers must place earnest money

deposits in escrow accounts. One must carefully examine the particular contract language relative

to deposits in order to determine the circumstances under which they may be withheld from the

depositor.

Deposit Insurance Fund An entity under the control of the Federal Deposit Insurance Corporation,

with two subfunds called the Bank Insurance Fund and the Savings Association Insurance Fund.

Depositors are insured to the extent of $100,000 of deposits per depositor per insured institution.

Bank customers who buy securities offered by the financial institution do not receive insurance for

those securities. By law, one should see prominently displayed on all such literature:“Not Insured by

FDIC.”

deposition Out-of-court testimony under oath by a witness or other party either during the

pendency of a lawsuit or in order to preserve evidence in the event of a lawsuit. The testimony is

recorded and transcribed by a court reporter, and the deponent (the person giving the deposition

testimony) then signs the transcript to confirm that it is a true and accurate record of the questions

asked and the answers given.Deposition testimony is admissible in court under some circumstances

if the deponent is unavailable to testify.Especially when dealing with elderly persons,if there is some

dispute over title to real property or the effects of adverse possession, it is good practice to obtain

deposition testimony.

Depository Institutions Deregulation and Monetary Control Act of 1980 Federal legislation

that accomplished phenomenal deregulation of federally chartered financial institutions, leading to

state deregulation so that state-chartered financial institutions could compete with their federal

cousins. Regulation Q phased out the former limits on interest that could be paid on deposits. Many

analysts say that the resulting unbridled competition for depositors’money, leading to a bidding war

to gain depositors, drove financial institutions to make ever riskier loans in order to obtain the high

interest rates necessary to service the deposits. According to such analysts, this legislation was one

of the primary factors in the savings and loan crash, the banking crisis, and the FDIC bailout of the

mid to late 1980s.

depreciable basis See basis.

depreciable life See accelerated cost recovery system.

depreciable real estate Property capable of supporting depreciation deductions. As a general

rule of thumb, improvements may be depreciated but land may not. Land may be depleted, how-

ever, if minerals are extracted.

depreciated cost See book value.

depreciation (1) In accounting, the process of deducting some portion of the acquisition cost of

property over time, as an expense against income, to reflect the fact that the property is becoming

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less valuable and will eventually require replacement. One cannot allow a $3,000,000 building to

remain on the books for 35 years as an asset at the same value and then, suddenly one year, demol-

ish the building, write off $3,000,000 against income for that particular year, and then construct

another building or move. (2) In appraisal, a reduction in the calculations for the reproduction cost

of an improvement, in order to arrive at a value of the improvement in its current state, not as it

would be if it were reproduced and brand new.

depreciation methods Various accounting tools for calculating depreciation.The most common

is the straight-line method, in which equal pro rata shares are deducted each year until one reaches

$0 or a salvage value, as the circumstances may warrant. The second most common is the double-

declining balance method.Some accountants still use the sum-of-the-years-digits method,although

this is no longer allowed for tax purposes.

Example:

Following are three graphs representing the depreciating value of a $10,000 asset

with a useful life of 5 years and a salvage value of $0, using the three different methods.

depreciation recapture A tax law provision that some depreciation expenses taken on real prop-

erty must be “recaptured” upon a sale of the asset and taxes paid at ordinary income rates rather

than capital gains rates. Ordinarily, property held for more than one year and then sold will qualify

for capital gains tax rates, which are lower than ordinary income tax rates.

There are two exceptions in which some or all of the gain must be taxed at ordinary income rates:

1. If depreciation was taken on personal property, that portion of the gain that is equal to

total depreciation taken over the years will be taxed at ordinary income rates.

2. If accelerated depreciation was taken on real property (see depreciation methods for an

explanation), then that portion of the gain represented by the difference between straight-

line depreciation and the accelerated depreciation will be taxed at ordinary income rates.

depth The distance between the front and the rear property line of a lot. Because local govern-

ment rights-of-way for streets and sidewalks may exceed the actual width of the pavement, the

lot depth may be less than the visible yard.

depth tables In a tax assessment appraisal, a set of tables that evaluate the relative value of artifi-

cially defined slices of property as one proceeds at greater depths from the street frontage.The first,

and most simple, table is the 4–3–2–1 table. It describes the front quarter of a parcel as represent-

ing 40 percent of the total value, the next quarter as representing 30 percent of the value, the next

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depreciation depth tables

130

Straight Line Dbl Declining Balance Sum of Digits

12,000

10,000

8,000

6,000

4,000

2,000

12,000

10,000

8,000

6,000

4,000

2,000

12,000

10,000

8,000

6,000

4,000

2,000

456 1

456

depth tables designated broker

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quarter as representing 20 percent of the value,and the rearmost quarter as representing 10 percent

of the value. Commercial appraisers consider the use of depth tables unreliable.

Example:

Here is an example of a depth table.

deraign To prove ownership of land; to trace the chain of title.

dereliction The gradual receding of water to leave dry land.

derivative acquisition See acquisition.

derivative investments Investments that rely on the performance of underlying assets in order to

establish value and return profits.

descent A method of acquiring real property, when the prior owner dies without a will and the

laws of intestate succession determine the person or persons who will acquire title by descent.

description The information in a deed that will precisely identify the land being conveyed, in

such a manner that it cannot be confused with any other land. It is not appropriate to use a street

address or a tax parcel identification number in a deed, except as additional information to aid in

the description.There are three predominant types of description:

• Metes and bounds. Includes an independently verifiable starting point, distances of lines

and directions, and angles between lines.

• Aliquot parts. Uses portions of one or more sections (640 acres), half sections (320 acres),

quarter sections (160 acres), or quarter-quarter sections (40 acres).

• Subdivision plat. Makes reference to subdivision plats, such as “Lot 9, Block 3 according

to the plat or map of Sunny Acres as recorded in the County records at Plat Book 182,

Page 79.”

designated broker See principal broker.

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$10,000

$20,000

Total value

of parcel:

$100,000

Skyland Blvd

$30,000

$40,000

detached housing Homes with freestanding walls not shared with any other house. Contrast

with row house, duplex, or townhome.

determinable fee See future interest and fee simple determinable.

detrimental reliance Taking an action or failing to take an action because of a representation

made by another person that turned out to be untrue.

Example:

Jake called his mortgage company to find out the remaining balance due on his

home loan. The lender sent Jake a letter advising him the payoff was $28,312. The sum was small

enough that Jake decided to sell his car to pay off the home loan, quit his job, and take a year off

to write a novel. After he sent the money in, the mortgage company advised him that it had made

a mistake and the payoff was really $48,312, so he needed to pay an additional $20,000 to satis-

fy the mortgage. A court may apply the theory of estoppel against the mortgage company and

force it to satisfy the loan without any additional money, because Jake had detrimental reliance

on the mortgage company’s representations.

developer One who transforms raw land into improved real estate.

developer profit The increase in value caused by the efforts of a developer.

development The process of improving raw land.

development impact fee See impact fees.

development loan A loan used to develop real property, which includes not just construction

of the improvements, but also excavation work, infrastructure such as storm sewers and roads,

and the holding costs of the property until such time as it can be sold or can support fully

amortizing permanent financing. Contrast with a construction loan, for building improvements

only.

devise A transfer of real property by virtue of the provisions in a will. Contrast with descent,

which is a transfer by virtue of statutory provisions controlling ownership of real estate when one

dies without a will.

devisee A person who inherits real property by virtue of provisions in a will.

diffused surface waters Water that comes from rain, melting snow, or underground springs and

that spreads over the surface of the land.The concept is important because

1. Applicable local environmental laws may require developers to provide siltation and

erosion control for diffused surface waters traveling over disturbed land.

2. In some states, called common enemy states, property owners may do what they want

with diffused surface waters—impound them and deny water to lower landowners,

or dam one’s own land to prevent a watershed and cause flooding to the upper

landowners.

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detached housing diffused surface waters

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diffused surface waters direct sales comparison approach

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3. In other states, using the civil law rule, property owners may not dam diffused surface

waters to the damage of upper owners, nor may they impound diffused surface waters

and deny water to lower property owners.

4. Still other states use the common enemy rule for urban land and the civil law rule for

rural land.

diluvion The gradual washing away of soil along a watercourse. Contrast with accretion, the

gradual adding of soil to land along a watercourse.

DINK An abbreviation for “dual income, no kids.”A slang expression for a particular income market.

dinosaur pen A traditional mainframe computer room complete with raised floor, special power,

and its own ultraheavy air conditioning.

DIP See debtor in possession.

direct capitalization Dividing the net operating income of a property by a selected capitalization

rate to arrive at a value. Contrast with yield capitalization.

direct costs Construction costs that are readily identifiable, such as labor, materials, and construc-

tion management fees. Contrast with indirect or soft costs which cover an allocation for overhead

plus all expenses spent away from the construction site, such as legal, accounting, permitting, and

construction period interest. Sometimes called hard costs.

direct endorsement A mechanism that allows HUD-approved lending institutions to approve FHA

mortgage insurance themselves,without having to submit paperwork to HUD and wait for approvals.

directional growth The direction in which a city or town seems to be growing.This is important

in appraisal and in making decisions to purchase speculative real estate to hold for later sale or

development.

direct participation program (DPP) An investment vehicle that allows parties to directly partici-

pate in the cash flows and tax benefits of the underlying property, without requiring any active man-

agement by the investor.The investment will be shares of a partnership,a subchapter S-corporation,

a limited liability company, or some other entity that files an informational return with the IRS but

does not itself have any taxable income or deductible losses.

direct reduction mortgage A mortgage loan in which at least a portion of each month’s payment

is used to reduce the principal balance of the loan—there is a direct reduction of the principal bal-

ance, resulting in next month’s interest being smaller.When a borrower makes a fixed payment each

month according to a fully amortizing loan schedule, the entire loan balance will eventually be paid

by the anticipated maturity date.That is the most common type of direct reduction mortgage, but a

wide variety of other options is possible.

direct sales comparison approach Formerly known as the market data approach, this is an

appraisal method in which the property being appraised is compared to sales of similar properties

in order to arrive at a value. The appraiser identifies the comparable properties as being similar in

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time and somewhat similar in size, quality, use, and amenities, among other considerations. The

appraiser then makes adjustments to the sales price of the comps,based on how they differ from the

specific property.

Example:

A home with a three-car garage might be reduced by $25,000 in order to make

it comparable to the subject home with a two-car garage. After making the adjustments,

the appraiser then reconciles all the comparables to arrive at an opinion of value for the

subject property.

disbursement Payment of money.

discharge in bankruptcy The release of a debtor from the payment of any and all debts except

those specifically approved by a bankruptcy court.

disclaimer (1) The refusal or rejection of a right, as a disclaimer of an inheritance of environmen-

tally contaminated property. (2) The limitation of a warranty or responsibility.

disclosure statement (1) Also called the Reg-Z box, information required by Regulation Z of the

federal Truth in Lending Act. (2) Any other federally required or state-required document designed

to inform consumers of rights, responsibilities, or property defects.

discount To sell at a reduced value, such as selling a $100,000, 30-year, 8 percent mortgage for

$90,000 in order to raise immediate cash.

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direct sales comparison approach discount

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Disclosure is required by the Truth in Lending Act.

Annual Percentage Rate Finance Charge Amount Financed Total of Payments

The cost of your credit The dollar amount the The amount of credit The amount you will

at a yearly rate credit will cost you provided to you or have paid after you

on your behalf have made all

payments as scheduled

A%$B $C $D

A: The annual cost of the loan, as a percentage. Usually higher than the quoted interest rate because of the

additional cost of prepaid interest and other finance charges.

B: If all payments are made on time, and the loan is paid in full over its expected term, “B” is the total of all

interest, prepaid interest, and mortgage insurance payments over the life of the loan.

C: The loan you applied for,less prepaid interest and other up-front finance charges such as commitment fees,

origination fees, or mortgage insurance premiums paid up front.

D: The total of all payments (principal, interest, and mortgage insurance) if the loan is paid in full over the

entire term.

discount broker disparate impact

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discount broker A real estate broker who offers limited services in return for a commission

rate lower than what is generally available in the marketplace.The most common service offered is

listing a property on a multiple listing service, but all prospective buyers are then referred directly to

the owner.

discounted cash flow Also known as a present value analysis; an approach to analysis of an

income-producing property by calculating the present value of a future income stream with the use

of a discount rate. The two most common methods are the internal rate of return method and the

present value method.

discounting The appraisal method of computing the value of an income-producing property by

calculating the present value of anticipated cash flows.

discount points Mortgage fees charged by the lender and treated as additional interest above the

face rate in the promissory note in order to obtain an effective rate higher than the stated rate. One

point is equal to 1 percent of the loan.

discount rate The rate at which the Federal Reserve loans money to lenders to cover short-term

cash needs, usually for overnight loans. Increases or decreases in the discount rate almost always

signal similar increases or decreases in bank loan rates to customers, even though the two are not

directly tied to each other.

discrimination (1) The act of making generalized distinctions among groups of people or

things without inquiry into the specific characteristics of individuals within the group. This

includes illegal discrimination such as that based on race, color, sex, age,disability, religion, or fam-

ily status (protected classifications) and legal discrimination such as a builder’s bias for or against

local subcontractors. Federal and state laws prohibit denying or discouraging housing or credit

choices for persons in protected classifications. (2) The unintentional but still illegal effect of bar-

ring certain groups of people from access to housing, credit, goods, or services because of their

race, color, sex, age, disability, religion, or family status.This is called disparate impact. An example

would be a prohibition against tenants having animals in their units,which would work a hardship

to the sight-impaired who rely on guide dogs. (3) Specific federal laws addressing discrimination

include the

• Americans with Disabilities Act

• Fair Housing Act provisions of the Civil Rights Act of 1964

• Equal Credit Opportunity Act

disintermediation The situation that exists when depositors withdraw their savings from finan-

cial institutions and invest the money directly in the marketplace, usually because they can obtain a

higher yield even though also running a higher risk of losing their money.

disparate impact A legal doctrine in discrimination cases whereby the plaintiff demonstrates

a type of discrimination that is perhaps not intentional, but which has the effect of barring certain

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citizens from full access to rights, property, or experiences. The courts may examine a policy that

appears neutral on its face but which has a different (disparate) impact on a protected class than

others. Once a plaintiff in a lawsuit proves that a disparate impact exists, the defendant must then

prove there is a valid and nondiscriminatory reason for the statistical imbalance.

disposal field The area where wastewater from a septic tank drains into specially prepared

ground for further purification.

disposition costs The seller’s expenses of sale.

dispossess proceeding One name for the legal proceeding commonly known as an eviction.

disseisin The wrongful deprivation of possession of real property; a wrongful eviction.

dissolution A termination, as of an agreement, contract, corporation, or partnership.

Distinguished Real Estate Instructor (DREI) A designation granted by the Real Estate Educators

Association (www

.reea.org).

distraint The legal right of a landlord to obtain a court order and seize tenants’possessions to pay

for back rent.

distressed property Real property that suffers a reduction in its market price because of pres-

sures operating on the owner, such as threatened foreclosure, divorce, settlement of an estate, or

fear of economic changes that might decrease the value.

distressed sale The sale of real property under circumstances creating great urgency on the part

of the seller, such as impending foreclosure, divorce, relocation to another city, or any other such

pressure.

distribution real estate The modern term for industrial real estate, because most industrial

operations today involve assembling components and/or distributing goods rather than the old

smokestack manufacturing uses.

divided interest An interest in some portion of the bundle of rights in real estate, such as a lease-

hold interest or a remainder interest. (This does not mean a particular percentage of interest or a

cotenancy.)

doc-in-a-box A popular term for a neighborhood or other retail-type medical office specializing in

walk-in patients.

dock-high building An industrial building with loading docks at the height of a delivery truck,

opening to a floor at the same height.

dockominium Condominium ownership of a boat slip or dock. The owner sometimes obtains

a deed to the small parcel of land under the water and has the right to use the common elements

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disparate impact dockominium

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dockominium double-load corridor

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consisting of the docks and perhaps some storage space, bathroom facilities,parking,and other such

things.The concept is still relatively new and is meeting legal challenges from people claiming that

it is inconsistent with doctrines of public trust and riparian rights. According to opponents, naviga-

ble waters are not subject to private ownership and, as a result, no one can sell condo-type rights in

a boat slip upon the waters. (Before investing in a dockominium, it might be wise to check out the

status of this emerging area of the law.)

documentary evidence Traditionally,evidence in the form of written papers or documents.Today,

many government agencies, such as the IRS, accept printed versions of electronic documents when

regulations require documentary evidence. See also Uniform Electronic Transactions Act.

documentary letter of credit Used somewhat like cashier’s checks,but with more safeguards.The

typical documentary letter of credit will allow payment to a vendor upon the vendor’s presentation

of the letter and certain documents, such as proof the goods were placed on board a vessel for

shipment to the United States.

Dodge, F.W. A company that provides a wide variety of reports and services relevant to the

construction industry. Its Web site is at www

.fwdodge.construction.com.

dog Slang for an undesirable property.

domicile The place of one’s principal residence.

dominant tenement (or estate) Land that benefits from an easement that burdens another

property, called the servient tenement.

donee One who receives a gift.

donor One who gives a gift.

dormitory town See bedroom community.

dotal property An archaic term meaning the property the wife brings into a marriage in order to

assist her husband in setting up the household.

double declining balance An accounting method employed to approximate the situation of an

asset losing value (depreciating) more rapidly in the early years after acquisition and then more

slowly in later years.

double escrow A process of flipping a property in a simultaneous closing. If anybody defaults,

then everybody defaults.

double-load corridor A building design in which there are apartments or other individual units

on both sides of a passage corridor. Contrast with single-load corridor.

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double taxation A situation said to exist when a corporation must pay taxes on income, make

dividend payments to shareholders on after-tax dollars, and then the shareholders must again pay

taxes on the dividends. This is the situation with normal corporations, called C-corporations, that

do not qualify for S-corporation (small corporation) status. S-corporations file reports allocating

pro rata shares of all income to the individual shareholders, who then pay taxes on that number.

The corporation itself does not pay any taxes.

dower A widow’s rights in the real property of her deceased husband. The similar right of a

widower in his deceased wife’s property is called curtesy. Many states have abolished these rights

and replaced them with a more generic homestead right or surviving spouse’s share.

down payment The balance of the purchase price for property after credits for money

contributed by lenders. See equity.

downzoning The process of changing the zoning on a parcel to a use that is less intensive than

formerly allowed. Property once zoned for multifamily residential use might be downzoned to

single-family residential use.

dragnet clause A clause in a mortgage loan that spreads a dragnet, which, in fishing, is a large

net dragged across an area in order to capture everything it encounters. Similarly, a mortgage

dragnet clause attempts to capture as much as possible for the lender.There are three types; some

or all may appear in a mortgage loan. One seeks to make all debts of the borrower includable in

the mortgage so that even a checking account overdraft may be deducted from sale proceeds

when the property is sold. Another type attempts to extend the mortgage to other properties

acquired by the borrower at a later date. In addition, a dragnet clause can provide that default in

any other loans will constitute a default in the mortgage loan, even if the mortgage payments are

current. Courts disfavor dragnet clauses and tend to scrutinize them very carefully in order to limit

their reach, or sometimes they even find them unenforceable. If opposed to a dragnet clause in a

promissory note or mortgage, one should request its deletion.

drainage rights Legal principles regarding the ability of a property owner to divert the natural

flow of water onto another property. Whether it is allowed or not depends on the state, sometimes

on whether the land is urban or rural, or on what’s reasonable under the circumstances.

draw (1) A request that a lender advance funds under a construction or other future-advances loan.

(2) A periodic request by a contractor or subcontractor for a portion of the contract price for a job,

usually according to the percentage of completion of the work and the cost of materials and labor.

DREI See distinguished real estate instructor.

dresser drawer title See trunk title.

drill track A segment of rail track that connects various individual industrial spurs to the main rail-

way. When negotiating for the purchase or lease of industrial property, one should make sure there

are provisions for a drill track,which usually requires easements over the properties of other owners.

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double taxation drill track

138

drive-by appraisal due care

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drive-by appraisal A value estimate made without examining the interior of a property. There is

nothing inherently wrong with such an appraisal, as long as it is disclosed.

Drug Enforcement Act Relevant to real estate as it allows seizure of real property if illegal drug

activities take place on it. Innocent owners may successfully contest the seizure after expending

large sums of money to lawyers to prove that the owner had no involvement and no knowledge

of the drug activity or took steps to stop the illegal activity but was unsuccessful. (The lesson for

property owners is that if you are suspicious about drug-related activity in your apartments or other

properties, you cannot take a “live and let live”approach to the problem.)

dry closing A closing that is completed except for the disbursement of money and delivery of

documents. Often used when a buyer delivers a personal check at the closing and the closing

company must wait until the funds are collected in order to complete closing.

dry hole clause A provision in an oil and gas lease that specifies rent payments in the event of a

dry well.

dry in To install black roofing felt (tar paper) on a roof. When completed, one says the building is

“in the dry” or “in the black.”

dry mortgage A nonrecourse mortgage,in which the lender looks solely to the property for recov-

ery in the event of default and has no rights to sue the borrower for a deficiency judgment if the

property is worth less than the loan balance at the time of foreclosure.

Dryvit A brand name for a particular exterior insulation and finish system (EIFS) that resembles

stucco.There has been extensive class-action litigation as a result of claimed deficiencies in the sys-

tem as a whole, not just the Dryvit brand.Unfortunately, Dryvit has come to be synonymous with the

entire industry, much the same as Xerox for copiers and Kleenex for facial tissues.

drywall Also called wallboard or gypsum board,it is a panel of gypsum covered on both sides with

paper and used as the primary wall material in home construction. Commonly also called by a par-

ticular brand name, Sheetrock.

dual agency A relationship in which an agent represents two principals—clients—who may have

competing interests. Most often encountered when one agent in a real estate company has a listing

on a property and represents the seller, and another agent has a buyer-agency relationship with a

buyer interested in the same property. Technically speaking, the managing broker is the agent of

both parties and acts as a dual agent.

dual contract The illegal and unethical practice of providing two different sets of contracts for

the same transaction—usually one at an inflated price so that 80 or 90 percent financing will, in

actuality, pay 100 percent of the true purchase price.This practice constitutes fraud.

due care A legal concept meaning just, proper, and sufficient care under the circumstances. It is

the care that would be taken by a reasonable person. For example, tenants are required to take due

care of leased property and not use a barbecue grill in the living room.

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due diligence The process of investigating all facts, conditions, rules, laws, regulations, financial

considerations, or any other such matters as would affect one’s decision to purchase property.

The various types of investigations as would comprise due diligence will vary from property to

property. With the purchase of a home, it might include nothing more than a home inspection,

termite report, and a review of any restrictive covenants. When purchasing raw land for develop-

ment, it could include zoning issues, possible environmental contamination, surveys, soil com-

paction studies, analysis of cost to develop versus value when completed, and so on as far as the

imagination can go.

due-on-sale clause A clause in almost all mortgage loans providing that the entire balance of the

loan will be due and payable if the property is sold, even if all payments are current and there has

never been a default; effectively destroyed former widespread ability to assume mortgages. The

clause allows lenders to control their interest rate exposure in a rising market, so they are not left

with a portfolio full of low-interest-rate loans in an era of high interest rates. It also allows lenders to

fully investigate any purchaser and make independent underwriting decisions about that purchas-

er and whether to extend a loan or not. A due-on-sale clause is not enforceable against someone

who inherits property from a relative and intends to live in that property as a principal residence.See

also assumable loan.

dummy A straw man, as when a developer desires to purchase a number of properties in order

to assemble them and build a shopping center but is afraid that owners will increase their asking

prices if they know the true name of the buyer. Owners sell to the dummy, who then transfers to

the developer.

duplex A building separated into two homes.

durable lease A lease with an annual rent and a term “for as long as the grass grows or the water

runs.” In most states, leases over 20 years in length must be recorded or they are void for their

period beyond 20 years, and leases longer than 99 years are void for any longer periods, even if

properly recorded.

durable power of attorney A power of attorney instrument gives one person—the attorney in

fact—the power to act for another in a general manner for all things, or for specifically listed things

or areas described in the power.The power ceases as soon as the person granting it—the principal—

dies or becomes legally incompetent. A durable power of attorney is different, in that it continues

even though the principal becomes incompetent, but still terminates upon death. Used by many

elderly people to allow children to manage their affairs in the event of mental disability, but without

the stigma, expense, and court oversight of a formal declaration of incompetence and appointment

of a guardian.

duress Unlawful pressure, force, or threats by one person against another. If one is the victim of

duress, then any contract or agreement entered into as a result of the duress is void. The operative

word in the definition is “unlawful.”Many people claim economic duress when a lender, for example,

threatens foreclosure unless a borrower signs a new loan agreement with onerous terms, a high

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due diligence duress

140

duress DWV (drain-waste-vent)

141

interest rate, and large fees for attorneys and other expenses. Usually, if the lender had the right to

foreclose, then the threats cannot be unlawful and duress does not exist.

Dutch auction An auction in which the asking price is lowered gradually until someone is willing

to pay at that level, and the property is then sold to that person. Contrast with the typical auction

practice in which the auctioneer asks a high price, lowers it until someone places a bid, and then the

auctioneer attempts to obtain higher bids to increase the price from there.

duty to disclose The legal responsibility of a seller, broker, or agent to tell a potential buyer about

a defect in the premises.Some states have laws requiring disclosure of certain named and described

conditions in addition to anything else that might constitute a defect.

dwelling A place of habitation.

dwelling defense In most states, people are allowed to use some degree of force to protect their

dwelling and the inhabitants. They may not set traps for intruders, and they are usually entitled to

use only the force reasonably necessary under the circumstances to deter the intruder. Some states

allow deadly force, however, without any requirement that the home occupant first attempt to

escape, or “otherwise avoid using force with complete safety.”The defense is based on 500-year-old

English court decisions that one’s home is one’s castle and entitled to defense. See castle—man’s

home as.

DWV (drain-waste-vent) The section of a plumbing system that carries water and sewer gases

out of a home.

