Capital and Financing Definitions

DEFINITIONS

ABSENTEE OWNER: An owner who does not personally manage or reside at property owned.

ABSTRACT or TITLE: A historical summary of all of the recorded instruments and proceedings that affect the title to property.

ACCELERATE COST RECOVERY SYSTEM (ACRS): A method of depreciation introduced by the Economic Recovery Tax Act of 1981. Under it, most buildings acquired in 1981 and thereafter may be depreciated using a 15-year life.

ACCELERATED DEPRECIATION: Depreciation methods, chosen for income tax or accounting purposes, that offer greater deductions in early years.

ACCELERATION CLAUSE: A loan provision giving the lender the right to declare the entire amount immediately due and payable upon the violation of a specific loan provision, such as failure; to make payments on time.

ACCEPTANCE: The act of agreeing to accept an offer.

ACCOMMODATIONS PARTY: One who has signed an agreement without receiving value for it, for the purpose of lending his or her name so that another person can secure a necessary loan or other arrangement.

ACCRUAL METHOD: A method of accounting that requires income or expense to be entered when the amount is earned or the obligation in payable.

ACCRUED INTEREST: Interest that has been earned but not paid.

ACCUMULATED DEPRECIATION:In accounting,the amount of depreciation expense that has been claimed to date.

ACRE: A 2-dimensional measure of land equaling 160 square rods, 10 square chains, 4,840 square yards, or 43,560 square feet.

ADDENDUM: Something added, as an attachment to a contract.

ADD-ON INTEREST:Interest that is added to the principal of a loan. The amount of interest for all years is computed on the original amount borrowed.

ADJACENT: Nearby but not necessarily adjoining.

ADJUSTABLE MORTGAGE LOAN (AML): A mortgage instrument authorized by the Federal Home Loan Bank Board in 1981 for use by all federally chartered savings and loan associations.

ADJUSTABLE RATE MORTGAGE (ARM): A mortgage loan that allows the interest rate to be changed at specific intervals over the maturity of the loan.

ADJUSTABLE TAX BASIS; The original cost or other basis of property, reduced by depreciation deductions and increased by capital expenditures.

AFFIDAVIT; A written statement, sworn to or affirmed before officer who is authorized to administer an oath or affirmation.

AFFIRM; To confirm, to ratify; to verify.

AFTER-TAX CASH FLOW: cash flow from income-producing property, less income taxes if any attributable to the property's income.

A.L.T.A.: A form of title insurance policy issued by a title insurance company, who will expand the risks normally insured against under the standard form policy.

AMERICAN INSTITUTE OF REAL ESTATE APPRAISERS (AIREA): A professional organization of real estate appraisers affiliated with the National Association of Realtors.

AMORTIZATION; A gradual paying off of a debt by periodic installments.

AMORTIZATION SCHEDULE: A table that shows the periodic payment, interest and principal requirements, and unpaid loan balance for each period of the life of the loan.

ANNUAL PERCENTAGE RATE: The effective rate of interest for a loan per yearly, disclosure of which is required by the Truth-in-lending law.

ANNUITY: A series of equal payments to be made over a period of time, or a lump sum to be made in the future.

APPRAISED VALUE: The estimated value determined by an appraiser's market worth. It is determined by three main factors: (1) replacement cost; (2) capitalization of the property's current and future income; and (3) the selling price of comparable properties.

APPRAISER: One qualified to estimate the value of real property.

APPRECIATION: An increase in the value for property

APPROPRIATION: Setting aside land for public use.

ASSESSED VALUE: A value placed by a public officer or board on a property.

ASSESSMENT: The amount of tax or special payment due to a municipality or association.

ASSET: Anything of value owned by a person that has an exchange value.

ASSIGNEE: The person to whom an agreement or contract is sold or transferred.

ASSUMPTION FEE: A charge made by a lender for changing over and processing new records for a new owner who is assuming an existing loan.

ATTACHMENT: Legal seizure of property of force payment of a debt.

BALANCE SHEET: A financial statement in table form showing assets, liabilities, and equity, in which assets equal the sum of liabilities plus equities.

BALLOON MORTGAGE: A mortgage loan which is written with an amortization schedule that is longer than the loan term therefore requiring a payment of the remaining principal at the end of the loan term.