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142

early occupancy If agreed among the parties, the ability of a purchaser to take possession of

property before closing. Under some circumstances, a buyer who takes early occupancy may be

considered as assuming the risk of loss if there is a fire or other destruction of the property. In

other words, the buyer may be obligated to proceed to closing at the full purchase price, even if

the seller has no insurance coverage.

earnest money A deposit of money made by the purchaser of real estate. It can serve the

following purposes:

• It shows evidence of economic resources and the probable ability to proceed to closing.

• It provides hostage value because of the usual contract provision that seller may retain the

earnest money in the event of default.

• It may allow enforcement of a contract that might be defective on purely technical grounds.

For example, some states allow enforcement of an oral real estate contract when there has

been partial performance by the payment of earnest money. This occurs often, as when a

buyer submits a written offer for property and an earnest money check. The seller makes a

verbal counteroffer, and the buyer verbally accepts. The seller deposits the check. No one

ever thinks to prepare a new written contract for signatures. Standing alone, this is an oral

contract that is unenforceable under the Statute of Frauds.

earnest money contract A real estate purchase contract with a provision for earnest money.

earnings before interest, taxes, depreciation, and amortization (EBITDA) (pronounced “ee-

bit-dah”) Net earnings of a business before deductions for interest, taxes, or depreciation. It often

provides the standard for purchase of income-producing properties or going-concern businesses,

with buyers and sellers conducting negotiations in terms of multiples of EBITDA, such as an offer

to buy at “seven times EBITDA.”

earthquake strap A metal strap used to secure gas water heaters to the framing or foundation of

a house; intended to reduce the chances of having the water heater fall over in an earthquake and

cause a gas leak.

easement A nonpossessory right to use another’s property. Easements may be created by express

words of grant in a written document, by prescription (unrestricted usage over time resulting in

property rights), or by necessity, as when the law will force the grant of ingress and egress rights for

landlocked property.

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143

• Easements are said to be appurtenant or in gross. If appurtenant, then the easement bene-

fits one property and burdens another one. The property being benefited is called the dom-

inant estate, dominant tenement, or dominant hereditament—they all mean much the same

thing. The one with the burden is called the servient estate, tenement, or hereditament.

• Easements appurtenant stay with the land, no matter who owns it or how many times the

land changes hands. An example is a right-of-way easement.

• If the easement is in gross, then it is personal to someone and does not benefit a particular

property. A common example is a power line easement. The easement stays in effect no

matter who owns the land burdened by the easement, but typically expires with the death

of the owner of the easement.

• An easement may not unduly burden the property.

Example: A right-of-way easement may have been originally granted so one farmer could

cross the property of another to reach another field. Later, one farm is sold to someone who plans

to build a 250-home subdivision and use the right-of-way as the construction entrance. Courts

will not allow this.

easement by necessity The legal ability of a property owner to use a right-of-way over the lands

of another because the owner’s property is landlocked and has no direct access to any public roads.

Generally, the right-of-way must be a route that places the least burden on the other property, even

if it is inconvenient for the landlocked property owner. See easement.

EBITDA (pronounced ee-bit-dah) See earnings before interest,taxes,depreciation, and amortization.

echo boomers Children of baby boomers; a distinct demographic with identifiable buying habits.

easement echo boomers

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Servient

tenement

Right of way

easement

Country Road 1289

Dominant

tenement

economic feasibility See feasibility study.

economic life The period of time during which an improvement has value in excess of its salvage

value; the useful life span of an improvement.

economic obsolescence A factor that reduces the value of an improvement because of some-

thing external to the property itself. A well-built and well-maintained house may suffer economic

obsolescence because it is located on one acre of land in the middle of a fast-food area on a major

suburban road. The improvement—the house—no longer has any value at all. In this example,

though, that hardly matters because the land is worth vastly more than the original homeowners

ever dreamed.

economic rent The rent reasonably to be anticipated in the marketplace as opposed to the actu-

al rent. For an investor familiar with economic rents in an area, there are usually many opportunities

to buy properties at values based on contract rents, and then raise the rents and realize immediate

growth in equity and the ability to refinance for amounts in excess of the original purchase price.

Also called market rent.

effective age The apparent age of an improvement rather than its actual age.

effective gross income The anticipated gross income from a rental property after deducting an

estimated amount for vacancies and bad debt.

effective interest rate The actual interest rate of a loan, regardless of the face interest rate or the

rate quoted. See annual percentage rate.

effective procuring cause The broker who first obtains the serious attention of a buyer and

brings the parties together.

effective rental rate True rent, after taking into account rent concessions; usually expressed as a

dollar amount per square foot. Some parts of the country quote rents as dollars per foot per month;

others use dollars per foot per year.

Example:

If 5,000 square feet of office space normally rents for $20 per foot per year, but the

landlord gives 6 months’ free rent on a 5-year lease, then the effective rental rate is calculated as

follows:

5,000 feet  $20 per foot  $100,000 per year

6 months free rent  $0

4.5 years paid rent @ $100,000 per year  $450,000

$450,000 paid rent spread over a 5-year term  $90,000 per year effective rent

$90,000 effective rent  5,000 feet  $18 per foot effective rental rate

effective yield A calculation of the return on an investment that considers the price paid, the time

held, and the interest received.

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economic feasibility effective yield

144

efficiency apartment electric lateral

145

efficiency apartment A small apartment with living, sleeping, and cooking areas all contained in

one room.

efficiency ratio The ratio of leasable space to gross space in a building.When planning a building,

it is important to balance the need to maximize the efficiency ratio in order to lease the maximum

amount of space possible, against the aesthetic need to have wide corridors and open spaces.

efflux The expiration of a prescribed period of time, such as the end of a lease.

egress An exit.

EIFS See exterior insulation and finish system.

ejectment A legal action to restore possession of property to the party entitled to it.

ekistics The science of how people settle land areas, including urban development.

elasticity The ability of the real estate market to respond to price increases over a fairly short

period of time.

elderly housing Housing occupied by persons 62 or older, or housing designed and marketed

for persons 55 and older. Under the Fair Housing Act, elderly housing does not have to be made

available to families.

election of remedies The necessity that injured parties make a selection of only one method of

being compensated for their loss, rather than collecting multiple times in different ways. For exam-

ple, if a certain lender behavior is a violation of the Equal Credit Opportunity Act and of local laws,

the borrower may recover damages under one law,but not under both.In addition,some courts hold

that when a seller breaches a contact to sell real estate, the buyer must choose between suing for

damages or suing to force the seller to proceed with the sale. This does not prevent parties from

suing for as many different theories as their lawyer can imagine, but they can have only one remedy

at the end of the trial. (The concept of election of remedies is similar to the concept of double

jeopardy—one can’t be punished twice for the same wrong.)

elective share The ability of a surviving spouse to elect to take a specified percentage of the dece-

dent’s estate rather than the amount left by the will. Most states make some sort of provision so that

a surviving spouse cannot be completely disinherited.The vehicle may be the common law rights of

curtesy (the widower’s share) or dower (the widow’s share). Because of archaic concepts about the

relative needs of surviving spouses, dower and curtesy did not provide the same benefits to hus-

bands as to wives. As a result, many states passed statutes modifying the rules or even completely

abolishing them in favor of a statutory scheme. The statutory system usually allows a surviving

spouse to elect between taking what was provided in the will or taking a certain preset percentage

of the decedent’s estate.

electric lateral The trench or area in the yard where the electric service line (from a transformer or

pedestal) is located, or the work of installing the electric service to a home.

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electrical rough Work performed by the electrical contractor after the plumber and heating con-

tractor are finished; normally the installation of all electric wires. The electrical contractor usually

receives a substantial payment on its contract price at the completion of the electrical rough.

Contrast with electrical trim.

electrical trim Work performed by the electrical contractor when the house is nearing comple-

tion. The electrician installs all plugs, switches, light fixtures, smoke detectors, appliance “pig tails,”

and bath ventilation fans and wires the furnace and “makes up”the electric house panel.The electri-

cian does all work necessary to get the home ready to pass the municipal electrical final inspection.

electronic signature A method of sending identity verification over the Internet, usually through

the use of a personal identification number (PIN).

eleemosynary corporation A nonprofit corporation. Also called a 501(c)(3) corporation.

elevation An orthographic (flattened;nonperspective) drawing of the various faces of a building,

component, or improvement, showing examples of relevant details and something to indicate

scale. One may have elevations of each side of a building, usually with a person standing nearby to

illustrate scale; elevations of cabinets in kitchens or offices; or elevations of a storm sewer system

showing a representation of the incline.

eluviation The movement of soil caused by excessive water within the soil.

emancipated minor (1) A child who is under the age of majority—18 or 21, depending on the

jurisdiction—but who has taken advantage of state laws and obtained a court order to remove the

disabilities of nonage and be declared a legal adult. As a result, such a child may enter into enforce-

able contracts and may, if not disallowed in the emancipation order, be allowed to sell real property.

There is a difference of opinion among states about whether an emancipation order in one state will

be given effect in another state. In other words,a child who has been emancipated in New York may

or may not be allowed to enter into contracts or sell real property in another state. (2) A minor child

may become emancipated from his or her parents when the child marries or enters the military serv-

ice.The parents no longer have any rights or responsibilities concerning the child, but the child still

may not enter enforceable contracts or sell real property until he or she has reached the legal age of

majority or has obtained a court order removing the disabilities of nonage, as described earlier.

emblement A growing crop. Emblements are personal property and do not automatically pass

with the land when a deed is executed. See also fructus industriales.

emerging markets A loosely defined term generally referring to countries with relatively stable

governments,developing economies,and an increasing ability to spend money on consumer goods.

eminent domain The power of government to take land for the public good with the payment of

just compensation. See condemnation.

empty nesters People whose children have matured, left the home, and established homes of

their own.This demographic segment generally has disposable income, homes with large amounts

146

electrical rough empty nesters

146

empty nesters energy efficient home tax credit

147

of equity, and a desire to change living arrangements either by going smaller, by moving to a

completely different locale, or by the addition of a second home.

encapsulate To remediate hazardous waste by surrounding it, such as spraying a special coating

on asbestos.

encroachment The trespass of an improvement upon the land of another.

encumber To place a burden or a charge upon property. Commonly used to mean placing a mort-

gage, but may include other liens, easements, covenants, and restrictions. The burden is called an

encumbrance.

Endangered Species Act A federal law originally intended to protect endangered species on

federal land, but expanded to include protections wherever found, including private property. The

existence of a protected species on one’s land may prevent development or dramatically increase

the expenses.This is not considered a condemnation, so there is no government compensation.

end cap In a strip shopping center (long and rectangular with large amounts of road frontage),the

retail space at either end is called the end cap. Chain restaurants usually desire freestanding space,

but will accept end cap. Any establishment requiring a drive-through window, such as a fast-food

restaurant, dry cleaning store, or bank, will need end-cap space.

end loan (1) A permanent mortgage financing placed after construction financing. (2) A loan to

buy stock in a cooperative apartment so one may rent a particular unit under a proprietary lease.

end money An amount of money held in reserve in case project costs exceed estimates in a

development. Called over-and-above money in FHA rental housing projects.

endorsement (also spelled indorsement) Placing one’s signature on the back of a check or other

negotiable instrument in order to transfer ownership to another. Endorsers warrant payment of the

instrument unless they sign with the additional words “without recourse.”

energy efficient home tax credit IRS income tax credits granted when a taxpayer installs ener-

gy-saving components in a residence. The amount of credit varies with the type and cost of the

particular equipment or features. Contractors who build new homes are eligible for some of the

credits. For more information, see IRS Publication 553, “Highlights of 2005 Tax Changes,” at

www

.irs.gov.

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Laundry

end cap

Gifts Videos Nails Bank

end cap

Grocery

store

enhancement An increase; a betterment.

enjoin To issue an order from a court commanding one to take some action or cease some action.

See injunction.

enterprise zone An area with the availability of tax incentives, grant money, or low-cost loans

offered by local government in order to assist in revitalization.

entertainment complex A shopping center that features theaters, restaurants, amusements, and

related retail stores.

entire tenancy A sole possession by one person. See tenancy in severalty.

entitlement (1) To be owed something under the law, such as federal entitlement programs.

(2) That portion of a VA-guaranteed loan that protects the lender in case the veteran defaults.

entity A legally created person as opposed to a natural person.May include corporations,partner-

ships, limited liability companies, associations, joint ventures, real estate investment trusts (REITs),

and traditional trusts.

entrants Newcomers; people who enter a market.

entrepreneur One who assumes risk in order to combine knowledge, capital, and resources to

create a venture that will hopefully return a profit.

entry for marriage in speech An ancient court order (writ) to recover land given to a man in con-

sideration of his promise to marry a woman, but if he did not marry the woman within a reasonable

time, married another woman, or entered the priesthood, he was obligated to return the land.

environmental assessment A study of land to determine if there are any factors such as would

possibly give rise to concerns about hazardous materials,protected species,historic remains,or other

such factors.

environmental impact statement A written report containing an analysis of the ecology and

general environment of an area, together with projections regarding how that will change during

construction of the project and after completion and public usage.These statements were original-

ly required by the National Environmental Policy Act of 1969, but only for federal projects. Today,

most state and local governments require these statements for all large projects and selected small-

er ones. The vast collection of federal environmental impact statements, for projects ranging from

Alaska to Antarctica, may be accessed online at the Web site for the Transportation Library of

Northwestern University, nuc

at.library.northwestern.edu.

environmental obsolescence Same as economic obsolescence.

Environmental Protection Agency (EPA) A U.S. government agency established in 1970 to coor-

dinate all federal activities relative to safeguarding the nation’s air, water, and land from dangerous

substances. Its oversight includes research, monitoring, standard setting, and enforcement matters.

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enhancement Environmental Protection Agency (EPA)

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Environmental Protection Agency (EPA) Equal Credit Opportunity Act

149

The EPA Web site at www.epa.gov offers information regarding all programs, educational tools,

enforcement actions, and current and pending legislation.

The most significant programs from a real estate perspective are the

• Clean Water Act

• Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)

• Resource Conservation and Recovery Act

environmental site assessment (ESA) A report by an environmental engineer or other qualified

professional regarding the existence of any environmental hazards or concerns.

EOY Abbreviation for “end of year.”

EPA See Environmental Protection Agency.

epitome An abstract of title in book form.

Equal Credit Opportunity Act A federal law that ensures all consumers and businesses are

given an equal chance to obtain credit, assuming they meet legitimate and legal underwriting

guidelines. Enforcement is by a number of different agencies depending on the identity of the

credit grantor. The FTC may bring an enforcement action against retail stores, utilities, and small

loan companies, to name a few.The Office of the Comptroller of the Currency would be responsi-

ble for bank violations. No agency will intervene in private disputes, but it will monitor the pat-

terns of violation and could make a decision to take action. Private individuals who believe they

have been victims of a violation may bring private or class-action lawsuits against offenders.

Among other things, it is illegal to

• Discourage an applicant because of sex, marital status, age, race, or national origin, or

because they receive public assistance

• Ask an applicant to reveal his or her sex, race, national origin, or religion, except that it

may ask that this information be voluntarily revealed in connection with a mortgage loan

in order to compile statistics to assist the government in making sure discrimination does

not take place

• Inquire about an applicant’s plans to have or raise children

• Ask if an applicant receives alimony or child support, unless the applicant intends to rely

on that income in order to qualify for the extension of credit

• Consider sex, marital status, race, national origin, or religion in making a decision to grant

credit

• Consider whether you have a phone listing in your own name, although a creditor may

consider whether you have a phone or not

• Consider the race of people in the neighborhood where the applicant wants to buy,

refinance, or improve a house with borrowed funds

• Refuse to consider public assistance income the same as any other income

• Refuse to consider alimony or child support the same as any other income

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It is not illegal to consider military status, citizenship, or sexual orientation, although specific state

laws may extend protections to such groups. For more information, visit the FTC Web site at

www

.ftc.gov.

equal dignities rule A rule of law that if a contract must be in writing in order to satisfy the Statute

of Frauds, then the authority of an agent to enter into such a contract must also be in writing.

equalization board A state or county agency responsible for ensuring consistency and fairness in

real property tax assessments.

Equifax One of the three major credit reporting bureaus. It maintains a Web site at

www

.equifax.com. The other two bureaus are Experian and TransUnion. See also Fair Credit

Reporting Act.

equitable conversion A doctrine commonly applied when death intervenes between the signing

of a contract regarding real property and the actual closing.The purchase money and the real prop-

erty are converted, or changed, into each other for purposes of determining the rights of heirs

and surviving spouses. If a will left all personal property to one child and all real property to anoth-

er, and the seller of real estate died before closing, then that particular parcel of property would be

treated as if closing had taken place before death and the cash received, so that the child inheriting

personal property would take the sale proceeds.

equitable lien A lien or charge on property arising because of some technical defect in a legal

instrument such as a mortgage or because a court determines that the lien is only fair and just under

the circumstances after considering all the facts.

equitable mortgage The declaration by a court that an instrument by which one is to pay money

to another and, as a result, receive title to real property when all payments have been completed is

in reality a mortgage, and the parties will be treated as if they had all the rights and responsibilities

of a mortgage relationship. The exception is if an innocent third party buys the property; then the

equitable mortgagor—the person making the payments—cannot recover the property but may

only sue the seller for damages. See also equitable lien.

equitable ownership Describes the rights of a trust beneficiary in property, as opposed to the

legal ownership resting in the name of the trustee.

equitable servitude A restriction on the use of land that runs with the land. It is often asserted

when there is no writing and no legal document imposing any restrictions. Proponents will argue

that the restriction is fair and just under the circumstances.If a court agrees with them,then an order

will be issued describing the servitude and binding the land to it.

equitable theory of mortgages An operative theory in states that treat mortgages as instru-

ments granting security rights to a lender,but legal title remains with the borrower at all times.These

are called lien theory states. In lien theory states, lenders must usually resort to judicial foreclosure

and obtain a court order authorizing sale of the property to satisfy a debt. The alternative is the

title theory of mortgages and title theory states, in which the borrowers transfer legal title to the

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Equal Credit Opportunity Act equitable theory of mortgages

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equitable theory of mortgages equity stripping

151

lender, who holds it in trust for the borrower under a deed of trust.Foreclosure in such states is non-

judicial because the lender already has the legal title.Some states are called hybrid theory states and

transfer title to the lender in an instrument called a mortgage rather than a deed of trust but allow

nonjudicial foreclosures.

equitable title (1) The interest held by one who has agreed to purchase property but has not

yet closed. (2) The title held by a trust beneficiary, because the trustee has legal title but the law

recognizes the beneficiary as having rights. See also equitable conversion.

equity (1) The difference between the value of a property and the mortgage debt on it is said to be

the equity. Under federal law, when one’s equity in property reaches 22 percent of the value of the

property—when the mortgage has been reduced to 78 percent of the value of the property—then

private mortgage insurance is supposed to be automatically cancelled if it is in place.(2) The ability of

a court to do what’s fair under the circumstances, without regard to many of the technical require-

ments of the law. Because real estate has always enjoyed a protected status in the courts, it is usually

easier to obtain equitable relief when real property is involved.As an example, in a boundary line dis-

pute there might be no legal theory to find in favor of a property owner who accidentally builds part

of his house on his neighbor’s land. Nevertheless, almost no court will require the property owner to

tear down the encroaching part of the house.Instead,the court will usually “do equity”and require the

landowner to sell,and the house owner to buy, the small amount of land necessary to fix the problem.

equity buildup The gradual increase in a person’s equity in property because of the monthly

payments of principal that reduce a loan amount.

equity dividend The annual cash flow that an equity investor receives.

equity loan A line of credit secured by the equity in the borrower’s home.It is open ended,mean-

ing the borrower may take advances, pay down the line to reestablish it, and then take advances

against it as needed; usually renewed on an annual basis, with adjustable interest rates tied to the

lender’s prime rate. (Often called a HELOC—home equity line of credit.)

equity of redemption The rights a mortgage borrower has to reclaim property after default and

before foreclosure. It is a right in real estate and may be transferred by deed, but a bill of sale of the

right to another will be unenforceable. Contrast with right of redemption.

equity REIT A real estate investment trust (REIT) with underlying investments in income-

producing properties. Contrast with a mortgage REIT that invests in mortgages, but not physical

properties.

equity participation See participating mortgage.

equity sharing loan See participating mortgage.

equity stripping A term applied to a variety of sleight-of-hand practices, most often:

• Offering to assist homeowners facing foreclosure through buying their home and then

selling it back to them, usually at rates and on terms guaranteed to result in default and

loss of all equity

151

• Protecting assets from creditors by encumbering the equity with loans from friendly

creditors, such as relatives, who won’t foreclose if you miss a few payments

equity yield rate The rate of return on the equity portion of an investment, taking into account

the periodic cash flow after debt service and before taxes, plus proceeds from a sale.

erosion The slow wearing away by natural forces such as water and wind.

errors and omissions (E&O) insurance Insurance that protects against malpractice. Especially

when working with a buyer’s broker, who has a high degree of responsibility to anticipate prob-

lems and warn the client, one should ask for proof of E&O insurance before hiring a real estate

professional.

escalation clause A clause in any of a wide variety of contractual or real property arrangements

that allows one party to increase the price upon the happening of certain specified events. Long-

term leases often have rent increases at 3- to 5-year intervals, with the adjustment being a certain

stated amount, a percentage of then-current market rents, or an increase based on some index with

the first year of the lease representing the benchmark and against which the index is measured.

Example:

The parties agree that rent will increase in 5 years in the same proportion as the

consumer price index (CPI) in 5 years bears to the current consumer price index. If the rent

today is $4,000 per month and the CPI is 179, and in 5 years the CPI is 192, then the new rent

is calculated at follows:

192  179  1.0726%

$4,000  1.0726%  $4,290.40 per month

Other escalation clauses are used to increase the interest rate in a loan when there has been a default

and to increase rent when a tenant remains in possession after expiration of its term.

escalator clause See escalation clause.

escalator mortgage See adjustable-rate mortgage.

escape clause A clause that allows one party or the other to cancel a contract without penalty

upon the happening of certain described events or conditions.The most common ones in real estate

are the ability to cancel a purchase contract if the buyer cannot secure acceptable financing or if the

buyer cannot sell his or her own home.

escarpment A long, steep face of rock or dirt.

escheat The reversion of property to the state because of the lack of anyone to inherit it.

escrow The process in which money and/or documents are held in trust by a disinterested third

party who will consummate the instructions of the parties as expressed in their contracts.The third

party is called the escrow agent. The escrow agreement usually contains a clause providing that if

the parties disagree about something and are unable to resolve their differences, the escrow

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equity stripping escrow

152

escrow estate

153

company will pay all money on hand into court in an action called an interpleader, name the disput-

ing parties as defendants, disclaim any interest of its own in the property except for reimbursement

for costs and expenses of bringing the interpleader action, and then let the parties battle it out in

court.This effectively takes the escrow company out of the middle of any disputes and avoids liabil-

ity on its part.

escrow account (1) A separate bank account for keeping money that is the property of others.

Attorneys and real estate agents are required to keep escrow accounts for client money and not

commingle client money with their own funds.(2) An accounting entry by a mortgage lender show-

ing the amount on hand from the borrower’s monthly budget loan payments to pay real estate taxes

and insurance when those bills become due.

escrow agent A person or firm who agrees to hold funds for others and disburse them according

to lawful instructions.

escrow analysis With a budget loan, the mortgage lender’s annual analysis of funds collected

each month from the borrower for insurance and real estate taxes, the amount actually expended

for those bills at year end, and the amount the monthly payments must increase or possibly decrease

in the next year to provide the appropriate level of funds to pay the next year’s bills.

escrow closing See closing.

escrow payment That portion of the monthly payments in a budget loan that will be accumulated

by the lender and then used to pay insurance and real estate taxes.

estate (1) All the property of a person who has died. (2) The degree, quantity, nature,and extent of

legal interest that a person has in real and personal property.The most common estates are

1. In fee simple absolute. This is the greatest degree of ownership possible, in which a per-

son owns all rights to a property and may freely dispose of them to purchasers or heirs.

2. At sufferance. In this type of estate a tenant continues to retain possession past the expi-

ration of the lease.

3. At will. A tenant is put into possession by the owner of land, but the possession may be

terminated at the will of the owner.

4. By the entirety. This is a joint estate held by two persons who are married to each other at

the time of creation and which cannot be destroyed by either one of them or by the credi-

tors of the other. In some states, a divorce court may not even divide the property, but the

parties must agree on its disposition.

5. For life. In this estate, someone has an interest in property that lasts only as long as some

life named or described in the granting instrument.

6. For years. This is typically a lease.

7. In remainder. In this type of estate a person takes property after the death of a person

with a defining life in a life estate.

8. In reversion. That portion of an estate that remains in a grantor who transfers less than

full ownership of a property. For example, if the owner of property transfers a life estate

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to another, the owner retains an estate in reversion and will regain full ownership when

the life tenancy ends. If that future interest were also transferred to another, it would be

called a remainder, but since it is retained by the grantor it is called a reversion.

9. In severalty. This term can be confusing, because it means the opposite of our common

understanding of the word “several.” An estate in severalty is an estate owned by one

person, alone.

estate tax A tax imposed on the value of the estate of a decedent. The conceptual justification is

premised on a peculiarly American notion that it is undesirable for generations to accumulate

wealth by passing it to each other in a manner similar to that of English aristocracy and that each

generation should make its own mark and earn its own way. As a result, it is considered advanta-

geous to remove wealth from each generation by way of estate taxes and use the money for the

common good. For details,see Publication 554,“Survivors,Executors and Administrators”available at

the IRS Web site, www

.irs.gov.

estoppel A doctrine that stops one from denying facts or taking a course of action because

it would be unfair under the circumstances. It may be because someone else relied on former state-

ments regarding the facts or because someone else relied upon a situation allowed to exist by

a party, so that the party cannot now be allowed to change that situation. The concept commonly

arises in three situations:

1. Before the sale of an income-producing property, the tenants sign estoppel certificates

acknowledging they have no claims against the landlord, no defenses to any of the terms

or conditions of their lease, and no outside or “side” agreements varying the terms of the

lease. After the sale, the tenant cannot claim otherwise, even if all parties agree that there

has been

a wrong done to the tenant by the prior landlord and the tenant would otherwise be able

to cancel the lease if it were not for the estoppel certificate.

2. A subdivision with restrictive covenants grows lax in the enforcement of them and per-

mits many violations over the years regarding, for example, parking boats and motor

homes in

driveways. If one buys a home in the subdivision and keeps a motor home in the drive-

way,

the principle of estoppel will prevent the homeowners association from suddenly decid-

ing

to enforce that particular covenant.

3. A government employee tells someone one thing, and it later turns out to be wrong. The

citizen has already taken action on the incorrect information. In most circumstances,

courts will not allow estoppel against a government or government agency.

estoppel by deed A legal concept that comes into play when someone deeds real property to

another, even though not having title at the time—usually due to a technical defect. When the sell-

ers later gain legal title through clearing up the technical defect or otherwise, they cannot claim the

property as their own because of estoppel by deed.

154

estate estoppel by deed

154

estoppel certificate exchange

155

estoppel certificate See estoppel.

estovers The right or privilege of a tenant to take so much from the land as is necessary for

support, such as the right to cut timber for heating.

et con From the Latin et conjunx, meaning “and husband.” Used in deeds and deed records. Also

called et vir.

et ux From the Latin et uxor, meaning “and wife.” Used in deeds and deed records. Usage arose in

the 1300s in England,when wives had no legal identity and therefore were not named in legal instru-

ments. Despite the dramatic change in circumstances today, one still sees deed references to “John

Jones et ux…”

et vir Latin for “and man,” it is often used interchangeably with “et con”to mean “and husband.”

evaluation A study of potential property uses, but not value.

eviction The process of denying possession to a tenant. It may be one of the following:

• Actual, as when the landlord obtains a court order that the tenant vacate the premises or

have his or her goods and person removed by law enforcement officials.

• Constructive, as when the landlord allows a condition to continue that renders the

premises, or a part of the premises, incapable of possession and enjoyment.

evidence of title Proof that one has title to property; may be deeds, court orders, probate estate

proceedings, or Torrens certificates.

examination of title The process of investigating title to real estate, usually confined to recent

records.

exception (1) Estates or described lands specifically spelled out in a deed as not passing to the

grantee. (2) Liens and claims specifically excluded from the coverage of a title insurance policy.

(3) Liens and claims specifically excluded from a contract of sale.

excess land Land taken by eminent domain in a condemnation proceeding, but which is greater

than the amount actually needed for the project in mind. A government may condemn excess land

because the portion remaining after the amount actually needed may be rendered completely

useless. In such a circumstance, the authority would have to pay for the condemned land and pay

damages for the loss in value of the remaining land. It may be cheaper to simply take all the land

and then attempt to sell the excess, especially if there are several excess parcels that are contiguous

to each other.

excess rent A contract rent that is in excess of current market rents. In a bankruptcy proceeding, a

bankrupt tenant may renegotiate a lease in order to remove the excess rent.

exchange Parties may exchange like-kind properties and not pay any income taxes at the time

of the exchange but, instead, defer them until the later sale of the exchanged property. See 1031

exchange.

155

exclusionary zoning Zoning that has the effect of excluding persons protected by law from

discrimination.

exclusive agency Same as exclusive agency listing.

exclusive agency listing A relationship with a seller of real estate in which a broker has the exclu-

sive right to list the property and receive a commission except that if the owner sells the property to

one not obtained by the listing agent or its advertising and marketing efforts, then the owner need

not pay a commission. Contrast with exclusive right to sell listing.

exclusive right to sell listing A relationship with a seller of real estate in which a broker has the

exclusive right to list and to sell the property, so that even if the owner sells to his or her child, with

no involvement whatsoever from the broker, the broker is still entitled to a commission.This is done

to avoid disputes over who procured a particular buyer. Sellers who wish to exclude certain persons

from the effect of the agreement should describe them, such as “except for the following named

potential buyers …” or “except for sales to family members related in the third degree… .“ Contrast

with exclusive agency listing.

exculpatory clause (1) A clause in a mortgage that allows the borrower to surrender the proper-

ty to a lender without any further personal liability for a deficiency. (2) A clause in a trust instrument

or in a will excusing the trustee or executor from liability when powers are exercised in error but in

good faith.

execute To complete, as by signing a contract or signing and delivering a deed.

executed contract A contract that has been fully performed by all sides; contrast with executory

contract.

executive suite An older term for a business center, a business arrangement granting no lease-

hold interests but allowing persons to enjoy the use of office space with a sharing of amenities such

as conference rooms, lobby, phone system, copiers, and network facilities, as well as a sharing of

clerical, support help, and facilities and personnel management.

executor One named in a will to fulfill the wishes of a decedent regarding the disposition of assets.

Today, the word refers to both males and females serving in that capacity. At one time, executor

referred only to males, and the female was called an executrix.

executory contract A contract under which one or more parties has not yet completed their

performance.

executory interest A general term used to describe all future interests other than reversions

or remainders; an interest that will shift from one owner to another or spring into being upon the

happening of some event in the future.

executrix An older term meaning a female executor.

exemplary damages The same thing as punitive damages. See damages.

156

exclusionary zoning exemplary damages

156

expansion option extended coverage

157

expansion option A right granted by the landlord to the tenant where the tenant has the option

to add more space to the premises according to the terms of the option, which may contain restric-

tions as to the time, proximity, and rental rate, or the restriction that the option is available only if

another named or described tenant fails to exercise its expansion option first.

expense ratio A comparison of the operating expenses to potential gross income of a property in

order to obtain a ratio that can be compared to other similar properties. In this manner, the owner

may receive advance warning that rents are below market or expenses are too high. In addition,

a potential buyer familiar with the ratios for similar properties may be forewarned if there is an

unusually small ratio in a property under consideration.This could be the result of a seller not spend-

ing the proper sums to maintain and manage property, a seller performing its own maintenance

without booking any expenses that might be incurred after the buyer takes over the property, or the

seller omitting expenses. Purchasers interested in buying self-managed and maintained property

will generally estimate a reasonable maintenance and management expense, and then reevaluate

the estimated net income and the asking price in light of that information.

expenses The cost of maintaining property or generating income.

expense stop In a commercial lease, a provision that annual rent escalations due to increasing

building operating expenses will be stopped, or capped, at a certain amount of increase per year or

over the lifetime of the lease.

Experian One of the three major credit reporting agencies. The other two are TransUnion and

Equifax.The Web site for Experian is at www

.experian.com. See also Fair Credit Reporting Act.

expire To end; to die.

exposure (1) In finance, the amount that one may lose in an investment; the potential loss, which

could be the capital invested plus any personal liability on loans in excess of the value of the prop-

erty securing the loans. (2) In the market, the process of making a property known to the market-

place as available for sale or lease. (3) Physically, the direction of an improvement; for example,“The

southern exposure of the house had all the best views.”

express condition See condition.

express notice The actual delivery of information to a party. Contrast with constructive notice and

implied notice.

express warranty Specific promises made by a party regarding the quality of something sold and

the remedial actions that will be taken if the property sold does not conform with the promises.

expropriation The seizure of private property for public use by condemnation.

ex-situ Off-site; most commonly used in the context of ex-situ remediation of contaminated soil,

which means removing the soil and replacing it with clean soil.

extended coverage Insurance that covers specific risks not covered in a normal policy.

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extender clause A clause in a listing agreement that says the broker may be entitled to a commis-

sion after the expiration of the listing period if a buyer originally procured during the period later

buys the property within a certain time span afterward,usually 6 months.When hiring a new broker

after no success with an earlier one, an owner should always disclose a copy of the former contract

and advise both brokers, in writing, that if there are any disputes as to claims for commission, the

brokers must share rather than the owner being liable for double commission payments.

extension An agreement to defer the time for doing an act or for termination of a lease.

extension option An agreed-upon continuation of occupancy under the same conditions, as

opposed to a renewal, which implies new terms or conditions. In a lease, it is a right granted by

the landlord to the tenant whereby the tenant has the option to extend the lease for an additional

period.

exterior insulation and finish system A cement-based synthetic material that resembles stucco

and is used in the same way. It is usually abbreviated as EIFS. One widely known manufacturer is

Dryvit.

external obsolescence Same as economic obsolescence.

eye appeal See curb appeal.

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extender clause eye appeal

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facade The front of a building; what one sees from the street. Sometimes a building is con-

structed of metal, but the facade is brick or some other attractive treatment. Zoning regulations,

subdivision restrictions, and historic district requirements may specify particular building facades.

facade easement Typically,rights granted to historic groups so they can maintain control over the

appearance of the exterior of a building.

face interest rate The interest rate shown on the face of a promissory note and used to calculate

the monthly payments on a loan. In order to help borrowers compare apples to apples when

shopping for a lender, the federal Truth in Lending Act requires lenders to reveal an annual percent-

age rate which includes the “face interest rate” plus the value of some closing costs and prepaid

expenses.

face value The value of an instrument (promissory note, bond, stock, etc.) as stated on the face

of the instrument.The face value does not always equal the market value.

Example:

A 5-year-old mortgage note with a face value of $100,000 and an amortization

term of 20 years at 2.8 percent interest is worth far less than $100,000 for two reasons: (1) The

principal balance is now a little under $80,000. (2) Why would anyone invest even $80,000 to

earn 2.8 percent interest when he or she can get better returns in the marketplace? For both

reasons, an investor would pay much less than the $100,000 face value to buy the mortgage.

facilitator Someone who helps out in a real estate transaction but owes no responsibilities to the

buyer, the seller, the lender, or the borrower. A facilitator in a real estate transaction might contact a

home inspector, arrange for a survey, assist with removing underwriting problems on a mortgage

loan, and explain the computations for the buyers’ and sellers’ costs at closing. When working with

people in a real estate or mortgage loan transaction, it is extremely important to ask them to dis-

close, in writing, their exact role and their responsibilities to you. Someone you might assume to be

your agent,with the responsibility to work for your best interests, might actually be only a facilitator,

with little or no responsibilities.

facilities management Taking care of what’s called the physical plant of a property—repairs,

maintenance, security, janitorial, groundskeeping, etc. Formerly this was considered a janitorial-type

career choice.Today, with rapidly changing technology, environmental concerns, government regu-

lations, terror-related security issues, and other such matters, a career in facilities management is

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seen as a white collar, high-dollar choice. For more information go to the FMLink Group Web site

at www

.fmlink.com.

factory-built home Generally, a home that is largely built someplace else and then shipped to a

site for completion and/or simple installation. Mobile homes (also called manufactured housing)

generally come to mind first, although the term also includes modular homes,panelized homes, and

log-cabin kit homes.

Fair Credit Reporting Act A federal law intended to remedy abuses by credit reporting agencies.

The law is enforced by the Federal Trade Commission, which maintains information on its Web site,

www

.ftc.gov. Generally, the law prohibits reporting erroneous or outdated credit information. The

following adverse information cannot be reported:

• Civil suits, civil judgments, or arrest records older than 10 years or the statute of limita-

tions, whichever is longer;

• Paid tax liens older than 7 years. (Note: Credit reporting bureaus and the Federal Trade

Commission take the position that unpaid tax liens can be reported forever. This seems to

be against the plain language of the statute.)

• Accounts placed for collection more than 7 years ago. When in doubt, the FTC assumes

that an account will be placed for collection 180 days after it first becomes delinquent.

• Anything else, other than crimes, older than 7 years.

An important exception allows reporting of older information if the consumer is applying for a loan

of $150,000 or more, life insurance with a face value of $150,000 or more, or a job with an annual

salary of $75,000 or more.

Consumers may obtain one free credit report per year from each of the three major credit report-

ing agencies—Equifax, TransUnion, and Experian—by going to their centralized site of

www

.annualcreditreport.com.

(Beware of firms promising to “clean up your credit” for a fee. Many times, they employ illegal

tactics that involve you committing fraud or perjury.The Federal Trade Commission has been very

aggressive in suing such services.)

Fair Debt Collection Practices Act A federal law designed to curb abuses in the debt collection

industry. The law applies to debt collectors, who are defined as persons or companies who

collect debts for another. If you owe money to Smith’s Marina and Mr. Smith himself or one of

his employees contacts you to collect the money owed, that person is not a debt collector

under the Act because they are trying to collect money due to themselves, not money due to

a third party.

Generally speaking, collectors cannot call you before 8 a.m. or after 9 p.m. They can’t threaten you

with arrest,bodily harm,or public exposure as a “deadbeat.”They can’t imply they are connected with

law enforcement.Collectors cannot harass you with repeated phone calls on the same day.They can’t

call you at work if you tell them you are not allowed to receive such calls at work.

facilities management Fair Debt Collection Practices Act

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Consumers may sue and collect damages and attorneys’fees for violations of the Fair Debt Collection

Practices Act. (It may be found at 15 USC §1601 and subsequent sections.) You must file suit within

one year of the violation.

Fair Housing Act A federal law originally passed in 1968. The law prohibits discrimination by

landlords, real estate agents, municipalities, lenders, and homeowners’ insurance companies, if the

discriminatory practices make housing unavailable to people because of race or color, religion, sex,

national origin, family status, or disability. Discrimination includes such things as steering, redlining,

and imposing greater requirements on some groups than on others.Limited accessibility that makes

housing practically unavailable for persons with disabilities is a form of discrimination. Housing

providers may not unreasonably limit the number of people living in a unit or restrict families to only

certain areas of a complex. It is, however, legal to limit a project to people over 55, as allowed by the

Housing for Older Persons Act of 1995. The many faces of discrimination are varied and sometimes

subtle. It is recommended that all persons involved in real estate become thoroughly familiar with

the law.

The Department of Justice may file civil or criminal actions for violations. Individuals who have

been discriminated against may file a complaint with the Department of Housing and Urban

Development or file suit in state or federal court. There is currently a thriving litigation industry in

consumer protection groups using individuals to attempt obtaining housing, lending, or insur-

ance and then suing under the Act when they encounter discrimination. (More information may

be found at the Web site for the Department of Housing and Urban Development,

www

.hud.gov/offices/fheo/index.cfm, and at 42 USC §3601 and subsequent sections.)

Fair Isaac Company (FICO) score A credit score, based on the name of the company that wrote

the software that calculates the scores.

fair market value The amount that a willing buyer would pay a willing seller for property after

reasonable exposure to the marketplace.

false advertising Advertising that contains blatantly false or misleading statements, whether

intentional or not. False advertising may be grounds for rescission, or cancellation, of a contract, and

it may also provide the basis for an award of compensatory and punitive damages.

FAMC See Federal Agricultural Mortgage Corporation.

familial status Under the Fair Housing Act, a protected class of people who live in a household

with one or more persons under the age of 18 years and are the parent, legal guardian, or custodial

adult for the minor.The concept includes pregnant women and people attempting to gain custody

of a minor. Except for elderly housing, one may not discriminate against someone on the basis of

familial status.

family Traditionally, people who are related by blood or marriage.The term can mean many differ-

ent things depending on the circumstances. Most statutes have a section devoted to “definitions”

that will tell you the intended definition of words used in the law. For example, the concept of

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Fair Debt Collection Practices Act family

what constitutes a family may be important in zoning cases for single-family housing or apartment

restrictions against non-family members living in the apartment with the tenant.

family limited partnership (FLP) A special type of limited partnership recognized by some states

as an estate planning tool. A donor establishes a family limited partnership and then transfers into

it property expected to appreciate in value over the years. The donor then makes gifts of small

percentages of the partnership to children or other family members. The gifts are small enough

to escape gift taxes and may be doubled if the donor makes the first gift to the spouse, and then

each of them makes gifts each year. As the property grows in value, the appreciation belongs to the

person receiving the gifted shares and so is not in the donor’s estate at death.

Fannie Mae A popular name for Federal National Mortgage Association.

Farm and Land Institute Now known as the REALTORS® Land Institute.

farm area A specific geographic area or condominium complex receiving intense marketing

efforts from a real estate agent in order to obtain listings. The agent specializes in the area, learn-

ing everything there is to know. Over time, communities will always have agents identified with

particular parts of town, such as “Myra the lake lady” or “Lyman the land man.”

farm assets All the assets of a ranch or farm,including the residence,outbuildings,barns,irrigation

systems, trees, and fencing. Farm assets receive special treatment under the Internal Revenue Code

if there is sale, exchange, or lease. Farmers are also exempt from the requirements to pay quarterly

estimated taxes. (See Publication 225,“Farmer’s Tax Guide”at the IRS Web site, www

.irs.gov.)

Farm Credit Administration (FCA) An independent agency (www

.fca.gov) responsible for regu-

lating and examining banks in the Farm Credit System, including Farmer Mac. It is funded through

assessments made against the FCS institutions.

Farm Credit Council A federated trade association representing the Farm Credit System.

Farm Credit System The oldest government-sponsored enterprise (GSE) (www.farmcredit-

ffcb.com) in the country, created in 1916. It is a nationwide network of borrower-owned lending

institutions and affiliated service entities that makes loans to agricultural and rural borrowers. The

members do not take deposits.The funds for loans are obtained through the issuance of Farm Credit

debt securities on a worldwide basis in the domestic and global capital markets.

Farmer Mac A nickname for the Federal Agricultural Mortgage Corporation (FAMC).

Farmers Home Administration (FmHA) A federal agency that formerly operated under the

United States Department of Agriculture (USDA). The Federal Crop Insurance Reform and

Department of Agriculture Reorganization Act of 1994 replaced FmHA with USDA Rural

Development.

fashion/specialty centers Shopping centers devoted to retail and dining establishments attrac-

tive to a higher-end, fashion-oriented concept.They usually contain 80,000 to 250,000 square feet of

space on 5 to 25 acres, with a primary trade area of 5 to 15 miles.

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family fashion/specialty centers

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fastrack construction Construction that begins before all plans and specifications have been

completed.For example, the builder may have full architectural and structural engineering drawings

sufficient to pour footings and a concrete pad, before the electrical plans have been completed.

FCA See Farm Credit Administration.

FDIC See Federal Deposit Insurance Corporation.

feasibility study An analysis of the marketplace to determine if it is economically practical and

desirable to develop a particular project. Contrast with a market analysis, which merely identifies

whether a defined market or trade area desires what you propose to build. A market study deter-

mines demand for the real estate development; a feasibility study determines whether that demand

is willing to pay what the project will cost, plus a profit.

Example:

The demand for first-class office space in downtown Elm City exceeds the available

space. There are no vacancies, and potential tenants must take space in the suburbs or settle for

less desirable space downtown. The market analysis determines that a market exists for a new

midrise office building. The feasibility study then analyzes all acquisition and construction costs,

the length of time until a new building would be at break-even occupancy, the cost of funds for

construction financing, and the expenses of operating such a building. According to the feasibil-

ity study, the building would have to command rents in the range of $28 to $30 per square foot

per year in order to be a viable project. Current market rents downtown for similar space range

between $19 and $23 per square foot per year.

This constitutes the feasibility study—what will it cost,what must I charge,what will the market pay?

The portion of the study that asks “What will the market pay” is the portion with the most risk, the

most in need of salesmanship when one is talking to lenders and investors, and the truest test of a

seasoned developer with good instincts. In the preceding example, the market may very well

respond positively to a new building with rental rates significantly higher than anything else down-

town. On the other hand, it might not. One has to choose, in the end, after all the analysis has been

completed.

Federal Agricultural Mortgage Corporation (FAMC) Commonly called Farmer Mac

(www

.farmermac.com), it is one of the system entities in the Farm Credit System. Its purpose

is to attract new capital for the financing of agricultural real estate and to provide liquidity to

agricultural lenders.

Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994

Federal legislation passed in order to streamline and modernize the Department of Agriculture.

Federal Deposit Insurance Corporation (FDIC) An independent agency (www

.fdic.gov) creat-

ed by Congress in 1933. It supervises banks, insures deposits up to $100,000 per depositor per

institution, and acts as a receiver and liquidator for failed banks.

Federal Emergency Management Agency (FEMA) Formerly an independent federal agency that

became part of the Department of Homeland Security on March 1, 2003. FEMA’s mission statement

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fastrack construction Federal Emergency Management Agency (FEMA)

is to “lead the effort to prepare the nation for all hazards and effectively manage federal response

and recovery efforts following any national incident.” FEMA (www

.fema.gov) also initiates proactive

mitigation activities, trains first responders, and manages the National Flood Insurance Program.

Federal Financial Institutions Examination Council A federal interagency body (www

.ffiec.gov)

that establishes uniform standards and reporting requirements for the examination and auditing of

financial institutions supervised by the Board of Governors of the Federal Reserve System, the

Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the

Comptroller of the Currency, and the Office of Thrift Supervision.

Federal Home Loan Banks (FHLBanks) The largest source of residential mortgage and commu-

nity development credit in the United States. This group consists of a regional cooperative of 12

FHLBanks, each with its own president and board of directors. Its primary business consists of

FHLBank Advances, which are low-cost loans made to member institutions. This gives those mem-

bers the liquidity to make mortgage loans.The FHLBanks (www

.fhlbanks.com) regenerate their own

liquidity by selling debt consisting of consolidated bonds with maturities of one year or more, and

consolidated discount notes which mature within 360 days.

Federal Home Loan Mortgage Corporation A stockholder-owned corporation chartered by

Congress in 1970 to assist home mortgage lenders with a steady flow of money. Called Freddie Mac

(www

.freddiemac.com) for short, it buys home mortgages from loan originators such as local finan-

cial institutions and then sells mortgage backed securities and debt securities. In order to realize

one of its goals, to stabilize the mortgage industry, Freddie Mac has transformed the industry by

standardizing mortgage documents, introducing automated underwriting, creating the market for

conventional mortgage backed securities, and leading the fight against unfair and predatory lend-

ing practices. Its primary competitor is Fannie Mae; both are regulated by the Office of Federal

Housing Enterprise Oversight in HUD.

Federal Housing Administration (FHA) Created by Congress in 1934 and later added to the

Department of Housing and Urban Development’s (HUD) Office of Housing in 1965. The FHA

(www

.fha.gov) says it is the only government agency that is entirely self-supporting and receives

no taxpayer funds at all. It provides mortgage insurance on loans made by FHA-approved lenders,

making those loans risk-free for the originators.

Federal Housing Finance Board (FHFB) Regulates the 12 Federal Home Loan Banks.

Federal Insurance Administration (FIA) A federal agency that administers several insurance

programs, including flood insurance.

Federal Land Bank The former name for institutions established by Congress in 1917 in order to

provide long-term mortgage credit to farmers and ranchers, and later to rural home buyers. The

Federal Land Banks merged with the Federal Intermediate Credit Banks after the Agricultural Credit

Act of 1987. It is now known as a Farm Credit Bank.

federally chartered banks Financial institutions authorized and regulated by the federal govern-

ment rather than the state government. They have the word “national” in their name, or the initials

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Federal Emergency Management Agency (FEMA) federally chartered banks

164

“N.A.” at the end. Supervision is by the Office of the Comptroller of the Currency (OCC) at

www

.occ.treas.gov.

federally related transaction (FRT) FDIC regulations define the term as “any real estate-related

financial transaction entered into on or after August 9, 1990, that the Board or any regulated institu-

tion engages in, contracts for, or regulates.”FDIC regulations require an appraiser for any FRT except

those under $250,000 and other narrowly defined exceptions.

Federal National Mortgage Association (FNMA) Popularly known as Fannie Mae. A former gov-

ernment agency that was privatized in 1968, Fannie Mae’s mandate is to increase the availability and

affordability of homeownership for low-, moderate- and middle-income Americans. It does this by

purchasing mortgages in the secondary market and then selling and insuring securities comprised

of packages of mortgages. These are usually single-class mortgage backed securities known as

Fannie Mae MBS. Contrast with multiclass mortgage backed securities described under real estate

mortgage investment conduit (REMIC). The association’s Web site is www

.fanniemae.com; shares in

the company are traded on the New York Stock Exchange as FNM.

Federal Reserve System Often called “the Fed,” it is the central bank of the United States, created

in 1913. It regulates credit through the interest rates it charges for short-term loans to financial insti-

tutions, supervises and regulates banking institutions,and provides advisory services to the govern-

ment. Funding comes from interest on investments, fees for services to depository institutions, and

interest on loans.The public usually comes into contact with the Fed in two ways:When the Federal

Reserve chairman announces interest rate changes for loans to member financial institutions,almost

all financial institutions change their interest rates within days afterward.In this way, the Fed controls

the cost of credit to consumers. Additionally, it provides a central clearinghouse for checks drawn on

different banks across the nation, making it possible for your bank in your home town to give you

credit for a check drawn on another bank on the other side of the country.

federal rule for condemnations A method of appraising property taken by the federal govern-

ment via condemnation under its rights of eminent domain. It is employed when less than an entire

parcel is taken. The entire parcel is given a value as it would be before condemnation. Then the

parcel to be taken is subtracted, and the remaining parcel appraised.The difference is the condem-

nation award. This differs from the method used by most states, which value the property

condemned and then award damages for the decrease in value suffered by any leftover property.

See before-and-after rule.

Federal Savings and Loan Insurance Corporation (FSLIC) A former quasi-governmental agency

that provided insurance for deposits at savings and loan institutions. FSLIC (pronounced fizz-lick)

went bankrupt in the 1980s banking crisis, and was replaced by the Savings Association Insurance

Fund, administered by the FDIC.

federal tax lien A lien or encumbrance upon all of a taxpayer’s real property located in the coun-

ty where the lien is filed. Tax liens may be for unpaid income taxes, or for the 100 percent penalty

assessed against controlling shareholders when their small corporations do not pay withholding

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federally charted banks federal tax lien

166

taxes for employees. Lenders who foreclose on real estate must send notices to the IRS regarding

impending foreclosures, or the property will still be subject to the tax lien after the foreclosure, even

if the lien was filed after the mortgage and would ordinarily be destroyed by the foreclosure.

(For more information, go to the IRS Web site, www

.irs.gov, and search on “IRC 7425 notice.”)

Federal Trade Commission (FTC) Created in 1914, the FTC (www.ftc.gov) was the successor to the

old Bureau of Corporations. It was formed in response to widespread concerns about monopolies

and their impact on consumers.