BALLOON PAYMENT: The final payment on a loan, when that payment is greater than the preceding installment payments and pays the loan in full,

BANKRUPTCY: The financial inability to pay one's debts when due.

BILATERAL CONTRACT: A contract under which each party promises performance.

BILL OF SALE: A written instrument given to pass title of personal property from a seller to a buyer.

BINDER: A notation of coverage on an insurance policy.

BLANKET MORTGAGE: A single mortgage that covers more than one parcel of estate.

BOOK VALUE: The carrying amount of an asset , as shown on the books of a company.

BREACH OF CONTRACT: A violation of the terms of legal agreement; default.

BREAK-EVEN POINT: The amount of rent or the occupancy level needed to pay operating expenses and debt service.

BRIDGE LOAN: A short term loan that bridges a gap between two other loans, usually intended to provide temporary financing in a period between two basically different loan types.

BROKER: An agent who acts as intermediary between two people.

BUILDING CODES: Regulations established by local governments describing the minimum structural requirement for buildings; includes foundation, roofing, plumbing, electrical, and other specifications for safety and sanitation.

BULLET LOAN: A mortgage loan with no amortization payable at interest-only payments.

BUY-BACK AGREEMENT: A provision in a contract under which the seller agrees to repurchase the property at a stated price upon the occurrence of a specified event within a certain period of time.

BUY-DOWN: The action to pay additional discount points to a lender in exchange for a reduced rate of interest on a loan.

CANCELLATION CLAUSE: A contract provision that gives the right to terminate obligations upon the occurrence of specified conditions or events.

CAPITAL ASSETS: An asset defined in Section 1221 of the Internal Revenue Code that can receive favorable tax treatment upon sale.

CAPITAL GAIN: Gain on the sale of a capital assets.

CARRYING CHARGES: Expenses necessary for holding property, such as taxes and interest on idle property or property under construction.

CHATTEL: Personal property such as furniture, car clothing etc.

CHATTEL MORTGAGE: A pledge of personal property as security for a debt.

CLEAR TITLE: A marketable title; one free of clouds and disputed interests.

CLIENT: The one who engages a broker, lawyer, accountant, appraiser, etc.

CLOSING: The act of transferring ownership of a property from seller to buyer in accordance with a sales contract.

CLOSING COSTS: Various fees and expenses payable by the seller and buyer at the time of a real estate closing ( also termed transaction costs ).

CLOSING DATE: The date on which the seller delivers the deed and the buyer pays for the property.

COLLATERAL: Property pledged as security for a debt.

COMPOUND INTEREST: An interest charge which is figured by applying the percentage of interest to not only the principal amount but also to the interest due. Interest itself is thereby considered part of the principal and therefore earns additional interest.

CONVENTIONAL LOAN: A mortgage loan other than one guaranteed by the Veterans Administration or insured by the Federal Housing Administration.

CONVERSION: Changing property to a different use or form of ownership, such as when apartments are transformed to condominiums.

COST APPROACH: Used in appraisals to analyze a value estimate of a property derived by estimating the replacement cost of the improvements, then deducting the estimated accrued depreciation and the adding the market value of the land.

COST OF LIVING INDEX: An indicator of the current price level for goods and services related to some base year.

COVENANTS: Promises written into deeds and other instruments agreeing to performance of non performance of certain acts, or requiring or preventing certain uses of the property.

CONVENTIONAL LOAN: A loan made without any help from any governmental agency such as FHA.

CREATIVE FINANCING: Any financing arrangement other than a traditional mortgage from a third-party lending institution.

CREDIT RATING (REPORT): An evaluation of a person's capacity ( or history) of debt re-payment.

CURRENT ASSETS: Any assets that can be converted into cash on a short notice such as stocks and bonds.

DEBT COVERAGE RATIO: The relationship between net operating income (NOIO) and annual debt service (ADS).

DECLARATION: Formal pleadings by a plaintiff as to the facts and circumstances that gave rise to his cause of action.

DECLINING BALANCE: The amount owed on a debt after the monthly payments are made.

DEED: A written document, properly signed and delivered, that conveys title to real property.

DEED OF TRUST An instrument used in many states in lieu of a mortgage.

DEFAULT: Failure to fulfill the requirements of an obligations such as not making the monthly payments.