Today, it is comprised of three bureaus:

1. Bureau of Consumer Protection. Created to protect consumers from unfair, deceptive, or

fraudulent practices. It enforces a variety of consumer protection laws enacted by

Congress. It also maintains the consolidated consumer Web site (www.consumer.gov)

with information and links to over 170 government agencies.

2. Bureau of Competition. The antitrust arm.

3. Bureau of Economics. Helps the FTC evaluate the economic impact of its various policies.

fee appraiser One who furnishes appraisals of real property for a fee. Contrast with review

appraiser, who is typically an employee of a financial institution or institutional investor and who

reviews the work of fee appraisers.

feeder road See arterial street.

fee simple The maximum possible interest (estate) one can possess in real property is the fee sim-

ple absolute. It is unlimited as to duration, transferability, and descendability to heirs. Lesser types of

fee simple estates include the fee simple defeasible and the fee simple determinable, both of which

may result in loss of the property upon the happening of some event in the future.

fee simple defeasible An interest in real property that may be defeated upon the happening of a

certain described event.In other words,someone must take an action in order for the estate to come

to an end.

Example:

“I grant Blackacre to First Methodist Church ‘so long as’ (or ‘while’ or ‘during the

period’) the property is used for religious services.” If the property ceases to be used for religious

purposes, then the grantor or the grantor’s heirs have a reasonable amount of time to declare their

rights and retake possession of the property. If they do nothing, they eventually lose their rights

and the property stays with First Methodist Church, to do as it chooses with it. Contrast with

fee simple determinable, which is an automatic termination.

fee simple determinable An interest in real property that will automatically terminate upon the

happening of a certain described event.

Example:

“I grant Blackacre to First Methodist Church ‘for so long as it is used as’ (or ‘but

only if the property is used for’) a church.” When the property ceases being used for the purpose

granted, then title automatically reverts back to the grantor or the grantor’s heirs. It is said that

the grantor retains a possibility of reverter. Contrast with fee simple defeasible.

federal tax lien fee simple determinable

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fee tail An ancient form of ownership and restriction on land,in which property could pass only to

members of the direct male line of a family, and when a time came when there were no direct male

members to inherit, the property reverted to the state.

felony A crime that carries the possibility of a sentence in excess of one year.Violation of some real

estate laws is classified as a felony.

FEMA See Federal Emergency Management Agency.

feng shui The art and science of placing buildings and specifying the use of components,

finishes, and furniture in such a manner as to create harmony and balance.

feudal system An ancient system of land ownership. Under old English common law, the king

owned all lands. All other people were mere tenants, who enjoyed possession solely by virtue of the

goodwill of the overlord above them. By the seventeenth century the system was replaced by the

allodial system we know today.

FF&E See furniture,fixtures,and equipment.

FHA See Federal Housing Authority.

FHA approved An activity, development, lender, or construction method which meets all

requirements of the FHA and will qualify for FHA-insured mortgage loans.

FHA insured A single-family or multifamily mortgage loan that is insured by the Federal Housing

Authority. If the borrower defaults, the FHA will either pay the lender the insurance proceeds, up

to the balance remaining on the loan after foreclosure, or it will pay the loan in full and take an

assignment of the collateral.

FHFB See Federal Housing Finance Board.

FIA See Federal Insurance Administration.

fiber to the curb An important amenity in a development; the existence of fiber-optic cable from

the phone company’s central office to the edge of the development,so that all properties within may

make use of advanced telecommunications services.

fictitious company name A trade name or assumed name for a company, rather than the actual

legal name of the person or entity that owns the business. Many states require fictitious party filings

so that consumers and others may determine the true ownership of a business simply by knowing

the trade name.

fidelity bond A special insurance policy that covers losses caused by dishonest employees.

Property management companies and others with employees who handle money belonging to

clients should generally obtain fidelity bonds. Also called a surety bond.

fee tail fidelity bond

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fiduciary A person who enjoys a relationship of trust or confidence with respect to another

such that the law will impose greater than normal responsibilities on the fiduciary for honesty,

integrity, candor, and scrupulous good faith even if it means sacrificing the interests of the fiduci-

ary. Typical fiduciaries include attorneys, real estate agents representing principals, trustees, and

guardians. Because of the fiduciary relationship between an agent and principal, it is difficult to

understand the concept of dual agency, in which the broker may represent both the buyer and

seller. A seller’s fiduciary must keep all the client’s information confidential,not volunteer anything

unless absolutely required by law, and attempt to gain the highest possible price for the proper-

ty. A buyer’s fiduciary must ferret out all secrets, volunteer all information regarding anything at

all that might affect property values, recommend the most thorough home inspectors, and

attempt to obtain the lowest possible price for a property.These positions are extremely difficult

to reconcile in one person.

fiduciary obligations Very high responsibilities of care, concern, representation,and confidential-

ity owed by one in a special relationship to another. An agent owes fiduciary obligations to the

principal, who is also called the client.

field fit The practice of taking measurements for building components as an improvement is

undergoing construction, rather than relying on precise written plans and specifications.Sometimes

small amounts of field fitting are necessary, as when tolerances can vary by fractions of an inch. Other

times, although the practice is widespread and commonplace, it is not recommended.

file To place a document in the public records. All such documents are time and date stamped

when received;this is important because the priority of deeds and of liens is usually on a race-to-the-

courthouse, first-to-file basis. In many states, if a judgment is recorded against a seller only minutes

before a deed to the buyer is recorded, then the buyer’s new property is subject to the lien, which

must be paid or the judgment creditor may execute and take the property and sell it for satisfaction

of the debt.

filled land An area where the grade—the level of the land—has been raised, preferably by

depositing clay, soil, rock, and gravel and then compacting the fill at regular intervals as the grade

is raised. Less ideal, but more common in areas with little regulatory oversight, is the practice of

dumping tree stumps and other vegetation, covering them with 6 feet or so of clay, and then com-

pacting only the top 6 feet.The property will pass most compaction studies, which bore down only

6 feet. In time, however, the vegetation will rot, the land will settle, and the owner will see potholes

and foundation cracks.

final injunction A court order entered after trial on all issues, directing that the losing party take

some action or stop doing something. If the losing party disputes the decision, it may appeal.

Contrast with a temporary restraining order, which is a court order intended to be effective for a very

short time until there can be a hearing. Contrast also with a preliminary injunction, which is a court

order intended to be effective only until there can be a full trial, usually several years later.

finance charge The total of all direct and indirect costs associated with obtaining credit.

fiduciary finance charge

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finance fee A charge by a mortgage broker to cover costs and expenses associated with placing a

loan.With VA and FHA loans, the fee is limited to 1 percent of the amount financed. Other loans vary

between one-half of 1 percent and 3 percent depending on the competition to obtain loans, credit

risk, and other such business factors.The fee is generally negotiable. See origination fees.

financial institution An organization that obtains money from deposits and earns money from

loans.

Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) (pronounced “fie-ree-

ah”) Federal legislation passed in 1989 in response to the banking and savings and loan crisis, the

FDIC bailout, and the bankruptcy of the Federal Savings and Loan Insurance Corporation (FSLIC). It

reorganized much of the oversight and regulatory framework for financial institutions and created

the Resolution Trust Corporation (now defunct) to receive and liquidate assets from failed financial

institutions.

financial management rate of return (FMRR) A method of evaluating the performance of a real

estate investment, FMRR is a modified version of the internal rate of return tool. FMRR uses two dif-

ferent rates for its calculations:(1) the cost of capital rate to discount future negative cash flows back

to the present (in other words, what would it cost you to borrow the money to cover losses in future

years?) and (2) a specified reinvestment rate for compounding future positive cash flows to the end

of the projection period (in other words, what if you took your profits and reinvested them at a

certain rate, how would they grow?)

financial privacy rules See Gramm-Leach-Bliley Act.

financial purchase A buying decision that involves insurance or other financial products, such as

a home mortgage.

financial statement A semi-itemized list of the assets and liabilities of a person or entity as of a

point in time, and the revenues and expenses over a representative month or over a period of time

such as one year. Do not confuse with financing statement.

financing Borrowing money to buy property. See leverage.

financing statement A document filed in the public records; gives notice that a secured party

claims a security interest in certain described goods and other personal property owned by a named

debtor. It is also called a UCC-1 after the form provided by the Uniform Commercial Code. The pur-

pose of the statement is to put other creditors, or purchasers, on notice that the security interest

exists and will remain on the property even if sold and even if another creditor loans money against

the same property. The financing statement does not give the security interest; it merely pro-

vides notice of the existence of a security agreement. If a creditor fails to obtain a signed security

agreement, the financing statement will be useless. (Do not confuse with financial statement.)

finder’s fee A fee for finding someone to buy, sell, or rent real estate. It is illegal in most states

unless the finder is a licensed real estate broker or agent. There is some question about whether

finance fee finder’s fee

170

existing tenants may receive small gifts or rent credits for referring new tenants.The states that allow

this limit the compensation or gift to something minimal.

finish-out allowance See tenant improvement allowance.

fire insurance A type of property insurance covering losses caused by fire and by damage caused

in putting out the fire. Premiums will often depend on proximity to a fire station (within 5 miles

is best), the rating of the fire department (all volunteer personnel with minimum equipment up to

full-time personnel with all equipment), proximity to a fire hydrant, and method of construction of

the property.

fireproof Having all surfaces covered with a noncombustible material such as concrete or brick.

Contrast with fire resistant.

fire resistant Able to withstand exposure to a fire of a specified intensity for a specified period of

time, usually 1, 2, or 4 hours. Contrast with fireproof.

fire sprinkler system A system for the delivery of water to locations registering a certain heat and

to surrounding areas.Local building codes sometimes change the requirements for fire sprinkler sys-

tems, requiring larger sprinkler heads than before. Even if a property has a sprinkler system in place,

you will need to check the pressure, the size of the heads, and any other matters required by local

law in order to ensure that the system will be in compliance.

fire-stop Obstructions placed in open areas above a ceiling in order to stop a fire that could

otherwise easily spread to all parts of a building.

fire wall A fire-resistant wall required by local health and safety codes. Depending on the particu-

lar code adopted, a property owner may need to erect fire walls between every 3,000 square feet

of space, between spaces rented by separate tenants or owned by separate condo owners, and

along exterior walls within a certain distance of a property line.The code will detail the hours of fire

retardant required under different circumstances.Doors allowing passage through fire walls must be

fire doors.

firm commitment A lender’s unqualified and irrevocable promise to grant a loan for a specified

amount, which may be a firm amount or a certain percentage of the appraised value. The commit-

ment will also specify the interest rate, term, and collateral. For commercial mortgages, the borrow-

er should ask that the firm commitment include a statement of anticipated legal fees and other fees

and expenses and, if possible, negotiate an upper limit to attorneys’fees.

FIRREA See Financial Institutions Reform, Recovery and Enforcement Act.

first-generation space Office space in a new building.First-generation space lacks walls,floor cov-

ering, ceiling tiles, and lighting; it has never been built-out. When comparing tenant improvement

allowances among buildings under consideration for leasing office space, it is important to note

if the space is first generation or second generation, because the build-out will typically be much

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more expensive in first-generation space. Even if second-generation space has to be completely

reconfigured, there will still be some savings by the ability to reuse doors and light fixtures.

first mortgage A real estate loan made to the borrower and recorded in the public records by the

lender, before any other mortgages.

first refusal, right of The right to buy or rent real property if and when the owner decides to sell

or lease.The owner is under no obligation to ever sell or lease, though. Contrast this with an option,

in which the the person who wants to buy or lease (optionee) has a legal right to require the owner

(optionor) to sell or lease, but the optionee does not have any obligation to buy or lease.With a right

of first refusal, control is in the owner. With an option, control is in the other person.

Care should be taken when drafting a right of first refusal. The parties should specify an expiration

date, a price or method of calculating the price, and what happens if the purchaser-lessee declines

to buy or lease at a particular point: Does the right of first refusal end, or does it continue to the

next time?

The parties should give particular thought and attention to describing the triggering event. What

gives rise to the ability to exercise the right of first refusal? Is it the owner merely soliciting offers,

or must there be a bona fide offer from a third party before the party will be notified and given

the first opportunity to buy or lease? What if the owner dies? Does the party have a right to buy the

property before it passes to the heirs?

first-year depreciation See additional first-year depreciation.

fiscal year Accounting year. Many companies use accounting years ending on June 30 or

September 30, rather than the calendar year ending on December 31.

fixed assets Items on a company’s balance sheet—the tangible property used in the business

and not for resale; would include buildings, furniture, fixtures, equipment, and land.

fixed bid A firm price for completing a job.

fixed expenses Expenses that continue at relatively stable levels, month after month or year after

year, regardless of occupancy levels, retail sales, or other areas of revenue, including property rent or

depreciation,some minimal level of personnel expenses,and some minimal level of utilities.Contrast

with variable expenses, which are more or less directly tied to revenue; as revenues increase, so will

the expenses.

fixed lease See gross lease.

fixed-rate loan A certain percentage rate of interest that will not change over the life of the loan.

Contrast with adjustable-rate loan or mortgage.

fixed-rate mortgage See fixed-rate loan.

fixed-term mortgage A real estate loan for a definite period of time, such as 15 or 30 years.

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172

fixer-upper Usually a polite way of describing a property in need of extensive repairs,renovations,

or cosmetic improvement.

fixture An item of personal property that becomes part of the real property.

fixturing period A time period before a lease begins, when the tenant is allowed access to make

improvements, deliver furniture, install phone systems, and other such matters.

flag lot A parcel of land shaped like a flag, with a narrow strip providing access to a public street

or waterway and the bulk of the property containing no frontage. When planned, it is a way to

maximize property density without having to install additional streets. Some jurisdictions require

subdivision platting and approval for any project that includes building additional streets. Flag lots

are a way around the platting laws.

flat An apartment.

flat-fee broker One who charges a set fee rather than a percentage of the sale price of a proper-

ty. Flat-fee brokers typically offer unbundled services, or no-frills services, and almost always exclude

any services connected with showing property, handling negotiations, responding to consumer

inquiries, or assisting with closing.

For a flat fee, one may usually obtain some combination of the following:

• Listing on the local multiple listing service

• Yard signs and subdivision entrance signs

fixer-upper flat-fee broker

A, B, and C are flag lots

Maple Street

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• An assigned phone number with voice mail for callers

• Placement on a Web site

• Packages of forms, instructions, videos, or DVDs

• A personal consultation for a specified time period

• An initial walk-through inspection with recommendations

flat lease See gross lease.

flat-rate tax A tax calculated as a certain percentage of income, with all persons paying the same

percentage.

flexible payment mortgage A mortgage with payments that are allowed to vary, but which will

always be sufficient to pay the loan over a certain amortizing period. An adjustable-rate mortgage is

one example, and a graduated payment mortgage is another.

flex space Originally, industrial space that could be configured as needed for offices, manufactur-

ing, assemblage, or warehousing.Today, the term usually refers to flexible office arrangements such

as movable walls, offices shared by different people during different time slots, or any number of

other flexible arrangements.

flip To buy low and sell high in a fairly short period of time; sometimes associated with predatory

practices such as securing an option on property about to be foreclosed and then exercising that

option only if able to find a purchaser who will pay enough to generate a profit.In the meantime,the

consumer cannot sell to anyone else.

• Condo flipping is accomplished through buying reservation rights in condos to be built

in the future, and then selling those rights, not the actual condo, shortly before project

completion. There are many Web sites devoted to nationwide markets for condo flipping.

• House flipping usually refers to the practice of buying a home at a price substantially

below market because of the need for repairs and then making the renovations and selling

in a short period of time, at a substantial profit. Acquisition and renovation is typically

financed with a mortgage note due in six months. The practice is risky for those unfamiliar

with construction, because delays can be catastrophic.

float (1) The amount of movement in a variable-rate mortgage, as in “the loan can float 1 percent

per year or a maximum of 5 percent in a lifetime.” (2) The period of time after a check is deposited

but before the funds have been collected or credited. If a depositor receives credit immediately, even

though it may take several days for the maker’s bank to transfer funds to the depositor’s bank, then

the depositor takes advantage of the float because it has use of the money. If a depositor does not

receive credit for several days, but the bank has already received its money from the maker’s bank,

then the bank takes advantage of the float.

floating lien Sometimes refers to the lien of an anaconda mortgage that attaches to additional

property acquired after a mortgage loan is originated. More properly refers to a lien on goods or

inventory that change constantly, as in financing for a retail establishment. The lien floats among

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174

items as they come into the store and are available for sale, detaching itself as the goods are sold

to consumers.

floating rate A loan interest rate that is not fixed and does not have specified times for increase

or decrease, but which floats and changes as the index changes.

floating zone A land area described in the text of zoning regulations but not placed on the

zoning map until a developer applies for rezoning.

flood insurance The popular name for the National Flood Insurance Program

(www

.floodsmart.gov) administered by the Mitigation Division of the Federal Emergency

Management Agency. Flood insurance is intended as an alternative to disaster assistance, by provid-

ing better assistance at cheaper net costs to the government. Policies are available in three forms:

dwelling (most homes), general property (apartments and businesses), and residential condomini-

um association. They cover structural damage; furnaces, water heaters, and air conditioners; flood

debris cleanup; and floor surfaces such as carpeting and tile.

flood insurance rate maps Maps maintained by the Mitigation Division of the Federal Emergency

Management Agency.They locate and describe areas having a 1 percent risk of flooding in any given

year.They can be viewed online at the FEMA’s Map Service Center Web site, h

ttp://msc.fema.gov.

flood plain Any normally dry land that is susceptible of being covered by water from any

natural source.

flood-prone area An area that has a 1 percent probability of flooding in any given year. Although

popularly known as an area that will flood sometime in a 100-year period, this characterization is

technically inaccurate.

floor Other than the obvious, refers to the bottom of something. Variable-rate mortgages may

provide a minimum interest rate, called a floor, even if the rate would otherwise be less if the index

dropped. Percentage leases with rent partially based on gross revenues might have a minimal

amount, or floor payment.

floor area ratio The ratio of floor space in a building to lot size; used in zoning regulations to

restrict the size of buildings.

floor duty The practice of assigning responsibilities to real estate agents for spending time in

the office in order to be available for walk-in customers or general phone inquiries not directed to a

particular agent.

floor joists Horizontal boards laid on edge and resting on the beams that provide the main

support for the floor. The subflooring is nailed to the joists, and then the flooring is installed. It is

increasing common to use engineered floor joists—wood and binding material rather than

traditional lumber—in order to gain strength and stability.

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floor load (1) The weight per square foot that the floors in a building can support, if the weight is

evenly distributed. (2) The weight per square foot of a particular piece of equipment or machinery

that will be installed in a building,frequently regulated in leases so as not to exceed a stated amount.

floor loan The minimum amount a lender will fund on an approved loan,with the balance payable

if and when the borrower meets certain conditions, such as minimum occupancy levels or preleas-

ing.If the borrower fails to meet the requirements, the borrower will have to secure gap financing or

mezzanine financing in the interim, which can be extremely expensive.

floor plan Architectural drawings showing the layout of the floor(s) in a building, locations of

load-bearing walls and/or required fire walls, dimensions for all walls, locations and swings (inward,

outward, which side the hinges are on) for all doors, and locations of windows.

flyspecking A slang expression for reviewing every word, every comma that might make a differ-

ence between dependent and independent clauses, every pronoun and its antecedents (does “he”

refer to the grantor or the grantee in a sentence,for example), and sketching every property descrip-

tion in every deed in a chain of title to make sure the same land is always described and the descrip-

tion makes an enclosed parcel.Comes from the expression “picking the flyspecks out of the pepper,”

which is an exceptionally tedious job.

FMHA See Farmers’Home Administration.

FNMA See Federal National Mortgage Association.

folio In some states, refers to the page number of the book in which real estate documents

are recorded.

foot-candle A measure of light intensity. One foot-candle is the illumination measured on a

surface one foot from the source of one candle. Many worker-safety regulations specify the mini-

mum foot-candles of light required in work areas. Zoning variances for commercial properties near

residential areas might place a restriction on the maximum foot-candles of lighting after a certain

hour at night.

footing A concrete support for a wall, chimney, or pillar, usually wider than the structure being

supported and intended to distribute the weight evenly over a larger surface area. Local building

codes will specify minimum footing size for various buildings, although the better practice is to

employ a structural engineer to determine the proper size,which may be in excess of the minimums.

footprint The area of land physically occupied by a building, including its square footage

and shape.

forbearance The act of restraining from exercising a right.

1. Typically encountered in leases and other contracts specifying that a forbearance by one

party who fails to declare a default when entitled shall not entitle the other party to rely

on future forbearances and will not constitute a waiver of any rights.

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2. After a loan default, lenders will sometimes enter into formal forbearance agreements

with borrowers, agreeing not to foreclose if the borrowers will agree to a new payment

plan, pay all attorneys’ fees associated with drafting the agreement, usually agree to a

higher interest rate and more collateral, and almost always agree to waive any and all

claims against the lender.

forced sale An involuntary sale resulting from foreclosure, execution on a judgment, partition

action by a cotenant wanting to sell the property and divide the money, or a divorce proceeding.

See distressed sale.

force majeure Something outside the control of parties to a contract and which could not have

been foreseen or planned for. Usually found in construction contracts, suspending the time limits in

the event of a force majeure. It can include Acts of God, such as tornadoes and hurricanes, or acts of

humans, such as a strike, terrorist attack, or other such disruptive event.

foreclosure The destruction of a borrower’s rights in mortgaged property, except as may be

allowed under statutes giving a post-foreclosure right of redemption.The foreclosure process varies

among states, but generally segregates into judicial foreclosures and nonjudicial foreclosures.

• Judicial foreclosures involve filing a petition with a court, asking that court to enter an

order as to the amount due under a mortgage loan, and then granting the lender

permission to sell the property and apply the proceeds to the debt.

• Nonjudicial foreclosures are accomplished by providing some sort of public notice of

the default and scheduled auction of the mortgaged property, and then carrying out the

auction process.

• Some states allow a statutory right of redemption after foreclosure. This gives the borrower,

and sometimes other creditors of the borrower, a certain amount of time to redeem the

property by paying the foreclosure purchaser the full amount of the purchase price plus

interest at a rate defined in the statute. This is different from the equity of redemption.

• The term equity of redemption means all rights of the borrower before foreclosure, but

which are extinguished at foreclosure. If the borrower has any rights after foreclosure,

they are granted by specific statutes giving a right of redemption.

• Some states have consumer protection statutes to guard against predatory purchasers

taking advantage of foreclosure panic on the part of homeowners.

• If a borrower deeds the mortgaged property to the lender in order to avoid a foreclosure,

that is called a deed in lieu of foreclosure. It is a risky route for the lender because all liens

remain on the property, even those that might have been cleared off by a foreclosure.

• In most states, if a foreclosure sale does not bring enough money to satisfy the debt, the

lender may sue the borrower for something called a deficiency judgment. Exceptions occur

in states that limit that right when the debt is a first mortgage on the borrower’s primary

residence. Another exception would be if the borrower has negotiated a nonrecourse

mortgage that insulates it from any personal liability.

• A foreclosure obliterates the rights of the owner (except as noted previously) and virtually

all creditors who might have filed claims after the mortgage was foreclosed. This includes

second mortgages, if the first mortgage is being foreclosed.

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The five major categories of parties who may still have claims on property after a foreclosure are

1. Those who hold mortgages or have other claims which were filed before the mortgage

that was foreclosed.

2. The IRS, if the foreclosing lender did not give it the proper notice required by federal law.

3. Those holding mechanics’ and materialmen’s liens, which might be for work started on

the property before the mortgage was taken, but perfected by filing documents after the

mortgage was recorded.

4. Local or state governments to which real estate taxes are due.

5. A bankruptcy trustee, who may set aside a foreclosure under the proper circumstances.

foreign corporation Any corporation organized under the laws of another state or country.

Foreign corporations may sue and be sued in the courts of a state only if they are registered and

licensed in that state.Normally, if a foreign corporation does business in a state without registration,

it may not use the courts of the state to sue the defaulting party.

foreign investment in real estate The U.S. government closely tracks foreign investment in many

critical sectors of the U.S. economy, including banking, technology, and real estate. Foreign investors

seeking real estate opportunities may gain information at the Web site of the Association for Foreign

Investors in Real Estate, www

.afire.org. The U.S. Department of Commerce, Bureau of Economic

Analysis (www

.bea.gov), requires annual reports from all foreign direct investors in U.S. business

enterprises, including real estate.

Foreign Investment in Real Property Tax Act (FIRPTA) A federal law designed to assist in the

collection of income taxes when foreign owners and investors sell real property or shares in entities

that own real property.

Purchasers are required to withhold 10 percent of the sales price unless either of the following

occurs:

1. The IRS is asked to calculate the exact taxes that would be due, in which case that

amount will be withheld.

2. The purchaser will use the property as a residence and the selling price is less than

$300,000.

Purchasers must report the withholding on IRS Form 8288 or 8288-A and must report and pay over

the money within 20 days after purchase. If purchasers do not withhold, they may be liable for the

taxes themselves. Almost all real estate closings today require the seller’s signature on what’s called

the FIRPTA affidavit, stating that the seller is not a foreign person. (For more information, see

Publication 515,“Withholding of Tax on Nonresident Aliens and Foreign Entities,”available at the IRS

Web site, www

.irs.gov.)

forfeiture The loss of rights to something as a result of a failure to perform an obligation. Courts

often view forfeitures as penalties, which are illegal. As a result, one who is buying property under a

bond for title and will receive a deed only when all payments have been made may be protected

from a forfeiture if there is a default after a substantial amount of money has already been paid.

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178

forgery A counterfeit signature or instrument. A forged deed is void and gives no rights, even to

innocent purchasers for value. If title insurance was purchased by an owner, however, that owner

may make a claim for compensation, or the title insurance company may take steps to buy out any

competing claims.

formaldehyde A colorless liquid with a distinctive odor, classified as a volatile organic com-

pound because it can be emitted as a gas from certain solids and liquids, even at room tempera-

ture. Almost every building component contains formaldehyde in some amount. It is used as a

component in glues and adhesives, and in paints and other coatings. Some claim it is a cause of

sick building syndrome.

form contract There is no such thing. Consumers often request a form contract for a real estate

sale, lease, or other transaction, thinking to obtain some universally recognized, perhaps govern-

ment-approved document with a few blanks for variables such as parties’ names. Office supply

stores, local associations of realtors, books in law libraries, and computers in real estate offices may

all have forms that are in widespread use,but each is capable of negotiation and customization.One

should never rely on a form to protect one’s rights—every document should be read in its entirety,

even the boring parts that seem like boilerplate, and changed as necessary.

formosan termite See termite bond.

fortress mall A shopping mall of superior quality, with at least one fashion department store,

at least four anchors having minimum sales of $500 per square foot, and surrounded by a “moat”

consisting of acres of parking. The goal is to capture consumers inside the fortress, where they will

remain to conduct all their shopping and dining. Still a strong market segment, but seeing erosion

by the newer lifestyle malls.

forum shopping clause A clause in an agreement specifying the state and county where any

disputes will be heard. All states have rules regarding jurisdiction, meaning the ability of particular

courts of the state (circuit, district, probate, justice of the peace) to hear particular disputes and

to issue orders that are binding on the parties. All states have rules regarding venue, meaning the

county in which a dispute must be heard. Forum shopping clauses alter the normal rules. They are

frequently included by financially strong parties who are afraid of the whims of local lawyers, judges,

and juries and would prefer that disputes are handled in their own backyard. Such clauses will be

upheld where reasonable under the circumstances.

The contractual agreement to a particular forum does not necessarily mean that forum’s law

will apply. Choice of law is another totally different concept. Many contracts with forum shopping

clauses also have choice of law clauses stating that the law of a certain state will control any disputes.

foundation inspection An examination of the support for a building to make sure it is sufficient

for the size and weight of the building and the character of the soil under it. Also, the examination of

an existing building to discover evidence of any defects in the foundation, such as cracks in exterior

walls or sinkholes.

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fourplex A small apartment building containing four residences. Many FHA loan programs are

available for fourplexes.

four quadrants of the real estate capital markets An expression describing the following:

1. Private equity. Direct, private, real estate investments

2. Public equity. REITS and other publicly traded vehicles

3. Private debt. Whole loan mortgages

4. Public debt. Collateralized mortgage backed securities and other similar vehicles

four-three-two-one rule One appraisal method that says commercial property of uniform depth

and with road frontage has 40 percent of its value in the front quarter of the parcel,30 percent in the

next quarter, 20 percent in the next quarter, and 10 percent in the rear quarter.

fractional interest Some interest in real estate less than the entire bundle of rights.

franchise (1) A contractual relationship whereby one party (franchisee) is entitled to use the trade

name, image, procedures, and trade secrets of another (franchisor) usually in return for paying an

initial purchase price and a percentage of gross revenues over the period of the arrangement. In

most instances, there is a separate fee for the franchisee’s share of national and regional advertising

campaigns. Real estate franchises include Century 21, RE/MAX, and ERA. (2) A government grant

of some privilege, such as the ability to operate as a corporation or the ability to sell drinks and

sandwiches in the county courthouse.

fraud A deceitful practice. Fraud consists of a misrepresentation of a material fact that is relied

upon by another party to his or her detriment. There is no requirement that the misrepresentation

be intentional. The thing misrepresented must be a fact; it is very difficult to prove fraud when one

fails to fulfill his or her obligations but had good intentions in the beginning.

There are three types of fraud:

1. Intentional fraud. Punitive damages may be assessed for this type of fraud.

2. Negligent fraud. As when one makes a statement recklessly but without any intention to

deceive, and someone relies on that statement and is injured when it turns out to be false.

One example would be a real estate agent telling a buyer that all appliances are new

when, in reality, the agent didn’t know but thought they looked new. Depending on the

degree of recklessness involved, this type of fraud may or may not support punitive

damages.

3. Innocent fraud. As when one takes steps to confirm facts but is perhaps mistaken or

given mistaken information, and then relays that information to someone else who relied

on it and was injured.

The Statute of Frauds is a rule that says certain contracts must be in writing, including contracts

having to do with real estate. It has nothing to do with fraud, per se, except to protect against

possible fraud by requiring a writing.

Freddie Mac See Federal Home Loan Mortgage Corporation.

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180

free and clear title Title to real property that is absolute without any liens, mortgages, adverse

claims, or other encumbrances.

freehold An estate in land for life or in fee. The duration of the interest is undeterminable. The

estate may end at some point in the future, but no one can predict the date of termination. Best

understood by reference to its opposite, which is a leasehold.

free market system auction An auction process used by the Federal National Mortgage

Association (Fannie Mae) to accept bids from approved lenders as to the amount,price, and terms of

existing mortgages those lenders desire to sell to Fannie Mae. Once Fannie Mae decides how much

it can spend to buy mortgages, it notifies the winning bidders, who have a certain amount of time

within which to deliver the mortgages. The servicing agent continues to service the loans and

receives a fee from Fannie Mae.

friable Crumbly, brittle.When asbestos is friable, it is hazardous.

frontage The length of a property line along a road, street, waterway, or important amenity such

as a state park.

front-ending Doing something in advance of the economically prudent time, taking into consid-

eration all risks. Local governments may front-end the streets in a project and require the developer

to build all of them, even though the rearmost lots might never sell. Metropolitan development

boards might front-end incentives and pay them to a developer in advance, in order to help defray

start-up costs, rather than the more normal method of giving tax breaks over time.

front-end ratio A mortgage qualification calculation prepared by taking the proposed month-

ly mortgage payments, plus real estates taxes and insurance, and dividing that number by the

borrower’s gross monthly income without reduction for taxes.

Example:

Steve makes $4,000 per month. The mortgage for a home he would like to buy

would result in payments of $1,100 per month. His front-end ratio is $1,100  $4,000  27.5%.

This is an acceptable ratio for lenders, who would prefer to keep it at 29 percent or lower.

front foot A method of describing or pricing commercial real estate by the number of feet of road

frontage the parcel has.The drawback is that there is no widely recognized standard for depth, so a

property selling for $1,500 per front foot might be half the depth of one selling for $2,400 a front

foot, but no one can tell just from the price.

front-loading See front-ending.

front money Cash needed to start a development, as opposed to borrowed funds. See seed

money.

frost line The depth of frost penetration into the soil. It varies from area to area,depending on the

soil quality in a particular location, but can average 3 to 4 feet below the surface. Building founda-

tions should penetrate below the frost line in order to avoid the shifting caused by frost heaving.

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Many local building codes allow an exception with the use of a frost-protected shallow foundation,

which uses insulation and drainage techniques to raise the frost line to just below the surface.

frost-protected shallow foundation A construction method that uses insulation and drainage to

artificially raise the frost line of soil to a level that allows relatively short—shallow—foundations. In

cold climates, building foundations must extend below the frost line to a depth of soil that does not

freeze. Freezing causes soil to heave upward and then sink back again, shifting everything on top

of the soil. It does not result in a very stable building base unless one takes steps to prevent soil

movement.

FRT See federally related transactions.

fructus industriales The fruits of industry, meaning crops and other annual plants that must be

sown each year in order to produce.At common law, these things were considered the tenant’s, who

could make claim for them at the end of a tenancy.The terms fructus naturales and fructus industri-

ales are not representative of modern agribusiness or ranching, but come from a time before the

industrial revolution.

fructus naturales The fruits of nature, meaning things produced by nature without the help of

humans, such as fruits, wool, offspring of animals, and milk. At common law, these things did not

belong to a tenant, who could not make any claim for them at the end of a tenancy. The terms

fructus naturales and fructus industriales are not representative of modern agribusiness or ranching,

but come from a time before the industrial revolution.

FSLIC See Federal Savings and Loan Insurance Corporation.

FTC See Federal Trade Commission.

full capacity Able to enter into contracts without any disabilities at all, such as would be

attributable to age or mental abilities.

full disclosure A requirement to reveal all information relevant to a transaction. Some states have

full disclosure laws requiring transmittal of property condition information to buyers.

full reconveyance A mortgage concept used in title theory states, where the borrower transfers

title to the real property to another, usually a trustee, and is entitled to full reconveyance, or a return

of the legal title, when the debt has been paid in full.

full service In connection with a lease, this indicates that the landlord provides janitorial, parking

lot cleaning, and waste removal services, but the tenant may have to pay for these services through

its pro rata portion of the building maintenance expenses. Contrast with full-service gross lease.

full-service gross lease A lease requiring the landlord to provide and pay for all maintenance,

upkeep, repairs, janitorial services, waste removal, utilities, insurance, taxes, and other operating

expenses for a property in return for a fixed periodic rent from the tenant.

frost line full-service gross lease

fully amortizing loan A loan calling for periodic payments that include some amount of interest

and some amount of principal reduction, such that, at the end of the loan term, the entire principal

amount of the loan plus all accrued interest will have been paid in full.

functional obsolescence A loss of value from all factors within a property except for physical

deterioration.This may include a poor floor plan, the lack of a garage, high ceilings that dramatically

increase heating costs, or the lack of central air conditioning in the South. Contrast with economic

obsolescence (factors outside the property that depress its value) and physical obsolescence

(deterioration).

funding (a loan) The act of a lender paying money under a loan.

funding fee (1) A fee charged to the borrower by the Veterans Administration for guaranteeing

a loan. (2) A fee charged by lenders as additional profit, and which may be negotiated downward.

funds from operations A measure of the profitability of any business,but particularly a real estate

investment trust. It is net income without downward adjustments for depreciation or amortization

and without considering any extraordinary revenues such as from the sale of an asset.

furniture, fixtures, and equipment (FF&E) All the property at a location, except for the real prop-

erty itself. Usually referred to by the initials only (FF&E). Lenders will often take security interests in

the FF&E of a business borrower, in addition to a mortgage on the real property, so as not to

encounter a possible post-default battle over what was covered by their lien.

future-advances mortgage A real estate loan that contemplates some portion being funded—

advanced—at the beginning of the loan, usually for a purchase of property. The amount advanced

is not the full allowable amount under the loan so that future monies may be obtained as necessary

for construction, renovation, or other uses in or for the property.

future interest Interest in land in which the possession and enjoyment are deferred until a

future date.

FY Fiscal year, as in FY07.

fully amortizing loan FY

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183183

GAAP (pronounced “gap”) Generally accepted accounting principles declared by the Financial

Accounting Standards Board (FASB).

gain The profit on the sale of an asset.One may realize gain, as when property is taken in condem-

nation, but not recognize gain for tax purposes until a later date. When reading tax advice, it is

extremely important to differentiate between these two concepts, as authors sometimes assume

that all readers understand the difference.

game theory The science of evaluating the relationships among parties and the optimal choic-

es for participants in any given situation. Game theory is an important tool in negotiating. Two

frequently encountered game theory models are the prisoner’s dilemma and chicken.

• The prisoner’s dilemma model involves parties trusting each other to make the best choice

for all, without prearranging their plans, rather than making the best choice for an individ-

ual. This is seen in the real estate world in quoting commissions, which involves informal,

nonverbal negotiations among real estate agents. Although there is no price fixing going

on, all brokers understand that if they cooperate and refuse to lower prices, they will all

make a good living. If one or a few lower commission rates in order to capture a lot more

business, those few will do well until all brokers lower their prices and get into a price

war, after which all will do poorly.

• Chicken is the “sport” of two cars racing against each other, head-on, with the first one to

swerve being labeled chicken and losing the match. The best way to win a game of chicken

is to remove your ability to swerve and to let the other side know that you no longer have

any freedom to move—no freedom of negotiation, in other words. For example, the com-

mon use of the chicken theory is to tell a seller that you do not have, and cannot borrow,

enough money to meet the asking price. The seller will have to reduce the price, or you

will have to find another property.

gap A time period when an additional title search is being conducted to determine if any adverse

findings have occurred since the original title search and the recording of the deed or mortgage.

gap financing A loan that covers the difference between the construction loan and the

permanent financing. See bridge loan.

gap in title A break in the chain of title, as when one finds a deed into party A, and then later

a deed out of party B, with never any more claims or deeds from party A.

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184184

Example: You see a deed into Ralph and Anna Brown in 1974, but no deed out of their names.

On the other hand, the same property suddenly has a deed in 1985 from “Anna B. and Thad

Morton” to Mirriam Waites, but you can’t find a deed into Anna B. and Thad Morton. This is

a gap in title. Most likely, Ralph Brown died and his widow, Anna Brown, married Thad

Morton, but you will need additional research to clarify this.

garage mahal A slang expression for an opulent parking garage.

garnishee A party who owes money or holds property belonging to the judgment debtor.

garnishment A process involving three parties:

• Judgment creditor. The party who takes a judgment against a debtor (can also be the IRS or

a state’s Department of Revenue).

• Judgment debtor. The party who owes the debt.

• Garnishee A party who owes money or holds property belonging to the judgment debtor.

In this legal process, the judgment creditor obtains a court order requiring the garnishee to turn

over funds or property to the judgment creditor instead of to the true owner, the judgment

debtor. The most common garnishments are against employers, requiring them to withhold a

portion of wages and salary and pay it to the creditor rather than to the employee. The second

most common garnishment is against a bank, ordering it to turn over bank account funds to the

judgment creditor or the IRS.

gap in title garnishment

184

John and Mary Rice

Ralph and Anna Brown

Mirriam Waites

1-31-1974

11-28-1985

Anna B. and Thad Morton

gated community A fenced and gated community of homes. Most local governments require

public access to all roads maintained by the government. As a result, gated communities must

usually assess homeowners in order to maintain their own roads.

gatekeeper A slang expression to describe the person you must persuade or impress just to get

your proposal in front of a decision maker.

gazump An action by a seller to increase the purchase price of goods or property after the buyer

is emotionally invested but immediately before the paperwork is signed. Contrast with gazunder.

gazunder An action by a buyer to lower the offer for goods or property after the seller has

already mentally spent the purchase money and is emotionally invested in a sale at that time, but

immediately before the paperwork is signed. Contrast with gazump.

GC General contractor. Also can be written as G/C.

general agency See agency.

general agent See agency.

general and administrative expenses Usually a pro rated portion of general overhead, charged

to a particular project although not capable of segregation into goods or services provided for that

project. An example could be the cost of paper, toner, office equipment maintenance contracts,

phone lines, and office space.

general bill of sale A document transferring ownership of personal property to another.There are

no particular requirements,so long as someone can identify the parties involved and the thing being

sold. It is not necessary to spell out the amount paid, but it is usually a good idea to include it.

Example: “John Jones sells to Lydia Lang, for $200, one 10x15 foot hard plastic portable shed

located at 135 Elm Street, Pleasant, New York.”

general contractor One who is responsible for construction of a building or other improve-

ment for an owner or a developer. Most states have educational, experience, and insurance

requirements as a condition of obtaining a general contractor’s license. They also prohibit

unlicensed persons from constructing improvements for another unless the project is under a

certain specified size. The trade association is the Associated General Contractors of America

(www

.agc.org), established in 1918.You may check licensing requirements and the status of local

contractors at www

.contractors-license.org, maintained by the Craftsman Book Company.

general lien A lien that attaches to all property of a debtor located within the area where the lien

was recorded. Judgments and IRS liens are general liens, which may be satisfied from the sale of any

property found. Contrast with specific lien, which is upon specifically described property only.

generally accepted accounting principles (GAAP) (pronounced “gap”) Established by the

Financial Accounting Standards Board (FASB), these are the guidelines for proper accounting

practices.

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gated community generally accepted accounting principles (GAAP)

general partner One who may enter into contracts for a partnership, is liable for all partnership

debts,is entitled to vote on all partnership affairs, and is entitled to a pro rata share of all partnership

profits.The general partner may be an individual or a corporation. A partnership may be comprised

entirely of general partners, or it may have one or a few general partners with the remainder of the

investors being limited partners.

general partnership A partnership in which all partners are general partners. Contrast with

limited partnership.

General Services Administration (GSA) A government agency established in 1949 with the

passage of the Federal Property and Administrative Services Act, consolidating several earlier agen-

cies. The GSA’s areas of responsibility are public buildings, federal supply, and national archives

and records. It has been responsible for establishing the Federal Citizen Information Center in

Pueblo, Colorado; bringing the government into the credit card age for employee expenses; and

creating www

.firstgov.gov, the official portal for all government Web sites. The GSA Web site is

at www

.gsa.gov, which is the starting point for all inquiries regarding surplus property sales

and auctions.

general warranty deed An instrument transferring ownership of real property, and which war-

rants—promises—that the seller has good title with no adverse claimants and that the seller will

defend the title against other parties should that prove necessary. Contrast with special warranty

deed, which simply promises that the seller has not done anything to cause a problem with the title.

Contrast also with quitclaim deed, which makes no promises at all, but simply transfers any interest

the seller might have, if anything.

gentrification The informal process of revitalizing an older and deteriorated neighborhood

into more upscale homes owned by more affluent occupants. The first step is usually taken by

young professionals seeking affordable housing in an urban setting, who immediately begin

using disposable income to upgrade their properties.Their efforts attract other like-minded home

buyers. Eventually the neighborhood reaches a point where the existing homeowners can afford

to sell their properties and buy elsewhere, but they can’t afford to pay the increasing property

taxes. The process gains momentum at that point, with former apartment buildings being

converted to condos, single-family residences undergoing complete renovations, and the entire

neighborhood changing to middle class or upper-middle class. It is controversial, with some

claiming it destroys the ethnicity and integrity of many older neighborhoods, all in the guise of

ethnocentric notions of “improvement.”

geodetic survey system A national coordinate system for mapping the lands, waters, coastlines,

and even the ionosphere. Geodetic coordinates are indispensable for routing transportation and

delivery of goods, locating underground utility equipment for repairs, excavating, and restoration of

the earth’s surface.The entire Internet depends on global positioning system (GPS) clocks for the pre-

cise timing necessary to avoid instant, perpetual gridlock. Without the spatial coordinates supplied

by the geodetic survey system, which are necessary for minute adjustments in the delivery of time

186

general partner geodetic survey system

186

information, the Internet, the financial sector, and a host of other necessary sectors of our economy

would be in the Dark Ages.

geographic information system (GIS) A computer mapping program in which land character-

istics and/or demographic information may be revealed and printed as color-coded overlays.

gerbil tube Slang for a glass-enclosed pedestrian overpass connecting two buildings.

ghetto A term with its origins in eastern Europe, used to designate the part of town occupied by

Jewish citizens. Now the term ghetto is used to describe any urban area suffering significant deteri-

oration,often predominated by one or a very few ethnic or racial groups.Disputes often arise regard-

ing whether lenders,insurers,and other service providers are engaged in illegal discrimination when

they redline these neighborhoods, or whether they are assessing risks based on the quality of the

infrastructure and not on any judgments regarding the inhabitants.

GI Bill Now called the Montgomery GI Bill, it offers support for veterans seeking postsecondary

education.

gift causa mortis A gift in contemplation of death. This was an important term at one time

because the IRS required such gifts, made within 3 years of death, to be included in the gross estate

for estate tax purposes. You will still encounter the word, but the legal significance is no longer

important because such property is no longer included in the estate.

gift deed A deed with love and affection as the consideration, but nothing else of generally

accepted monetary value.

gift letter A letter provided to a lender or government agency stating that money to be used

as the down payment for a home loan was a gift and not a loan from the donor.

gift tax A federal tax that must be paid by a donor. The tax is based on the value of lifetime gifts

made to others except in the following situations:

• For the base year of 2004, one can make gifts of up to $11,000 of cash or property per year

to each recipient without incurring gift taxes; spouses may give up to $22,000 per year to

each recipient. After 2004, there is a cost-of-living adjustment. This is an important aspect

of estate planning. See family limited partnership for details.

• Tuition or medical expenses paid directly to the educational or medical institution are not

counted as gifts, regardless of the relationship with the student or patient.

• Gifts to spouses are not taxable; there are no dollar limits.

• Gifts to political organizations or charities are not taxable.

For more information, see Publication 950, “Introduction to Estate and Gift Taxes,” available at the

IRS Web site, www

.irs.gov.

GI loan GI is a slang term for armed services personnel—”government issue.” A GI loan is a loan

program for armed services personnel. See Veterans Administration.

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geodetic survey system GI loan

Ginnie Mae A corporation formed in 1968 and placed under the control of the Department

of Housing and Urban Development (HUD). Ginnie Mae makes no loans, nor does it buy or sell

mortgages.Instead,it guarantees pools of federally insured or federally guaranteed loans.It is almost

never called by its true name, which is the Government National Mortgage Association (GNMA)

(www

.ginniemae.gov).

going-concern value The value of a business in operation,taking into account the goodwill and

the value of the income, in addition to hard assets, such as real estate and equipment. When

appraising a project to develop income-producing property, the appraiser will usually provide two

numbers—one for the project on the day of completion, with no tenants, and one when it reach-

es stabilized occupancy and is a going concern. Lenders who take mortgages on income-produc-

ing property with intensive management aspects—such as hospitality properties—usually obtain

a going-concern rider for the title insurance so that coverage will be increased above the value of

the real property.

going dark A slang expression for a retail store closing its doors and discontinuing operations at

a particular site. Many shopping center and strip center leases prohibit an anchor store—the one

that draws traffic to the center and assists the smaller stores with business—from going dark.

Without the clause, the anchor store would be able to move to another location, close operations at

the old location but continue paying rent, and effectively destroy the business of all other tenants

because of the reduction in traffic.

going-in capitalization rate A total obtained by dividing a project’s first year’s net operating

income by the purchase price or development cost.

gold plating Including unnecessarily expensive items in a construction or renovation project to

justify a large budget or a substantial rent increase.

good and marketable title A title to real estate, free of any liens or adverse claims.

good and merchantable title See good and marketable title.

good consideration Usually signifies something founded on moral obligation or affection for the

value necessary to support an enforceable contract. Many deeds will recite they are in consideration

of love and affection.This is good consideration,and is sufficient,but it is not valuable consideration.

good faith Honesty.

good-faith estimate An initial estimate of expected closing costs, net proceeds to seller, gross

cash required of buyer, or loan expenses. By virtue of various state and federal laws, a seller’s real

estate agent may be required to provide a good-faith estimate of net seller proceeds to accompany

every offer; the closing company may be required to provide a good-faith estimate of closing

expenses to the buyer, and a lender may be required to provide a good-faith estimate of loan costs

to a borrower.

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Ginnie Mae good-faith estimate

188

good funds Collected funds in a bank account and usable immediately by the owner of the

account.

good title See good and marketable title.

goodwill An intangible asset consisting of the public esteem in which a business is held. When a

business is sold, the difference between the value of the hard assets and the value of the income

stream is often attributed to goodwill. One may not depreciate goodwill, but it can be amortized

over 15 years because of its inclusion in the IRS definition of Section 197 intangibles.

Government Accountability Office (GAO) An investigative arm of Congress, formerly called the

General Accounting Office. Members of Congress may request a wide variety of reports, analyses,

and raw data, which is supplied in a nonpartisan manner by the GAO. It also recommends actions to

be taken by Congress as a result of findings in the reports. Its Web site, www

.gao.gov, contains an

excellent search engine to find reports on housing, financial services, and natural resources, to name

a few topics.

A few interesting reports related to real estate include

• ‘’Financial Institutions: Issues Regarding the Tax-Exempt Status of Credit Unions” (impor-

tant because credit unions usually offer lower interest rates because of their tax-exempt

status, but banks are crying “no fair” over the situation.)

• ‘’Real Estate Brokerage: Various Factors May Affect Price Competition”

• ‘’Title Insurance: Preliminary Views and Issues for Further Study”

• ‘’Catastrophe Risk: U.S. and European Approaches to Insure Natural Catastrophe and

Terrorism Risks”

• ‘’Consumer Protection: Federal and State Agencies Face Challenges in Combating

Predatory Lending”

• ‘’Residential Care Facilities Mortgage Insurance Program: Opportunities to Improve

Program and Risk Management”

• ‘’Public Housing: Information on the Roles of HUD, Public Housing Agencies, Capital

Markets, and Service Organizations”

• ‘’Elderly Housing: Federal Housing Programs and Supportive Services”

Government National Mortgage Association (GNMA) Almost always referred to by its popular

name—see Ginnie Mae.

government patent The original deed out of the government and into the first private individual

to own a particular parcel of land. A thorough title search will trace the title of real property all the

way back to a government patent.

Government Printing Office (GPO) The federal government’s primary, centralized resource for

gathering, cataloging, providing, authenticating, and preserving published information in all its

forms. It maintains a 1.5 million square foot facility in Washington D.C. for processing, printing,

189189

good funds Government Printing Office (GPO)

and distribution of materials. Unless one knows the specific government agency responsible for

particular materials, GPO’s Web site, www

.gpo.gov, is the best place to start any search regarding

laws,regulations,procedures,forms,advice,or virtually anything else prepared by or collected for the

U.S. government.

government rectangular survey system See public land survey system.

government-sponsored enterprise (GSE) One of a group of financial services organizations cre-

ated by the government. Some are owned by the federal government, some are owned by private

individuals,and some are owned by corporations that use their services.All of them enjoy exception-

ally low loan rates and exceptionally high sales prices for their bonds and other debt instruments

because of the implicit backing of the U.S. government.They include

• Federal Home Loan Banks. Owned by over 8,000 community financial institutions that use

the services of the FHLBs.

• Federal Home Loan Mortgage Corporation (Freddie Mac). A stockholder-owned, publicly

traded corporation listed on the New York Stock Exchange as FRE.

• Federal National Mortgage Association (Fannie Mae). A stockholder-owned, publicly

traded corporation listed on the New York Stock Exchange as FNM.

• Government National Mortgage Association (Ginnie Mae). A wholly owned (by the

government) corporation within the Department of Housing and Urban Development.

• Farm Credit Bank. Federally chartered and borrower-owned financial institutions.

• Federal Agricultural Mortgage Association (Farmer Mac). A stockholder-owned, publicly

traded corporation listed on the New York Stock Exchange as AGM.

• Student Loan Marketing Corporation (Sallie Mae). A stockholder-owned, publicly traded

corporation listed on the New York Stock Exchange as SLM.

government survey method See public land survey system.