DEPRECIATION: A decrease in the value of property due to age, physical deterioration and or use.

DEMOGRAPHIC: Pertaining to characteristics of the population, such as race, sex, age, household size, and to population growth and density.

DIRECT REDUCTION MORTGAGE: A loan that requires both interest and principal with each payment such that the level payment will be adequate for amortization over the loan's term.

DISCLAIMER: A statement whereby responsibility is rejected.

ECONOMIC LIFE: That remaining period for which real estate improvements are expected to generate more income than operating expense cost.

EMINENT DOMAIN: The right of the government or a public utility to acquire property for necessary public use by condemnation; the owner must be fairly compensated.

ENCROACHMENT: A building, a part of a building, or an obstruction that physically intrudes upon, overlaps, or trespasses upon the property of another.

ENCUMBRANCES: Any right to or interest in land that affects its value.

EQUITABLE TITLE: The interest held by one who has agreed to purchase but has not yet closed the transaction.

EQUITY: The value of a property which an owner has over and above the liens against it.

ESCROW: An agreement between 2 or more parties providing that certain instruments or property be placed with a third party for safekeeping pending the fulfillment or performance of a specified act or condition.

FANNIE MAE: Nickname for Federal Mortgage Association.

FEDERAL HOME ADMINISTRATION (FMHA): A government agency which provides credit to farmers to promote development of rural communities.

FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC): "Freddie Mac" A federal agency used to develop a secondary market in conventional residential mortgages. They purchase loan packages originated by savings and loan associations.

FINANCIAL STATEMENT: A statement that lists assets and liabilities for a certain period of time, shown in net worth.

FINDER'S FEE: Money paid to someone other than a broker who locates suitable property or a purchaser.

FISCAL YEAR: A 12-month time interval used for financial reporting; the period starts on any date after January 1 and ends one year later.

FLOATING RATE MORTGAGE: The interest rate on a loan moves with the float of the bank's prime rate. This rate can be adjusted either monthly, quarterly, yearly or every 5th year as stated by the lender.

FORECLOSURE: A termination of all rights of a mortgagor or the grantee in the property covered by the mortgage.

GAP LOAN: A second mortgage loan made during the period of funding between the floor loan and ceiling loan, which is contingent upon the achievement of specific leasing requirements.

GINNIE MAE: Nickname for Government National Mortgage Association.

GOODWILL: A business asset of intangible value created by customer and supplier relations.

GRACE PERIOD: The period during which one party may fail to perform without being considered in default.

INSTITUTIONAL LENDER: Financial intermediaries who invest in loans and other securities on behalf of their depositors or customers; lending and investment activities are regulated by laws to limit risk.

INSTRUMENT: A legal document.

INTANGIBLE VALUE: Value that cannot be seen or touched.

INTEREST ONLY LOAN: A loan for which there is no principal reduction for the full term of the loan. Payments are interest only and the entire principal will be due at the end of the term.

JOINT TENANCY: Ownership of realty by 2 or more persons, each of whom has an undivided interest with the right of survivalship.

LEGAL DESCRIPTION: A description of property so that it can be located by reference to government surveys or approved recorded maps.

LESSEE: A person to whom property is rented under a lease.

LETTER OF INTENT: The expression of a desire to enter into a contract without actually doing so.

LEVEL PAYMENT MORTGAGE: Requires the same payment each month (or other period) for full amortization.

LEVERAGE: Use of borrowed funds to increase purchasing power and, ideally, to increase the profitability of an investment.

LEVY: To legally impose or collect that which is due.

LIABILITY: A debt or financial obligation.

LIEN: A charge against property making it security of the payment of a debt, judgment, mortgage, or taxes; it is a type of encumbrance.

LIQUID ASSETS: Assets that can be converted to cash readily.

LINE OF CREDIT: An agreement whereby a financial institution promises to lenduup to a certain amount withoutthe need to file another application.

LOAN COMMITMENT: An agreement to lend money, generally of a specified amount, at specified terms at some time in the future.

LOAN FEE: A fee over and above the annual interest that the lender charges the borrower for making a loan.

LOAN-TO-VALUE RATIO (LTV): The portion of the amount borrowed compared to the cost or value of the property purchased.