GO-Zone Certain named states and counties in the southern United States,as designated in the

Gulf Opportunity Zone Act of 2005. This legislation was passed by Congress in the wake of the

devastating 2005 hurricane season to provide tax benefits in hurricane-ravaged areas. Among

other benefits, improved property purchased and put into use after August 25, 2005, and before

January 1, 2009, may have 50 percent of the value of the improvements depreciated in the first

year. In addition, demolition expenses may be written off as expenses rather than capitalized, and

the Section 179 expense limits were increased dramatically. Neither the properties, nor the

investors,need to have suffered any hurricane damage.The program is similar to the now-defunct

Liberty Zone tax benefits enacted after 9/11. For more information, see Publication 4492,

“Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma,” available at the IRS

Web site, www

.irs.gov.

grace period The allotted time during which a payment can be made without penalty and

without entry upon credit records as delinquent or in default.

Grade (1) A designated ground level. (2) To change the contours of land.

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Government Printing Office (GPO) Grade

190

Gradient The slope, or change in elevation, of land or improvements such as a pipe or a road. It is

expressed as the ratio of inches (or feet) of rise or fall over a specified distance. It is similar to the

concept of pitch in roofing. Figure A (above) has a gradient of 1:12 because the grade increases by 1

foot over a distance of 12 feet. Figure B has a gradient of 1:6.

Graduate REALTORS® Institute (GRI) An education program developed by the National

Association of REALTORS® (www

.realtor.org) and offered through state REALTOR® boards. Members

may earn the designation after completion of 90 hours of coursework.

graduated payment mortgage A home loan structured to provide lower payments in the

early years, growing as the homeowners’ financial situation hopefully improves. The FHA-insured

graduated payment mortgage plan is called a 245 loan.(Do not confuse with the FHA-insured 245(a)

program, called a growing equity mortgage.)

graduated rental lease A commercial lease that offers low rental rates in the early months or

years, increasing over time to reach market rates. Sometimes the later rents are greater than market

rates, as when the low early rent must be recouped in later years; usually offered as an incentive to

secure tenants for a new building or one suffering the recent departure of an exceptionally large ten-

ant.Other times it is offered when a large tenant vacates but continues paying rent for the unexpired

term of the lease—the old tenant will make an arrangement with the landlord and effectively

subsidize the new tenant’s rent for some period of time.

Gramm-Leach-Bliley Act Contains privacy provisions regarding consumers’ financial informa-

tion. Financial institutions are required to provide information to their customers regarding infor-

mation-gathering and information-sharing practices. Consumers may opt out if they do not want

their information shared with nonaffiliated third parties.

grandfathering An expression used to describe a statutory or contractual willingness to allow

some activities or former rights to continue even though not technically allowed under current con-

ditions. For example, downtown zoning regulations no longer allow gas stations in the area, but

Fred’s Fuel was doing business before the zoning laws went into effect,so it is grandfathered and can

stay in business.

191191

Gradient grandfathering

Figure A

1 ft

6 ft

12 ft

Figure B

grand list A name for tax rolls in the New England states.

granny flat A slang expression for accessory apartments in areas of single-family zoning; also

called mother-in-law apartments or maid’s quarters, they may or may not be allowed under zoning

regulations.

grant The act of conveying title to real estate via a voluntary transfer. In some states, use of the

words “grant, bargain, and sell” in a deed automatically incorporates some or all of the typical deed

warranties. (See warranty deed.) In order to avoid the consequences of such statutes, if a grantor

wishes to convey title without any warranties, it should use a quitclaim deed or the words “bargain,

sell, and quitclaim”rather than “grant, bargain, and sell.”

grantee A person who receives the title of real estate via a deed.

grantor A person who gives title to real estate via a deed.

grantor-grantee index A method of tracing ownership of real property. Before widespread use of

computer databases, all deeds in the abstract system of recording were recorded in deed books,but

indexed in grantor-grantee indexes and grantee-grantor indexes.These are large books divided into

alphabetical sections such as “Aa through Ad,”“Ae through Al,” and so on. Each deed was recorded

by the grantor’s name and then by the grantee’s name in the appropriate section of the index.

Depending on the volume of transactions over time, an index book might contain entries for a few

or for many years.

gratuitous agent An agent who acts without compensation, but who still owes full fiduciary

responsibilities to his or her principal.

grave dancer See bottom feeder.

greater fool theory An investing theory that supports buying overvalued property in a hot mar-

ket because a greater fool will come along and buy it from you at a profit. Like the game of musical

chairs,the greater fool theory breaks down when one misjudges when the music will stop and there

won’t be enough fools (chairs) to go around.

greenbelt An area of natural vegetation around a development, intended to provide a buffer and

natural setting. It may be required by zoning or restrictive covenants or may be simply an aesthetic

choice.

green space A natural area in or around a development,intended to provide buffer, noise control,

recreational use, and/or wildlife refuge, all in order to enhance the quality of life in and around the

development.

GRI See Graduate REALTORS® Institute.

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grand list GRI

192

gridiron Used to describe the numbered rectangular street and avenue system once popular with

urban planners. For example, 101 1st Avenue would be on 1st Avenue, between 1st Street and 2nd

Street. Contrast with the street hierarchy system (above), which is a more disorganized street system

consisting of neighborhoods with very limited entrances and exits, and streets with names rather

than numbers.

grid system See gridiron.

gross area A term that must be defined with each use; sometimes it means the total heated and

cooled floor area of a building,measuring from the exteriors of all walls and including all floors.Other

times it is used to signify space measured from the inside of the exterior walls.

gross income The total revenue of a business or individual before deduction for expenses,

allowances, depreciation, or other adjustments.

gross income multiplier A rule of thumb for evaluating the reasonableness of an asking price.

One compares the monthly or annual gross income to the asking price and evaluates how that

compares to typical ratios for similar properties. For example, some investors will not pay more

than 100 times the monthly gross income for a property. If a house rents for $900 per month,

the investor will pay $90,000 but no more.The method is not a good indication of value and would

never be employed by an appraiser, but it has its uses as a preliminary qualifier or disqualifier of

properties.

gross lease A lease for a set amount of rent each month, with the landlord paying all expenses of

the property and its management. It is the typical form of lease for residential properties. Contrast

with a net lease in which the tenants reimburse the landlord for some or all of the expenses of

ownership and management. (Net leases are common in commercial transactions.)

gross leasable area (GLA) A total amount of floor space available for rental to tenants; typically

encountered in the retail development industry, although it also applies to office space.

193193

gridiron gross leasable area (GLA)

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d Ave N

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Poe D

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Gridiron system. Street hierarchy system.

gross potential income The total rent possible from a property if it were 100 percent leased at

market rates (with no deductions for bad debt,) plus ancillary income such as from laundry machines

and late fees. Contrast with gross potential rental income.

gross potential rental income The total rent possible from a property if it were 100 percent

leased at market rates (with no deductions for bad debt,) but does not include ancillary income like

laundry machines or late fees.

gross rent multiplier See gross income multiplier.

gross square footage The total number of square feet of a building, measuring from the outside

of the exterior walls and including all floors.The term is generally encountered in an institutional set-

ting where the ratio of head count to gross square footage of buildings is important for determining

capacity and the need to construct more buildings.

gross up To artificially increase operating expenses in a project for accounting purposes in order

to calculate each tenant’s pro rata share of those expenses. Most commercial leases provide that

actual operating expenses will be increased—grossed up—to what they would be if the project

were 95 percent leased. That figure is then divided among the tenants according to their pro rata

share of expenses, as determined by their pro rata share of leased space.

ground area See footprint.

ground lease A long-term lease of land in which the tenant will erect improvements at its own

expense. Not a desirable arrangement from the tenant’s point of view, but sometimes the only

way to gain access to extremely valuable real estate in an excellent location. The owner may be

unwilling to sell, or the owner may have received the property by gift or deed (such as a church or

university) and be prohibited from selling for some period of time. At the end of the lease term,

the improvements become the property of the landowner.

ground rent The rent paid under a ground lease.

groundwater Water below the earth’s surface, saturating soil and rock at the level of the water

table and below. It supplies approximately 35 percent of the drinking water in the country and,

as such, is a source of much concern for the Environmental Protection Agency. If one purchases a

property with contaminants, and those contaminants have leached into the groundwater, then

remediation will usually be required before development can proceed.

group boycott An illegal practice in which two or more real estate brokers or agents refuse to

cooperate and split commissions with another one, usually a discount broker.

group home A residence for a group of persons with similar special needs, such as developmen-

tally challenged adults or abused women with small children.

growing equity mortgage (GEM) A home loan arrangement in which the payments are

increased each year by a specific amount, with the additional money credited to additional principal

194

gross potential income growing equity mortgage (GEM)

194

reduction. As a result, the loan is paid in full earlier than the normal amortization period. The FHA-

insured GEM program is called a 245(a) loan.

grow your own buyer strategy When seeking out occupants for a single-tenant building,

searching for one that is likely to desire purchasing the building in 3 to 5 years.

GSE See government-sponsored enterprise.

guarantee The act itself, or also the document, whereby one agrees to pay a debt if the principal

obligor does not. Under common law, creditors had to exhaust their remedies against a debtor

before pursuing a guarantor. Today, almost all guarantee instruments contain clauses allowing the

creditor to seek payment directly from the guarantor if there has been a default by the debtor.

Guarantee agreements must be in writing to be enforceable. Usually, there must be some consider-

ation passing to the guarantor unless the instrument creating the obligation (note, lease) is signed

at the same time as the guarantee, in which case the law assumes the guarantor has some interest

in the transaction.

guardian A person who operates under court supervision and handles the affairs of a party—the

ward—who is incapable of doing so.Wards may be minor children or those adjudged incompetent.

Guardians may execute deeds on behalf of their wards. In some states, a guardian may not place

a mortgage on property owned by the ward, nor may the guardian buy property subject to a

mortgage.

guide meridians Lines placed every 24 miles in the public land survey system in order to correct

for the earth’s curvature.Meridian lines are imaginary lines running north and south.They cannot be

parallel because the earth curves as it approaches the poles. As a result, they cannot be a uniform

6 miles apart, as they should be.The guide meridians correct for this.

Gulf Opportunity Zone Act of 2005 See GO-Zone.

195195

growing equity mortgage (GEM) Gulf Opportunity Zone Act of 2005

196

habendum clause The part of a deed that begins with the words “to have and to hold” and that

defines the quantity of estate granted,such as “to have and to hold for and during her natural life and

thereafter to grantor.”This example gives a life estate to the grantee and a remainder to the grantor.

habitable Living quarters capable of being occupied without danger to health or safety and in

a manner generally consistent with minimum living conditions for the community. Many states

require landlords to provide habitable dwellings to tenants.

half section See public land survey system for a full explanation.

Example:

A section of land is 1 square mile, being 5,280 feet on each side and containing 640

acres. A half section can be the north or south half, or it can be the east or west half, but it can’t

be an arbitrary 320 acres somewhere in the middle. A half section would have one side of 5,280

feet and the other side of 2,640 feet.

handicap The Fair Housing Act prohibits discrimination on the basis of a handicap.A handicap has

been defined as having the same meaning as disability. Persons with disabilities are persons with

mental or physical impairments that substantially limit one or more major life activities. The term

mental or physical impairment may include conditions such as blindness, hearing impairment,

196

2,640 ft 2,640 ft

1/2 section

5,280 ft

1/2 section

197

mobility impairment, HIV infection, mental retardation, alcoholism, drug addiction, chronic fatigue,

learning disability, head injury, and mental illness. The term major life activity may include seeing,

hearing, walking, breathing, performing manual tasks, caring for one’s self, learning, speaking, or

working.The Fair Housing Act also protects persons who have a record of such an impairment or are

regarded as having such an impairment.

handyman’s special In real estate advertising,generally indicates a building with substantial dete-

rioration and in need of extensive repairs beyond normal paint-up/fix-up aesthetic improvements.

harbor line Also called the navigable line, it is an arbitrary line set by local authorities for the far-

thest extent wharves and other structures may intrude into the rivers and other waterways so as not

to interfere with navigation.

hard costs See direct costs.

hazard insurance A form of property insurance that protects against physical damage to

property, such as by fire or tornado.

hazardous substance Generally defined as a substance posing imminent and substantial dan-

ger to public health and welfare or the environment. The Superfund hazardous substances are

specifically defined by inclusion lists within the following legislation:

• Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)

• Clean Water Act

• Resources Conservation and Recovery Act

• Clean Air Act

• Toxic Substances Control Act

hearing A legal proceeding conducted by an administrative agency in order to take testimony

and arguments for or against a proposed action. Parties may have attorneys present but are not

required to do so. Unlike the court system, most agencies permit corporations to appear through an

officer or majority shareholder, without requiring an attorney.

heavy industry A concept usually important in zoning regulations,where it will be defined for the

particular purposes of those laws.In common parlance, heavy industry is usually understood as that

requiring extensive capital investment in land and machinery and thus not easily relocated. This is

handicap heavy industry

197

North River

This wharf violates the harbor line

Shoreline

Harbor line

contrasted with light industry, which is usually more labor intensive and relatively easy to move.

Other times, the term “heavy industry” is intended to convey an image of severe environmental

impact through normal operations.

hectare A land measurement under the metric system, equal to 10,000 square meters, or roughly

2.471 acres.

height, building Generally held to be the height from the street to the surface of a flat roof or

the average height of a pitched roof, without taking into account roof structures, air handling

equipment, antennas, or satellite dishes. The term is most often significant when attempting

to meet zoning restrictions, which usually contain their own definitional sections. If so, then it is

irrelevant what the general public considers as the true measurement of building height; the

method of measurement specified in the statute will control.

heir One who inherits property.

heirs and assigns Because of peculiarities in old English common law, these words when used

in a deed, “To Harry Smith, his heirs and assigns,” indicate an intention to transfer the maximum

possible estate in land.

hereditament Any real or personal property that may be inherited. It would not include a life

estate in oneself—meaning a right to land during one’s own life but no longer—because that

obviously can’t be inherited.The word had more importance under older English law because of the

ability to place a greater variety of restrictions on land than is possible today. It is often encountered

in wills, leaving “all my lands, tenements and hereditaments to my daughter… .“ As a practical

matter, only the word “hereditament” is necessary because it includes the other two.

hiatus A break or gap. In discussions of land, an area of land that lies between two parcels but

appears from legal descriptions and public records to not be a part of either.

198

heavy industry hiatus

198

500 ft

500 ft wide

and 5 ft deep

495 ft

500 ft

500 ft500 ft

1,000 ft

199

Example: A parcel 1,000 feet by 1,000 feet has been divided. In writing the deeds, though,

parcel C’s description started at the southeast corner and proceeded northward only 495 feet

rather than the full 500 feet necessary to meet the boundary with parcel B. The missing 5 feet

is the hiatus. A court might hold that property C’s grantor still owns the 5-foot parcel, or

it might reform the deed, or it might find that the owner of parcel B adversely possessed the

5-foot parcel.

hidden defect (1) A title defect that is not obvious from examining the public records, such as a

forgery. (2) A defect in property that is not observable by the untrained eye and must be disclosed

by the seller or seller’s agent if known.

hidden risk See hidden defect.

highest and best use In public appraisal and tax appraisal, that use of land which would be the

most economically advantageous over a given period of time, while at the same time being legally,

financially, and physically possible. A 5-acre residential estate within minutes of downtown Houston

would have a highest and best use if it were developed for offices,and therefore should be appraised

with that use in mind. Many property tax laws allow exemptions and appraisal at current use rather

than highest and best use.

high-rise A concept with no fixed definition except as contained within specific fire codes or

building codes. In commercial real estate, it is generally understood by reference to what it is not. It

is not a low-rise, which is a one- or two-story structure. It is not a midrise, which could be anything

between three and six, perhaps eight stories high, depending on the community. A high-rise is

anything taller than a midrise.The meaning of high-rise in Asheville, North Carolina, will be different

than that in New York City or Chicago.

high-water mark The line on shore marked by the reach of the medium tide and which

usually determines the boundary between private property and public property. Some jurisdic-

tions limit private property to the shoreline, which is the highest reach of the waves inward to

the land.

historic cost The cost of a structure when it was first built. Contrast with original cost, which is the

price paid by the current owner.

historic district A designation given by local government to particular parts of town deemed his-

torically significant or containing a large concentration of older buildings considered worthy of

preservation in an historically accurate condition. Properties located in historic districts are usually

the subject of dramatically increased scrutiny by planning and zoning authorities. The approval of

an historic board may be required before a building permit for repairs or renovations for these

properties is issued. Many are also eligible for federal historic preservation credits.

historic preservation credits A common name given to the IRS concept of rehabilitation tax cred-

its, allowing tax credits equal to 10 percent of the cost of renovation, reconstruction, and restoration

of buildings placed in service before 1936. A larger credit, 20 percent, is allowed for certified historic

structures. There is a special increase for properties in the Gulf Opportunity Zone (named counties

hiatus historic preservation credits

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suffering hurricane damage in the 2005 hurricane season) with 13 percent allowed for pre–1936

buildings and 26 percent for certified historic structures.The properties do not need to have suffered

any hurricane damage, as long as they are in the specifically named states and counties. See Form

3468,“Investment Credit,” and the attached instructions, available at the IRS Web site, www

.irs.gov.

holdback Retainage; amounts withheld from payment until certain goals have been reached.

Example:

A lender holds back funding the balance of a loan until stabilized occupancy has

been reached, or a homeowner holds back the final 10 percent of a construction contract price

until after completion of all inspections.

holder in due course A party who acquires possession of an instrument (usually a check, prom-

issory note, or installment sale contract) after giving value for it, in good faith, and without notice

that there are any defenses; the holder in due course takes free of any claims. It was common at

one time for health clubs, home improvement companies, vinyl siding installers, and many others

to provide financing for their customers.The company would then sell the promissory notes to a

holder in due course.When the consumer complained of high-pressure sales tactics, services infe-

rior to those represented, or shoddy workmanship and refused to continue making payments, the

holder in due course would sue and win a judgment because it was not subject to any defenses

against the original party. State legislation has now exempted purchasers of consumer contracts

from holder in due course status, so that defenses good against the original party are also good

against the purchaser of the paper. There is still a very lively industry in buying consumer paper,

but purchasers now include clauses making the purchase with recourse, meaning that if the

consumer asserts any defenses, the original contracting party must buy the paper back and deal

with the consumer directly.

hold-harmless clause A contract provision that if one party is harmed, injured, subjected to

claims,sued,or has a judgment against it,the other party to the contract will reimburse the first party

for all such costs, expenses, and claims. It is a common clause in commercial leases, because the law

imposes liability on both owners and occupiers of land for a wide variety of injuries caused by

defects in or on the property. By the time an innocent landlord,tenant,or other party to a contract is

able to obtain a dismissal of charges as to them,the bills for legal fees could amount to many tens of

thousands of dollars. To control this situation, landlords usually require hold-harmless clauses from

tenants. On the other hand, if the tenant has the superior bargaining position, the tenant will refuse

to indemnify the landlord and, in addition, require the landlord to indemnify the tenant! Also called

an indemnity clause.

holding company A company that owns or controls another company.

holding costs See carrying charges.

holding period (1) A time period important in the law of adverse possession, with its own pecu-

liar rules for calculation. See adverse possession for more information. (2) A period of time one

owns property, important in tax law for determining tax rates and benefits and for disallowance of

some benefits.

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historic preservation credits holding period

200

Examples:

• Property exchanged in a 1031 exchange by related parties has a 2-year holding period

before it can be sold; otherwise there will be adverse tax consequences.

• Banks have a 21-day holding period before sending taxpayer bank deposits to the IRS

pursuant to a garnishment.

• Property sold after a holding period of 1 year or less will result in short-term capital gains

or losses.

• Property sold after a holding period of more than 1 year will result in long-term capital

gains or losses.

• Property sold after a holding period of more than 5 years will result in super-long-term

capital gains or losses.

• Property acquired by inheritance will be treated as if it were held for longer than 1 year.

holdout A property owner who refuses to sell to a developer who is purchasing a number of sep-

arate parcels in order to put them together—an assemblage—for development. Sometimes the

practice results in an offer vastly in excess of market price, because the holdout controls the success

of the entire project. Other times, developers go back to the drawing board and redesign the proj-

ect, leaving the holdout with no offer at all and what could turn into very unpleasant living condi-

tions due to being surrounded by parking lots and 24-hour high-intensity lighting.Developers often

avoid the problem by purchasing options rather than properties, so that if a critical property owner

refuses to sell, the developer can abandon the entire project with a minimal expenditure.

holdover tenant A tenant who remains in possession of leased premises beyond the expiration of

a lease term.Most commercial leases,and many residential leases,provide that a holdover tenant will

be responsible for rent in an amount 125 to 200 percent greater than current market rents, but

accepting the rent does not sacrifice any of the landlord’s rights to obtain an eviction. (State laws

may place a cap on the amount of increased rent charged to consumers.)

holiday A day set apart for commemorating an important event. The term is used often in con-

tracts and leases when computing time,as when a certain number of days are allowed for an action,

but if the due date falls on a weekend or holiday, it will be the next business day. Leases, in particu-

lar, limit delivery of certain services,such as heating and air conditioning, on weekends and holidays.

The better practice is for the contract or lease to define the holidays meant by it. In the absence of

such a definition, holidays will usually include federal holidays, when federal offices are closed, and

may include state holidays when state offices are closed, if different.

holographic will A will written by the testator’s hand but bearing no witness signatures. Regular

wills must be witnessed, and the testator and all witnesses must sign in the presence of each other;

otherwise the will is void. The holographic will is an exception recognized by some states. Contrast

with nuncupative will, which is an oral will made shortly before death before witnesses and later

reduced to writing by them.

home cooking A slang expression indicating the fear held by out-of-state or out-of-town

defendants in a lawsuit that they will not receive a fair trial because of jury prejudice or because

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holding period home cooking

201

202

judges will not accord out-of-town lawyers the same credibility and leniency granted to local

lawyers. This is the reason for most forum shopping clauses in contracts between local persons

and large, usually nationwide, companies. The forum shopping clause requires any lawsuits to

be brought in the other party’s jurisdiction, thus presumably giving them the advantage of

home cooking.

home equity conversion mortgage (HECM) An FHA-insured reverse mortgage loan allowing

persons to borrow money against the equity in their home with no repayment usually necessary

until after death.The money may be taken in one lump sum, or in payments over time.

The important elements are

• The borrower and any other current owners of the home must be aged 62 or over and live

in the home as their principal residence.

• The home must be a single-family residence in a one- to four-unit building, a condomini-

um, or part of a planned unit development (PUD). Some manufactured housing is eligible,

but cooperative apartments are not.

• The home must be at least 1 year old and must meet HUD minimum standards, except that

the HECM can be used to make necessary repairs.

• Applicants must discuss the program with a HUD-approved counselor before making any

decision.

• Repayment in full is due (1) when the last surviving borrower dies, (2) when the home is

sold, (3) when the borrowers permanently move elsewhere or fail to live in the home for

12 months, or (4) if there is a default in mortgage terms, such as failing to pay property

taxes or keep the property insured or allowing it to deteriorate below HUD minimum

standards.

home equity line of credit (HELOC) A revolving credit line secured by a mortgage on the borrow-

er’s residence.The borrower may draw down the loan—obtain funds—and then repay the principal

later and restore the full borrowing ability for the maximum amount of the loan.The loan is often for

amounts represented by the surplus above the first mortgage up to 125 percent of the appraised

value of the home.These are high-risk loans because a foreclosure after default will not provide a sale

price high enough to pay off the HELOC. As a result, the loans carry fairly high interest rates and,

despite widespread advertising for 125 percent loans, only the most credit-worthy borrowers are

able to secure the maximum loans. IRS rules allow the deduction of the interest on up to $100,000

of home equity line of credit debt.

home improvement loan A loan to make improvements on one’s principal or secondary resi-

dence; may be a home equity line of credit or a traditional loan in a fixed amount. Both are secured

by a second mortgage on the property.

home inspection Usually a professional, third-party inspection of a home prior to purchase in

order to discover defects and report them to the purchaser.

home loan See mortgage.

home cooking home loan

202

Home Mortgage Disclosure Act A federal law requiring lenders with federally related loans to

report the number of mortgage loan applications and the number of actual mortgage loans in dif-

ferent parts of their service areas.The Act is designed to shed light on discriminatory practices and

thereby eliminate them. Reports are available on the Web site of the Federal Financial Institutions

Examination Council, www

.ffiec.gov/hmda.

home office An area of one’s residence used for office purposes. Home offices may be eligible for

tax benefits—see home office tax deduction. Some states allow real estate brokers to maintain their

principal office in their homes under certain circumstances.

home office tax deduction The ability to deduct a portion of the cost and upkeep of a home

because of the use of some space for business purposes. Generally,

• You must use some portion of the home regularly and exclusively as your principal place

of business, or a place where you meet with clients, or

I If using some structure separate from your home, you must merely use it in connection

with your business.

I If you are an employee, the use of a portion of your home for business must be for the

convenience of your employer, not for your own convenience.

• The space must be used exclusively for business, but it does not have to be separated by

walls or other partitions from other space.

• The deduction will be calculated using a percentage determined by comparing the space

used for business purposes with the total space in the home. For example, a 150-square-foot

room in a 3,000-square-foot house, or 150/3,000, will equate to 5 percent.

• Direct expenses used for work, materials, or repairs only in the business portion of the

home are fully deductible; indirect expenses used for the entire home, such as utilities,

cleaning, insurance, and real estate taxes can be deducted in a pro rata amount as deter-

mined from the percentage of space; unrelated expenses for nonbusiness parts of the home,

such as painting other rooms, landscaping maintenance, or pool care are not deductible.

• Your use of home office business deductions cannot result in a business loss that will

shelter other income.

For more information,see Publication 587,“Business Use of Your Home,”available at the IRS Web site,

www

.irs.gov.

homeowners association An organization of the homeowners in a subdivision or a group of

related subdivisions. In order to have the ability to collect dues and enforce rules, the association

must be created by a legal document that was drawn up and filed before the first lot or home is

sold, or by a legal document signed by 100 percent of the property owners and then filed in the

public records.

• The associations sometimes own common areas. They also enforce restrictive covenants for

the subdivision, such as setback lines, prohibitions against parking motor homes in drive-

ways, restrictions on home-based businesses, and even architectural and landscaping

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Home Mortgage Disclosure Act homeowners association

203

restrictions. Often, one cannot cut trees, paint a house, add a porch, or make any other

changes without first submitting detailed plans to an architectural review committee.

• The associations generally collect monthly dues in an amount barely sufficient to pay for

common area maintenance and an annual party. Maintenance could be as minor as buying

new flowers for the entrance or as pervasive as maintaining private roads in a gated com-

munity; siltation control and dredging for a private lake; costs of a security system and/or

guard; and the care and upkeep of swimming pools, tennis courts, and other recreational

facilities. In the absence of a fund for attorneys’ fees, or the ability to assess additional dues

for attorneys’ fees in order to take rule breakers to court, the result is that rules generally go

unenforced except as may be possible through peer pressure.

• Most homeowners associations have the right to impose fines and to place liens on proper-

ty and force a sale if the fines are not paid, but this route is rarely successful without long

and expensive litigation. Usually, the liens remain in place until the property is eventually

sold, and then they are collected, but this has little deterrent value when trying to stop

current rule violations.

homeownership rate The ratio of owner-occupied units to total residential units in a specified

area.

Example:

For an area with 20,000 units, 17,000 of them are owner-occupied and 3,000 are

occupied with renters. This means that the ratio of owner-occupied units is 85 percent and the

ratio of rentals is 15 percent.

homeowner’s insurance policy An insurance policy tailored for most homeowners with a pack-

age of coverages and endorsements designed to address most risks. Usually includes coverage for

the main structure,a certain percentage of that in additional coverage for outbuildings,a certain per-

centage of additional coverage for contents, reimbursement for rental expenses and cleanup costs

in the event of significant loss, and liability coverage in case anyone else is injured on the property

as a result of a condition or defect of the property.

204

homeowners association homeowner’s insurance policy

204

15%

85%

Homeowners Protection Act of 1998 (HOPA) Legislation passed in response to abuses in the

private mortgage insurance (PMI) industry. Home purchasers who wish to borrow more than

80 percent of the purchase price of their property must usually purchase private mortgage insur-

ance, which pays the lender in the event of default and a foreclosure.The purchaser pays the premi-

ums through additional fees added to the monthly mortgage payment. Once the loan is paid to an

amount less than 80 percent of the purchase price or the fair market value,there should be no need

for the insurance. Despite this, PMI companies would continue to collect insurance premiums. The

Act requires PMI companies to notify borrowers of their right to cancel the insurance when the loan

is no more than 80 percent of the value of the home, and it requires them to automatically cancel

the insurance when the loan is no more than 78 percent of the value of the home.The value is based

on the purchase price or can be based on a recent appraisal if the borrower is willing to order and

pay for an appraisal.There are exceptions to the cancellation rules, primarily when there has been a

history of loan delinquencies. Also called PMI Cancellation Act.

homeowners’ warranty program An insurance program offered by a subsidiary of the National

Association of Home Builders. If purchased, the policy provides the buyer of a new home with a

10-year warranty against named physical defects.

home rule The power granted to local governments to pass ordinances regulating matters partic-

ularly local in nature. Some states have limited home rule, so matters that would seem to be local in

nature must still be submitted to statewide referenda for approval and passage.

homestead The dwelling house and adjoining land forming the permanent residence of the head

of household.Under modern law,a person’s homestead is given a very specific definition within each

state’s statutes and is then granted protections from creditors and against excessive real estate taxes.

The term homestead may also apply to the rights granted to a widow or widower to use real prop-

erty for their remaining lives if they elect to take advantage of homestead laws rather than provi-

sions made in a will. The protections may be unlimited, only up to a certain dollar value of equity,

or limited in area. Each state’s laws are different, and homestead may be defined differently in the

various statutes within a state.

homogenous The same.The value of property in a homogenous neighborhood is relatively easy

to determine because of ample evidence regarding recent sales of comparable sites.

HOPA See Homeowners Protection Act of 1998.

Horizontal Property Acts Name given by some jurisdictions to their statutes regulating the

creation of condominiums.

hostile possession See adverse possession.

hotel A concept that seems relatively straightforward, as a place where people rent rooms for

the night. Local business codes, tax laws, and zoning ordinances will all have their own definitions,

however, contained within particular statutes. If in doubt regarding whether a particular use will be

considered a hotel, one should refer to the appropriate laws.

205

Homeowners Protection Act of 1998 (HOPA) hotel

205

house In real estate jargon, generally indicates a detached dwelling on a parcel of its own land.

house fluffer A decorator who recommends improvements and renovations designed to

maximize a home’s sale price.

house poor Also called land poor; a situation in which all of one’s wealth is in the home (or land)

and there is very little cash or income to pay for anything other than necessities.

house rules Everyday-conduct rules adopted by a condominium association to cover things

such as hours of pool usage, number of allowable guest parking places, prohibitions against drying

towels on balcony railings, and other such matters.

housing affordability index Developed by the National Association of REALTORS® to track the

financial ability of consumers to buy homes.Many state organizations publish similar indices for their

local markets.The benchmark is 100, sometimes expressed as 1.0. It means that a family earning the

median income has exactly enough money to qualify for a mortgage to buy a median-priced home

in that market. It assumes a 20 percent down payment,and that mortgage payments will not exceed

25 percent of income. A figure less than 100, or less than 1.0, means that the median income family

cannot afford the median house. A greater figure means the median income family can afford a

home more expensive than the median home.When a trend line is declining, it indicates that hous-

ing is becoming less affordable. Upwardly trending numbers mean housing is becoming more

affordable. National figures may be obtained by going to the National Association of REALTORS®

Web site, www

.realtor.org, and clicking on Research, then Housing Statistics, and then Housing

Affordability Index.

housing code A local ordinance that establishes minimum health and safety levels for existing

housing. Contrast with building codes, which address new construction.

housing completions A statistic tracked by the U.S. Census Bureau (www

.census.gov) and by

many local real estate and builder organizations. It indicates the number of new homes made ready

for occupancy within a certain time period, usually one month and one year.

housing counseling agency A nonprofit organization that provides advice and credit counseling

to individuals wishing to purchase housing. Many low-income loan programs require completion of

a housing counseling course as a condition of obtaining the loan.

housing finance agency A state or local organization that provides housing assistance through

low-interest mortgage loans to qualifying buyers, including loans to fund down payment and

closing costs due after the application of traditional mortgage money.

housing for the elderly Any project specifically designed for persons 55 years or older and

marketed to that demographic group. Housing for the elderly is exempt from Fair Housing laws

prohibiting discrimination against families.

housing permit See building permit.

206

house housing permit

206

207

housing starts A statistic tracked by the U.S. Census Bureau (www.census.gov) and by many local

real estate and builder organizations;indicates the number of new homes on which construction has

started within a certain time period, usually one month and one year.

housing stock The total number of dwelling units in a defined area.

Howey rule A rule of securities law articulated by the Supreme Court in the case of Howey v.

Securities and Exchange Commission. The Howey company sold real estate interests in orange

groves that it managed. As a practical matter, one could not buy the real estate and make any profit

from it unless Howey handled all the details of cultivation, harvesting, and marketing. The SEC

claimed Howey was selling “investment contracts” and therefore had to register with the SEC. The

Supreme Court agreed.

The Howey rule, as it has come to be called, says that an investment contract is

1. A contract, transaction, or scheme whereby one person invests his or her money

2. in a common enterprise

3. led to expect profits solely from the efforts of a third party.

HUD The United States Department of Housing and Urban Development. This federal cabinet-

level department has a wide variety of responsibilities, including

• Enforcing fair housing laws

• Assisting community development through block grants, loan guarantees, and disaster

recovery assistance

• Regulating Fannie Mae and Freddie Mac

• Supporting health care through providing mortgage insurance for hospitals, nursing

homes, and assisted living facilities

• Aiding Native Americans with specialized housing programs

• Educating citizens about hazards such as lead paint

• Overseeing the Federal Manufactured Housing Program

• Providing public housing assistance

• Making available housing counseling

• Administering a number of mortgage insurance programs for multifamily housing

• Providing mortgage insurance for single-family houses

• Handling witness relocation for people who have testified about crimes in their public or

assisted housing buildings

HUD-Code home A manufactured home. The word “code” refers to the HUD regulation requiring

all manufactured homes built after 1976 to meet the minimum requirements of the HUD Code, as

contrasted with local building codes, which usually don’t apply to manufactured housing.

HUD–1 form See closing statement.

hundred percent commission A real estate office arrangement in which the qualifying or man-

aging broker keeps none of the real estate commission earned by the office, but instead pays 100

percent to the agent who secured the listing, the buyer, or the tenant. The broker makes his or her

housing starts hundred percent commission

207

own money by competing against the agents, contrary to the typical practice in most other real

estate offices. The broker also charges each agent a monthly fee to cover office space, advertising,

and operating expenses and to provide a profit to the broker. This is in contrast to the more wide-

spread practice in which commissions are paid to the broker, who is the only person legally author-

ized to enter into an agency agreement with another.The broker then splits the commission, paying

some portion to the agent actually responsible for the work performed to earn the money.

hundred percent location Refers to the best location with the highest land value.

HVAC Heating, ventilation, and air conditioning.

hybrid mortgage A mortgage that combines the benefits of an adjustable-rate mortgage and a

fixed-rate mortgage, such as adjustable rates in the early years and then an automatic conversion to

fixed rates after a stated period of time.For example,the 5/25 (adjustable for 5 years and fixed for 25)

and the 7/23.

hypothecate To give a security interest in specific real or personal property while retaining pos-

session of the property. Contrast with a pawnshop, in which one surrenders possession of the

security, or a loan against negotiable securities such as stocks and bonds,which could be sold by the

borrower if the lender did not require possession in itself.

hypothetical condition A condition that does not currently exist in fact but has some probability

of existing in the future. An appraisal may determine the value of property in its current condition,

and then also determine a value based on a hypothetical condition, such as a state’s plans to build a

new highway exit at the property.

208

hundred percent commission hypothetical condition

208

209209

idem sonans Sounding the same, or alike. The rule of idem sonans is that absolute accuracy in

spelling names is not required in a deed or other legal document,so long as the spellings sound the

same and there is no intent to deceive.Without the rule, typographical errors in a deed would result

in title not passing, creating a nightmare in writing title insurance and in litigation over competing

claims.

Example:

Jayne Smith is idem sonans with Jane Smith.

illiquidity (1) The condition of having insufficient cash to meet anticipated requirements, such as

a business loan that is turned down because of the borrower’s illiquidity, not because of problems

with the borrower’s credit rating or the value of the collateral. (2) The relative ease with which an

asset can be converted to cash.The more difficult, the more illiquid the asset is.

impact fees Fees imposed by local government on new construction projects in order to compen-

sate the government for the increased costs of delivering services. Impact fees can sometimes be

extremely high, having the result of chilling development.

implied agency An agency relationship that arises out of the conduct of the parties and the

impressions they give to the world, rather than because of a written or oral agreement.It is extreme-

ly rare to have an implied agency in real estate because of the rule that real estate contracts must be

in writing, so agency relationships regarding real estate must also be in writing.

implied authority A principal grants the agent implied authority when there is an implied agency.

See implied agency.

implied condition A provision not specifically spelled out in a contract, but considered an

important underlying assumption of the parties. In most states, there is an implied condition in

a new home sales contract that the home will be habitable and can be safely occupied in rela-

tive comfort with working hot and cold water with no leaks, a working sanitary sewer system,

operational heating, and relative security from intruders.

implied contract A contract that arises out of the actions of the parties rather than any express

words or writings by them. For example, when one names a price for a service and another accepts

that service without any comment about the price, there is an implied contract to pay the quoted

price. Almost all real estate transactions must have a written contract, by law, to be enforceable.

Only the major terms need be in writing, however—the parties, a description of the property, a

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210210

description of the estate granted (forever, for life, lease for years, etc.), and the consideration. Minor

terms may be determined by reference to the actions of the parties, and so can be the subject of an

implied contract.

implied easement An easement recognized by the law, although not expressly agreed upon by

the parties or their predecessors in title.This situation usually arises when the owner of a parcel of

land sells a portion to someone else.At the time of the sale,there might have been common roads,

irrigation, or other uses. After the sale, courts will sometimes recognize an implied easement

allowing all owners of the sold parcel to continue to enjoy those uses that technically belong to

the other parcel, such as a right-of-way easement or an easement to use water from a lake or

stream.This should not be confused with an easement of necessity, which generally requires that

there be no other method of ingress or egress, for example.The better practice is to identify such

matters ahead of time and include them in the purchase agreement and deed. Unfortunately,

these issues usually arise long after the amicable relationship between the original seller and

purchaser has deteriorated or the land has changed ownership and conflict results.

implied listing A listing agreement for the sale of property that arises out of the conduct of

the parties, rather than any express written or oral contract between them. If there were an implied

listing, then the listing broker would be entitled to the normal and customary commission available

in the marketplace. As a practical matter, most states require listing agreements to be in writing

to be enforceable and many states subject brokers to disciplinary action for entering into unwritten

listing agreements.

implied notice A situation in which the law considers someone as having notice of a particular

fact because they knew of sufficient other facts such as would cause a reasonable person to make

inquiries and then gain additional knowledge.

Example:

Zack finds a house he wants to buy. The owners live out of town, but every time

Zack visits the house to review and inspect it, he sees evidence that someone is living in the

house. Despite that, he signs a contract to buy the house, goes through with the closing, and is

surprised when the current tenants tell him they have a 5-year lease on the property. Zack had

implied notice of this fact. When he saw evidence of occupancy, he should have asked more ques-

tions and is not entitled to simply sit in ignorance and hope everything works out for the best.

implied warranty of habitability (1) A legal doctrine that imposes on a landlord the obligation

to make leased premises ready for occupancy in a safe, healthy, and nonhazardous condition and

with the minimal amenities necessary for the provision of heat and water,although not including the

utilities themselves. Many states have passed uniform landlord tenant laws, changing the implied

warranty into an expressly articulated and defined legal obligation of the landlord.(2) State law may

also imply similar warranties for new home builders.

impound account See escrow account.

improved land Land that has some improvement from its natural state, such as grading, added

structures, planted timber, or crops.

implied contract improved land

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improvements Valuable additions to land intended to increase its value.

imputed interest A common term for the IRS expression “unstated interest” or sometimes “origi-

nal issue discount.”It applies to the situation in which a promissory note calls for no interest or insuf-

ficient interest under the circumstances.In an audit, the IRS will calculate an interest rate,impute that

to the transaction, and declare each year’s imputed interest as additional income to the lender, on

which the lender must pay income taxes, penalties, and interest. (The rules are found at 26 U.S.C.

§1273, 1274 and 483.)

imputed notice The concept that notice to one person will be considered notice to another in a

special relationship to the first person.For example,notice to an attorney is the same as notice to the

attorney’s client. In circumstances allowing oral contracts (usually not the case with real estate), if a

seller makes an offer and a buyer accepts that offer via a communication to the seller’s agent, then

the acceptance makes a binding contract as of that moment. The seller cannot withdraw the offer

before actually learning of the acceptance, because the contract has already been formed when the

agent received the notice.

inactive license A mechanism under some state real estate licensing laws for a real estate agent

to withdraw his or her name from licensing under any broker and hold the license in an inactive

status until the agent is ready to return to active practice with the same, or another, broker.While on

inactive status, the agent may not engage in activities requiring a real estate license and may not

accept compensation for buying, selling,or referring buyers or sellers.Normally the inactive licensee

is able to pay a smaller licensing fee and is relieved of some or all continuing education requirements

during the inactive status.

inchoate Incomplete, impartial, not completed. Inchoate property rights include mechanics’ and

materialmen’s liens, which come into possibility when work is commenced on a property but might

never ripen into actual existence if all bills are paid for the work.

inclusionary zoning Zoning that requires inclusion of low- or moderate-income housing in new

residential developments.

income (1) For IRS purposes, income is never precisely defined, but it apparently includes all

moneys received from any sources unless specifically excluded by some IRS Code provision. (2) In

business, all the revenues derived from the business, less all expenses. Many people use the word

income interchangeably with revenues, but revenue implies a gross figure without deductions, and

income implies an amount after expenses.

income and expense report See financial statement.

income approach A method of valuing real property by determining the net operating income

over the useful life of the property and then translating that number to the present value via a dis-

count rate.The present-value concept depends on the assumption that $1 today is worth more than

10 cents a year for the next 10 years, because of the purchasing power of the $1 to buy other invest-

ments that will yield a return over the next 10 years, and because of the effects of inflation, which

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improvements income approach

211

decreases the amount of goods or services $1 will buy over the years. In order to compensate for

these considerations, one would say that the value of 10 cents a year for the next 10 years is worth

less than $1 today. How much less is the art and science of discounting.

income averaging A tax tool formerly given to all taxpayers and now available for just a few class-

es, such as farmers and fishermen. It allows taxpayers to average their income over 3 years and pay

taxes on the average income, rather than no taxes one year and then high taxes at a high bracket in

the next year, for example. (Calculated on Schedule J of IRS Form 1040.)

income capitalization approach See income approach.

income limits The maximum amount a family can earn and still be eligible for certain government

housing assistance programs.

income-producing property Whether or not it actually produces a profit, a property that is

intended to generate rental or other revenues for the owner.

income property Property purchased for the income it generates, such as rents.

income statement See financial statement.

income stream A steady flow of money from a property. When evaluating the property, one has

to evaluate the strength and durability of the income stream.

Example:

Is the tenant a national tenant with good financial strength, excellent prospects

for continued health, and a 20-year lease on the property with rent adjustments annually to

reflect cost-of-living increases, or is the tenant a start-up business with a 1-year lease in an

area already saturated with similar businesses? Those two income streams are markedly

different from each other.

income tax A tax on income. A simple concept, but one that requires thousands of pages of IRS

statutes, regulations, revenue rulings, and court interpretations to explain. See the IRS Web site at

www

.irs.gov.

incompetent Legally not able to make decisions, enter into contracts, or execute wills. This may

be a result of a permanent mental impairment, as when one is declared non compos mentis or

incompetent, or it may be for temporary reasons, such as a minor child’s inability to make binding

contracts.

incorporate To form a corporation by filing documents in the appropriate state authority, which

may be one’s own state or a corporation-friendly state such as Delaware. Once having formed the

corporation, one must pay annual franchise taxes to the state for the privilege of existing as an arti-

ficial entity, and one must observe all the forms and conventions of corporate existence. In other

words, the sole shareholder cannot form a corporation and then never have meetings, never sign

documents in the corporate name,take all corporate money for personal use without accounting for

it on the books and records of the corporation, and generally behave as if the corporation did not

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income approach incorporate

212

exist. If the shareholder(s) behave as if the corporation does not exist, then creditors may be able to

pierce the corporate veil and seize assets of the individual shareholders.

incorporation by reference A method of including all the terms of one document into anoth-

er document without having to spell everything out. Deeds will frequently make reference to

restrictive covenants on file in the real estate records at a certain book and page number and

incorporate them by reference into the deed itself. In that manner, any purchaser of the land is

bound by the restrictive covenants, without getting into arguments about whether or not they

had constructive notice because of the public filing. A renewal lease may be a one- or two-page

instrument incorporating the original lease by reference, with the exception of changes to the

rental rate and the term.

incorporeal rights Property rights that are inheritable but not tangible or visible, such as

easements, licenses, mining claims, and franchises.

increment A portion, as of property or time. Developers build subdivisions in phases or incre-

ments, completing one section in order to gauge market demand before starting another section.

Lawyers bill in minimum increments of 6, 10, 15, or 30 minutes depending on the particular lawyer

and local custom, so a 3-minute phone call might be billed as any of these time increments.

incubator space Office, industrial, or high-tech space usually owned or managed by a local gov-

ernment development board and intended to provide an economical and supportive environment

for new business start-ups. The rental rates are usually below market, there is some sharing of serv-

ices and amenities, and mentoring services are provided. The new business is usually kicked out of

the nest after it reaches a certain volume of business or after it achieves a previously approved and

agreed upon business plan.

incumbrance Same as encumbrance. See encumber.

incurable obsolescence See functional obsolescence.

indemnification The process of shifting a loss from one party to another either because of an

express agreement by the parties or because the law requires it under the circumstances.

Example:

A purchaser of real estate discovers the property is subject to a lien that was placed

against it prior to sale and pays the lien in order to avoid foreclosure; then the purchaser is enti-

tled to indemnification, or reimbursement, from the prior owner who breached the warranties in

the deed.

indemnity clause See hold-harmless clause.

indenture deed A deed in which the buyer and seller bind themselves to certain obligations,such

as an agreement that any liability for environmental cleanup expenses will be paid by the buyer and

not the seller. Under ordinary circumstances, only the seller need sign a deed, because only the sell-

er has any obligations regarding transferring good title. Leases are often called indentures, because

they are a conveyance of an interest in real estate with both parties having continuing obligations.

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incorporate indenture deed

213

The name indenture deed comes from ancient times, when such deeds were torn in half in an

indented or jagged manner and could be proved by matching the two pieces.

independent appraisal An appraisal conducted by a disinterested person.

independent contractor One who is hired to reach a certain goal or perform a certain task, but

who has the ability and the right to determine the methods and times for reaching that goal or

task, so long as it is not illegal and is within the limits of the contract.This is an important concept

because

1. Employers must take withholding taxes and pay matching taxes for employees but not

independent contractors. The IRS has significantly tightened the definition of indepen-

dent contractor so that most work relationships do not qualify. Under certain circum-

stances, real estate agents have been held to be employees for tax purposes.

2. If an independent contractor is negligent or commits an intentional tort, then the person

who hired the contractor is not generally liable for the resulting damage. If an employee

did the same thing, the employer would be liable so long as the employee was acting

within the line and scope of his or her employment, which is usually a fairly easy hurdle

for plaintiffs’ lawyers to overcome.

3. An exception exists for the general rule of nonliability for the actions of an independent

contractor, and that is in the area of real estate brokerage. Most real estate agents are

independent contractors working for the broker. Real estate licensing laws, however, usu-

ally hold the broker responsible for the actions of agents.

index (1) A statistical indicator that measures changes in the economy in general or in particular

areas. An example is the cost-of-living index. (2) A reference point against which measurements are

taken for purposes of making future adjustments.An adjustable-rate mortgage might begin with an

interest rate of 6 percent and provide that it will increase or decrease in a like percentage as the

increase or decrease between today’s quoted price for 10-year U.S.Treasury bonds and the price on

the loan’s annual anniversary date.We would say that 10-year T-bonds are the index.

Some leading loan indices include

• Wall Street Journal prime

• Federal discount rate

• Fed funds rate

• 11th District Cost of Funds

• 10-year Treasuries

• One-year LIBOR

index lease A lease that makes some or all of the rent dependent upon calculations with reference

to some index, such as the cost-of-living index or the whole price index.

index loan See adjustable-rate mortgage.

index rate See index.

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indenture deed index rate

214

indicated value The bottom line in an appraisal;the appraiser’s opinion of the current value of real

propertyafter reconciliation of all methods and approaches to appraising the property.

indirect costs Costs of construction not directly related to the sticks and bricks. Examples include

• Real estate taxes

• Administrative costs

• Professional fees

• Insurance

• Lease-up expenses

individual retirement account (IRA) A retirement savings program entitling the individual to

deduct contributions from gross income for purposes of calculating income taxes.The contributions

are said to be from before-tax dollars.

Generally speaking, first-time home buyers can withdraw up to $10,000 from their IRA or Roth-IRA

accounts, penalty free, in order to pay qualified home purchase expenses such as a down payment.

Spouses can withdraw up to $20,000.There’s a lifetime limit, though. Once you use up your distribu-

tion “free passes,” you can’t put the money back in your account and then use it again in the future.

(For more information, see Tax Topic 428, “Roth IRA Distributions,” and Publication 590, “Individual

Retirement Accounts,” available at the IRS Web site, www

.irs.gov.)

indorsement See endorsement.

industrial broker One who specializes in industrial properties, also commonly called distribution

properties.

industrial park An area zoned for industrial use.Often developed by local industrial development

boards in order to provide low-cost real estate with shared rail lines or other amenities to attract

employers to an area.

industrial property (1) Property designed for or used by companies or persons for manufactur-

ing, warehousing, or assemblage of components. (2) In zoning, environmental, and building codes,

the term “industrial property” will be defined within the statutes or codes for the specific purposes

of those laws.The phrase may include uses not typically considered industrial and may exclude uses

normally considered industrial.

in-fill development Property development within the boundaries of an area rather than moving

outward and contributing to sprawl.The concept carries with it connotations of demolition of older

buildings in order to make way for new construction, usually with a greater height and/or increased

densities, rather than simply finally getting around to developing vacant land. In-fill development

generally takes place in older neighborhoods outside the central business district but inside the ring

of modern suburbs.

inflation A loss in the purchasing power of money. Inflation is generally measured by the

consumer price index.

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indicated value inflation

215

inflation guard An insurance policy endorsement that automatically increases coverage over

time in order to keep up with the effects of inflation.

information reporting Reports provided to the IRS but which do not carry with them any

liability for income taxes from the reporting entity. Partnerships and subchapter S-corporations

must file information returns,closing agents must report real property purchase price information

regarding the seller (Form 1098), and real estate brokers must report earnings of their agents

(Form 1099).

informed consent Consent given after being provided with fair and full disclosure of all the facts

necessary to make an intelligent decision after weighing the relative pros and cons of the situation

and the possibility of realistic alternatives.Real estate agents may sometimes represent both buyers

and sellers in the same transaction if all parties agree after informed consent.

infrastructure The basic amenities and services that must be in place for a particular activity or

pursuit.The infrastructure in a subdivision would consist of roads;storm sewers; and mechanisms for

the transmission of water, waste products, electricity, telecommunications, and possibly natural gas.

References to the infrastructure of a community might also include basic services, such as fire and

police protection, schools, and libraries.

ingress A way of entry.

in gross See appurtenance.

inheritance tax See estate tax.

in-house sale One in which the listing broker also brought the buyer to the closing table.There is

no other broker involved, and no one is entitled to a share of the commission except as the broker

and the agent working for the broker may have agreed to between themselves.

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inflation guard in-house sale

216

217

initial interest rate In an adjustable-rate mortgage, the first interest rate charged.

injunction A court order requiring a party to do something, or to stop doing something, until fur-

ther notice. If the party fails to perform according to the injunction, then the party will be required

to appear in court, defend his or her actions, and show cause why he or she should not be held in

contempt of court.If held in contempt,the party may be ordered to pay a fine,may be jailed until the

contempt is cured, or could suffer both consequences.

Injunctions come in three varieties:

1. Temporary restraining order (TRO). Usually obtainable with little or no notice to the

defendant, sometimes as quickly as within an hour or so if the complaining party can

convince a judge that there is immediate risk of irreparable harm if the restraining order

is not issued.

2. Preliminary injunction. Usually issued after a TRO, if the judge decides that an injunction

should remain in effect until such time as there can be a full trial on the merits of the

case. Failure to obtain a TRO does not mean a judge will not issue a preliminary injunc-

tion; it simply means the judge did not agree with the plaintiff’s evaluation of the neces-

sity for urgent action.

3. Final injunction. The final order issued by a court after it has heard all the evidence and

legal arguments for and against the injunction. The order is a final order, from which the

parties may appeal.

inner city Technically refers to the densely populated area just outside the central business dis-

trict, but usually connotes a blighted area near the city center.

innocent misrepresentation See fraud.

innocent purchaser for value See bona fide purchaser.The words “for value”are sometimes added

to bona fide purchaser, also, in order to emphasize the requirement for valuable consideration as

opposed to mere “good consideration,” which might consist of love and affection.

in perpetuity Forever.

inquiry notice That legal notice presumed to exist when a person is in command of sufficient facts

as would cause a reasonable person to make further inquiries.

Example:

If one buys real property and knows that it is occupied by someone other than the

seller, then the buyer has an obligation to make inquiries to find out the character of the rights of

the occupant, whether the occupant has a long-term lease, no lease at all, or is claiming title to

the property as his or her own. But, having failed to make any inquiry, the purchaser cannot

make a claim against the seller if the occupant claims rights in the property.

in rem Meaning “against the thing.” Lawsuits regarding title to real estate, or claims against real

estate, are said to be in rem, so they must be filed in the state and county where the property is

located.

initial interest rate in rem

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inside lot Any subdivision lot except the corner lots.

in situ In place, on-site, such as EPA provisions for remediation in situ of contaminants rather than

a requirement the contaminated soil be excavated and disposed of in an approved facility. To illus-

trate, the following is a diagram showing the process of chemical oxidation as an in situ solution to

contamination.

insolvent The condition that exists when (1) one’s liabilities are greater than assets, so that a com-

plete liquidation even at fair market value would not pay all debts, or (2) one’s current income is not

sufficient to pay current bills, resulting in the need to contribute more cash to the organization or

default on some payments.

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inside lot insolvent

218

Poplar Ave.

Maple Ave.

Elm Street

Inside lot

Oxidant

Land surface

Pool of contaminants

Extraction

well

Injection

well

Source: EPA.

installment contract A contract providing for payment of the purchase price to the seller over

time. Installment contracts are given favorable treatment by the IRS (www

.irs.gov), which allows the

seller to declare gain only as the seller receives principal payments each year, rather than requiring

the seller to immediately take into income the entire gross amount of the purchase price. Interest is

counted as income in the year paid.

installment note A promissory note requiring payments over some period of time. Contrast with

a single-pay loan, in which all principal and interest are due at maturity.

installment sale See installment contract.

Institute of Real Estate Management (IREM) An affiliate of the National Association of

REALTORS®, this association (www

.irem.org) is devoted to the needs of multifamily and commercial

property managers.

institutional investor A large corporate investor in real estate and real estate securities, such as

a pension fund, university, or insurance company.

institutional lender A federal- or state-regulated entity that loans money.

institutional lender financing Loan funds provided by a federal- or state-regulated entity that

loans money as one of its core business activities. Contrast with seller financing, and with private

investors who loan money for particular projects.

institutional property A zoning category authorizing schools, hospitals, and nursing homes.

instrument A written legal document.

insulation disclosure Also called the R-value rule, a Federal Trade Commission (FTC) require-

ment that persons selling new houses must disclose in their sales contracts the type, thickness,

and R-value of the insulation installed in the house. Failure to make the required disclosure

constitutes a deceptive trade practice and subjects the party to fines by the FTC.

insurable interest A right or interest in property or in the life of another that would cause the per-

son to suffer a monetary loss if injury came to the property or to the other person. One must have

an insurable interest in order to buy insurance, because the insurance is intended to compensate

one for a loss.

insurable title A real estate title that can be insured by a title insurance company.

insurance A commercial contract agreeing to compensate one for loss in the event of specifically

named or described risks.

insurance binder Evidence of property insurance coverage. Some insurance agents will bind cov-

erage before receipt of payment for the premium. Lenders usually require proof that the premium

has been paid for one year.

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installment contract insurance binder

219

intangible property Something that is nonphysical, noncurrent, and exists only in connection

with something else. Business goodwill is intangible property—it does not exist by itself; it cannot

be seen, touched, smelled, or heard; and it cannot be sold separately from something else, because

even the goodwill built up in a particular business name cannot be sold separately from the name.

Intangible property is usually exempt from property taxes.

intelligent building A building equipped with the telecommunications infrastructure to easily

and economically adapt to changing conditions through the use of automated control systems for

heating, air conditioning, ventilation, lighting, power, and a variety of health, safety, and security

conditions. Contrast with smart home, which usually refers to home automation systems that can

be controlled by a centralized panel or device, or by dialing in to the control panel from outside

the home.

intentional fraud A misrepresentation of a material fact which is intended to deceive another,

does actually deceive another, and which causes harm to the one deceived.The law allows punitive

damages. See also fraud.

interest Sums paid or earned for the use of money.

interest deductions The IRS allows various interest payments on loans secured by real property

to be deducted: Some of these deductions are as follows:

• For business loans, 100 percent of the interest paid each year is a deductible expense.

• For homeowners, the interest on up to $1,000,000 of combined primary and secondary

residence home mortgage debt can be deducted.

• Home equity line of credit interest is deductible up to the interest attributable to $100,000 of

debt.

• Interest on loans to buy stock in a cooperative building are deductible within the same

limits as home interest.

• Co-op apartment owners may deduct their pro rata share of mortgage interest on

underlying debt on the building.

For more information see Publication 936,“Home Mortgage Interest Deduction,” at the IRS Web site,

www

.irs.gov.

interest in property The extent of ownership in property.

interest-only loan A loan on which one pays periodic interest payments without any reduction in

principal, and the entire principal balance is due and payable upon maturity of the note.

interest-only securities (IOs) Instruments created from collateralized mortgage obligations from

which the monthly interest payments have been stripped out and converted into securities.

interest rate The cost of borrowing money, expressed as a percentage per year of the money

borrowed.

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intangible property interest rate

220

interest rate cap In an adjustable-rate mortgage, a ceiling on the amount the interest rate may

increase during any described period, such as one year, or over the lifetime of the loan.

interim financing A short-term loan arranged in order to buy time until something changes. At

the end of the original construction loan period, a developer may wish to seek interim financing

rather than permanent financing because of an expectation that interest rates will fall in the future,

or because the developer’s plans have changed and the property will be sold rather than retained.

The problem with permanent financing and many development projects is the existence of very

large prepayment penalties—one cannot simply refinance when interest rates go down or simply

pay off the loan when there is a sale. A borrower may also seek interim financing because the

borrower’s financial strength, or that of income-producing property serving as collateral, is not

currently sufficient to justify attractive financing terms.

interim use A use for property until it can be put to its highest and best use. Land that is not quite

ready for development because of insufficient population densities may be used as a sales lot for

manufactured housing, for example. An empty freestanding department or discount store might be

used as a flea market.

interlocutory decree A court order that is provisional, temporary, or not final. Interlocutory

decrees are usually not appealable unless one obtains permission from the court.

intermediate theory state See hybrid theory state.

intermediation The normal flow of money into financial institutions in the form of deposits,which

are then loaned out to earn income. Contrast with disintermediation,which occurs when depositors

take their money out of financial institutions because they can earn more money, relatively risk free,

in other investments.

internal rate of return The annual rate of earnings on an investment equates the value of cash

returns with the cash invested,taking into consideration the power of compounding interest.The fol-

lowing formula requires a trial-and-error method for solution. The fallacy with the method is its

assumption that all cash flows are reinvested at the internal rate of return.

Using this formula,CF is the cash flow in each period,with one subpart of the formula for each invest-

ment year until you reach n, the final year of the investment.You have to solve for R, the annual rate,

by trial and error.

Internal Revenue Service (IRS) A bureau within the United States Department of the Treasury,the

IRS is charged with the responsibility of collecting the taxes imposed by Congress. In furtherance of

that responsibility, it provides a wealth of resources to assist law-abiding persons in understanding

and complying with the complicated tax laws of the country. An excellent search engine at the IRS

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interest rate cap Internal Revenue Service (IRS)

221

11 11

CF CF CF CF

()()()(rr rr

))

Web site, www.irs.gov,gives access to thousands of online publications,forms,instructions,and even

internal IRS manuals.

International Code Council A membership association (www

.iccsafe.org) that develops the

codes used in the construction of residential and commercial buildings.

International Council of Shopping Centers A global trade association (www

.icsc.org) of the

shopping center industry.

International Facility Management Association A global association (www

.ifma.org) for facil-

ities management. The organization defines facilities management as “a profession that encom-

passes multiple disciplines to ensure functionality of the built environment by integrating people,

place, process and technology.”

interpleader A legal proceeding in which one holding money and making no claim to it, but

unsure as to which of several claimants should receive the money, pays the money into court.This is

the normal route taken by an escrow agent or someone else holding earnest money when the buyer

and seller both demand the earnest money.The escrow company will name both the buyer and sell-

er as defendants; ask that it be reimbursed out of the money for its costs, usually a small attorney’s

fee and a court filing fee; and that it be allowed to exit from the fight. The buyer and seller then

battle over the funds.

interrogatories A set of written questions by one party in a lawsuit to another party in the

lawsuit, which must be answered under oath.

interstate A concept with many different interpretations depending on which federal law is being

considered. Usually relevant in determining if an activity has a sufficient connection to interstate

commerce, and thus the Commerce Clause of the Constitution, to warrant federal intrusion or over-

sight of the activity. Article I, Section 8, Clause 3 of the United States Constitution is known as the

Commerce Clause and empowers the United States Congress “To regulate Commerce with foreign

Nations, and among the several States, and with the Indian Tribes.” Representative areas of federal

power may include

• Matters in interstate commerce

• Matters affecting interstate commerce

• Agencies and instrumentalities of interstate commerce

• Local laws that discriminate against interstate commerce

• Crimes that interfere with or obstruct interstate commerce

Interstate Land Sales Full Disclosure Act A federal law passed in response to abuses in the

sale and development of large subdivision projects. Developers often took large deposits or even

sold lots and then did not begin development for many years. The law requires registration of the

subdivision with the federal government and mandates certain disclosures and rescission (contract

cancellation) periods to consumers. Subdivisions of less than various size limits or those that will be

completed within specified time limits are exempt, as are subdivisions in states certified as having

substantially similar laws.

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Internal Revenue Service (IRS) Interstate Land Sales Full Disclosure Act

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interval ownership Also called time-share ownership, in which a person shares ownership of

property but is entitled to exclusive possession only for a particular time period each year.

inter vivos branch A theory that is applied to transactions entered into during one’s lifetime.

Some legal principles have differing rules depending on whether property was disposed of during

the owner’s lifetime or by provisions in the owner’s will.The rule that applies for lifetime transactions

is called the inter vivos branch of the rule.

inter vivos trust A trust established during the granting party’s lifetime, rather than by virtue of

the party’s will.

intestate Without a will. All states have laws specifying the rules of intestate succession, or who

will receive property, and in what shares, when someone dies without a will. If there is no one to

inherit, then the property escheats to the state.

intestate succession The order of distribution of property when one dies without a will.

intrinsic value An appraisal term meaning an intangible value based on a property’s proximity to

certain features and amenities, such as good schools, health care, and shopping.

inventory (1) The total listings controlled by a real estate broker. (2) The total property for sale or

lease in a defined area. (3) Property held for sale in the ordinary course of business or to be used in

the manufacture of goods held for sale. (4) An itemized listing of personal property.

inverse condemnation A lawsuit brought against a government agency because of some action

claimed to have damaged property to such a degree as to amount to a condemnation, even though

there was no official exercise of the right of eminent domain and no compensation offered or paid

to the property owner.This situation often comes up when governments increase the level or degree

of regulation of property in such a manner as to make it economically incapable of development

and thus worthless to the owner.

investment analysis A study of the potential return on a real estate investment to the owner,

without reference to a potential sales price but strictly limited to the earnings and investment

returns on the property. There are several different methods of analysis, some of which might be

appropriate for particular properties and others not, or some of which are easier to use and favored

by investors.The most common methods include

• Cash-on-cash return

• Payback period

• Internal rate of return

investment contract “Any contract, transaction or scheme whereby a person invests money in

a common enterprise and is led to expect profits solely from the efforts of the promoter or third

party,”is the definition used by the Securities and Exchange Commission (SEC).Investment contracts

related to real estate come within the definition. Nationwide litigation is currently under way to say

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interval ownership investment contract

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that purchases of units in hotel condominiums—condotels—are also investment contracts.If some-

thing qualifies, it is possibly subject to registration, reporting, and disclosure requirements imposed

by the SEC.

investment-grade property A term used to describe property felt to be of sufficient size

and quality to be an attractive purchase target by one of the large institutional portfolios, such as

retirement funds or insurance companies.

investment interest An IRS phrase meaning the interest incurred on debt for an income-producing

property. Investment interest is deductible only to the extent of investment income; you can’t use

investment interest to shelter other income. Unused investment interest may be carried over to sub-

sequent years.

investment life cycle The time period from acquisition of an investment to its final disposition.

investment property Property held for the production of income or for an increase in value, as

opposed to property held as a personal residence, use in a business, used for pleasure, or held in

inventory.

investment value The value of property to a particular investor, aside from the property’s gener-

al market value. Often encountered when a person sells appreciated real estate and must identify

another property to purchase within 45 days in order to take advantage of the 1031 tax exchange

vehicle for deferring taxes. Because of the short time limits, that investor is willing to pay a higher

price than someone else, because the investor must buy something in order to avoid paying income

taxes on the earlier sale.

investor One who uses his or her money to purchase property in the expectation of earning peri-

odic cash flows from the property, making a profit on the eventual resale of the property, or both.

involuntary alienation Loss of property for nonpayment of debts, such as foreclosure, tax sale, or

execution on a judgment.

involuntary conversion An IRS term meaning the involuntary loss of property through destruc-

tion or condemnation. The event can be a tax loss or a tax gain, depending on any proceeds

received as a result of the involuntary conversion. If there is a gain, the taxes can be deferred. See

condemnation.

involuntary lien A lien on real estate that results without the property owners’ voluntary cooper-

ation in the placement of the lien. Examples include tax liens and judgment liens. Contrast with a

mortgage, which is voluntary.

ironclad agreement A mythical contract that can’t be broken—like the Loch Ness Monster, often

reported but never confirmed.As a practical matter,there is no agreement that can’t be broken if the

parties have sufficient resources, well-qualified legal talent, and plenty of time.

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investment contract ironclad agreement

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irrevocable Not capable of being revoked. An offer to sell at a certain price can be revoked at any

time before acceptance. An irrevocable offer to sell cannot be revoked, but it should always have an

expiration date.

ISO 14000 Refers to a series of voluntary standards for implementation and auditing of environ-

mental controls previously agreed upon by a community or required by statute.The term is interna-

tionally recognized. In the United States, the Environmental Protection Agency (EPA) refers to the

standards as Voluntary Environmental Management Systems/ISO 14001.

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irrevocable ISO 14000

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jeopardy (1) Danger, hazard, peril. Mortgaged property is said to be in jeopardy because it might

be taken by foreclosure. (2) Subjected to the possibility of criminal punishment, including fines.The

constitutional protection against double jeopardy has been held to apply to fines, such as might be

levied against a company for violation of housing discrimination laws.

joint and several liability Having full liability for the whole of a debt or injury. Comakers on

promissory notes have joint and several liability, so that the lender may collect the entire amount

due from only one borrower and is not limited to collecting one-half from each borrower. The

following usually have joint and several liability unless required otherwise by a specific state law

or contractual agreement:

• Partners in a general partnership

• Taxes owed by husbands and wives who file joint returns

• Multiple persons who commit one wrong and injure another

• Tenants under one lease, such as roommates

• Cosigners on promissory notes

• Cosigners on guarantee agreements

joint ownership Ownership of property by two or more people or entities. It includes tenants in

common, joint tenants with right of survivorship, tenants by the entireties, and community property

interests.

joint tenancy A short version of the term “joint tenants with right of survivorship.” A method of

taking title to real property; commonly used by husbands and wives, or by others, as an estate plan-

ning tool.The parties each own a fractional share and, at the same time, own the whole of the prop-

erty. If a joint tenant dies, the others do not inherit that tenant’s share, but simply see the removal of

an obstacle in the way of taking everything.This is a subtle point,but it is the heart of the estate plan-

ning tool—no one inherits anything as a result of the death of the other joint tenant(s). As a result,

the property does not pass through probate and cannot be used to satisfy claims against the estate

of the decedent. However,

• The property may be includable in one owner’s estate for purposes of calculating

estate taxes. The rules are different depending on whether the parties were married

or not.

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• A joint tenancy may be destroyed if one owner transfers his or her interest to a third party.

If that happens, the new owner becomes a tenant in common, not a joint tenant. If there

were originally more than two joint tenants, the remaining ones may still be joint tenants

as to each other’s interest.

joint venture A legal entity somewhat similar to a partnership, except that its purpose is the pur-

suit of a single transaction for the mutual benefit of both joint venturers. Each joint venturer has

equal rights of direction and control. For tax purposes, the joint venture is treated as a partnership

and must file a partnership tax return.

judge-made law Legal decisions by appellate courts that are binding on all future generations

unless overruled by a later appellate court, but which are directly contradictory to specific statutes

or earlier case authority. This happens rather often in real estate law, much of which arose out of

peculiarities of life in the Middle Ages and before.When faced with a situation that would result in a

seemingly unfair conclusion under applicable principles of law,the judges sometimes simply change

the law.

judgment An order of a court.

judgment creditor One who has obtained a judgment against another.The original claim did not

have to arise out of a debt—it could have been an automobile accident,a promissory note,an award

in a divorce case, or anything at all.

judgment debtor One who has had a judgment rendered against him or her. The original claim

did not have to arise out of a debt—it could have been an automobile accident, a promissory note,

an award in a divorce case, or something similar.

judgment, foreign A judgment taken in another state.Once the judgment has been entered and

becomes final in the other state, it may be domesticated—filed of record—in any other state where

the debtor may have property. The judgment debtor may not relitigate the original issues at that

time, unless there are very extraordinary circumstances.

judgment in rem A judgment against property, rather than against a person.One example would

be a judgment establishing a right-of-way easement in favor of one property and over another

property. The judgment binds all people to the extent of their interaction with the property.

judgment lien A lien on all property of a judgment debtor as a result of the entry of a judgment,

the failure to appeal, and the filing of some document in the public records as evidence of the

judgment.

judgment-proof Having no assets out of which a judgment may be satisfied. In some states,

a judgment debtor may have substantial assets, but they are legally beyond the reach of credi-

tors. In other states, judgments can remain liens against property for as long as 20 years. Today’s

judgment-proof debtor may be wealthy in 5 or 10 years and have assets that can be seized at

that time.

joint tenancy judgment-proof

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judicial foreclosure A foreclosure mechanism used in some states. An action must be filed with

a court to begin the foreclosure process. The court will then fix the amount of the debt and order

foreclosure of the property.

judicial landmark A tool available in some states for marking court-established boundary line

corners after a lawsuit between contiguous property owners. The applicable statute will usually

specify a certain size monument, such as a concrete block at least 12 inches per side; a depth

at which it should be buried; and a requirement for an engraved notation that indicates that it is a

judicial landmark, the date set, and the name of the surveyor setting the landmark.

jumbo mortgage A loan in an amount greater than the size limits for Fannie Mae or Freddie Mac

purchase.The loans must remain in the lender’s portfolio or be sold to other investors. Because the

loans cannot be sold easily, some banks charge a higher interest rate for them.

junior lien or mortgage Refers to the priority of payment if a property must be liquidated to sat-

isfy the debts against it.The first recorded lien or mortgage will be paid first out of sale proceeds, up

to the entire amount of the debt,including principal, interests,legal fees,and expenses.If there is any

money remaining,junior lienholders (which include junior mortgages) will be paid in full in the order

of their priority until the money runs out.

junk fees A popular term for lender fees and expenses that are disguised additional profit. They

are usually relatively small, but can add up to significant income if enough borrowers pay them.

Sample junk fees are loan processing, document handling, fund maintenance, review appraisal,

underwriting review, and other such items.

jurisdiction Power. The concept that a court or government authority may exercise control over

a person or property because of the location of the property, the activities of a person within a geo-

graphic area, or a person’s request for assistance from that authority, thereby voluntarily subjecting

themselves to jurisdiction.

jury trial, right to In many states, there is no right to a jury trial on disputes relating to real prop-

erty.This is because of rules with their roots in English courts dating back to the time of the Norman

invasion in 1066.Before making any litigation decisions based on what you think a jury of your peers

would decide, be sure to see if you are entitled to a jury.

just compensation A requirement of the United States Constitution that no owner be deprived

of private property without payment of a value which is fair to the owner, and fair to the taxpay-

ers who must pay the compensation. This concept forms the basis of eminent domain law and

condemnations.

just title A title that seemed to be proper and legal, although defective in some regard. In some

states, persons with a defective title may gain full title to the property if they use the property for

a certain period of time, claim it as their own, and have such title such as would give rise to

a good-faith belief that the property was theirs.

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judicial foreclosure just title

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Kelo One of the most important real estate cases of modern history, Kelo v. City of New London

tested the limits of the government’s right to condemn private property for public use, and

concluded with the United States Supreme Court granting wide latitude to local government.

The issue involved a desire by the city of New London, Connecticut, to condemn 90 acres of

private property and offer it to a developer as part of a larger urban revitalization plan.

Historically, eminent domain has been used to build roads, schools, and public buildings. In

the Kelo case, the overall development plans called for a resort hotel and conference center,

retail space, residences, and a new state park.

The case finally ended up in the United States Supreme Court. On June 23, 2005, Justice

Stephens wrote the majority opinion, finding in favor of the city of New London. Justice

Stephens said that local governments should be given wide latitude in local condemnation

cases. “The city has carefully formulated a development plan that it believes will provide appre-

ciable benefits to the community, including, but not limited to, new jobs and increased tax

revenue.” Under the particular facts of the Kelo case, the condemnation was for a permissible

public purpose and not a private purpose.

There have been two types of backlash to the Kelo decision.

Many local governments immediately passed laws prohibiting the use of eminent domain for

private development. The Supreme Court decision left open the likelihood that such laws

would be constitutional and, in fact, practically invited states to pass new laws.

Small towns across America began plans to condemn undeveloped property owned by Wal-

Mart within their borders. City leaders and citizens claimed it would be for the public good,

because a Wal-Mart store where planned would be a blight on the community, much the same

as the 90 acres in New London was considered a blight. (At this writing, it is too early in the

judicial process to see where this will go.)

key tenant See anchor tenant.

kickback An illegal fee or rebate paid to someone in order to gain that person’s decision or rec-

ommendation for the award of business. Under the Real Estate Settlement and Procedure Act

(RESPA), federal law prohibits kickbacks to real estate agents from mortgage companies.

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kiosk A small, freestanding retail location within the confines of another business or in the com-

mon areas of a shopping center. Kiosks represent a method of significantly expanding real estate

income without raising rents or building more space. The term is sometimes used to denote only

self-service locations, with the attended sites called carts. (For more information see the Web site of

the Self Service and Kiosk Association, www

.selfservice.org.)

kit homes Structures that arrive as prefabricated components to be erected on-site. Includes the

familiar log cabin kits, geodesic dome houses, and post and beam houses.

kiosk kit homes

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laches A doctrine of equity, or fairness, holding that people cannot sleep on their rights and then,

after the passage of time and possibly the intervening claims of other people,suddenly demand that

the law fix everything.The concept is similar to a statute of limitations,except that it has no fixed time

period and is totally dependent on the particular circumstances of a case.

Example:

Ruby plants 10 pecan trees on the wrong side of her property line with Jake. Jake

knew this when the first shovel of dirt was turned, but he remained silent. Seven years later Ruby

begins harvesting pecans to supplement her income, but Jake sues her and claims the pecans

belong to him. Most likely the court will rule that Jake’s claims are barred by laches and Ruby

may harvest pecans until the trees stop bearing.

land In the law, the surface of the earth, descend-

ing down in a cone shape to the center of the world

and upward to the heavens, along with all natural

things thereon, such as minerals, water, vegetation,

and rights to the air. This is less than the concept of

real property, which includes land but also all rights

in and to land or its use, and all artificial things

attached to the land.

land bank Land purchased and held for future

development.

land contract Also called a bond for title,land sale

contract or contract for deed. It is a financing

arrangement for real property, in which the seller holds the financing and the legal title and does not

give the buyer a deed until all payments have been made in full. For many people with the inability

to secure financing, it is the only practical way for them to own a home. The practice is perilous,

though, and could result in the loss of the property, and substantial money spent over the years,

simply because of one late payment.

land court A specialized court to hear real estate matters.The details vary from state to state.

land description Any instrument granting or relinquishing rights in real estate must contain a

description of the real estate.The description must be precise enough so that a stranger, relying only

on the writing in the instrument and perhaps some training as a surveyor, could go out in the world

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Traditionally, land

extended to the depths

of the earth and the

heights of the heavens

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