LONG TERM CAPITAL GAIN: For income tax purposes, the gain on a capital asset held long enough to qualify for special tax consideration.

M.A.I.: A person who is a member of the American Institute of Real Estate Appraisers of the National Association of Realtors.

MARKET VALUE: The highest price that a seller can expect to obtain from the sale of property or assets in present market.

MECHANIC'S LIEN: A lien given by law oron a building or other improvement oron land, and upon the land itself, as security for payment for labor done and materials furnished for improvement.

MODULAR HOUSING: Dwelling units constructed from components prefabricated in a factory and erected on the site.

MORTGAGE: A written instrument that creates a lien upon real estate as security for the payment of a specified.

MORTGAGEE: The lender.

MORTGAGOR: The borrower.

MORTGAGE BANKERS ASSOCIATION (MBA): An organization that provides educational programs and other services for mortgage bankers. Offers the Certified Mortgage Banker (CMB) designation. Publishes Mortgage Banker magazine. Address: Mortgage Banker's Association of America, 1125 Fifteenth Street, N.W., Washington, D.C. 20005.

NEGATIVE AMORTIZATION: An increase in the outstanding balance of a loan resulting from the failure of periodic debt service payments to cover required interest charged on the loan.

OPEN END MORTGAGE: A mortgage which contains a clause which allows the mortgagor to borrow additional funds after the loan has been reduced.

OPERATION EXPENSES: Amounts paid to maintain property, such as property taxes, utilities, hazard insurance.

OPTION: A right given for a consideration to purchase or lease a property upon specified terms within a specified time.

OUTSTANDING BALANCE: The amount currently owed on a debt.

PLAT: A plan or map of a specific land area.

POINTS: A percentage of the loan amount paid to the lender when the loan is negotiate for the privilege of borrowing a sum of money. Each point equals to one percent of the amount.

POWER OF ATTORNEY: An instrument authorizing a person to act as the agent of the person granting it.

PREPAID INTEREST: Interest paid in advance of the time it is earned.

PREPAYMENT PENALTY: Fees paid by borrowers for the privilege of retiring a loan early.

PRIME RATE: The lowest commercial interest rate charged by banks on short-term loans to their most credit-worthy customers.

PRINCIPAL: The one who owns or wills property.

PRIMARY LEASE: A lease between the owner and a tenant whose interest, all or in part, has been sublet.

PRINCIPAL AND INTEREST PAYMENT (P&I): A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to amortization of the principal balance.

PRINCIPAL, INTEREST, TAXES AND INSURANCE PAYMENT (PITI): The periodic (typically monthly) payment required by an amortizing loan that includes escrow deposits.

PROXY: A document that allows one person to act for another.

PURCHASE MONEY MORTGAGE: A mortgage given by a grantee (buyer) to a grantor seller in part payment of the purchase price of real estate.

QUITCLAIM DEED: A deed that conveys only the grantor's rights or interest in real estate, without stating the nature of the rights and with no warranties of ownership.

REAL PROPERTY: Immovable property along with all the fixtures and land.

RECONCILIATION: In appraisal, the process of adjusting comparable to estimate the value of the subject being appraised.

REFINANCE: The substitution of an old loan(s) with a new loan(s).

REPLACEMENT COST: The cost to replace a structure with one of equivalent cost but constructed with the modern materials and current standards.

RIDER: An amendment or attachment to a contract.

SECOND MORTGAGE: Any mortgage that is recorded after the first mortgage.

SECONDARY FINANCING: A loan secured by a junior mortgage or trust deed on real property.

SPEC LOAN: A loan made based on the speculation that the property will be full, or nearly fully leased, soon after the construction is completed.

SIMPLE INTEREST: A method of calculating the future value of a sum assuming that interest paid is not compounded, i.e., that interest is paid only on the principal.

STANDBY COMMITMENT: A promise made by lender to stand by the fund a mortgage loan that he does not expect to fund unless the project gets in trouble. Use by developer to get a construction loan.

STANDBY LOAN: A commitment by a lender to make available a sum of money at specified terms for a specified period.

STATUE OF LIMITATIONS: A specified statuary period after which a claimant is barred from enforcing his claim by suit.

STIPULATION: The terms within a written contract.

TERMS: Conditions and arrangements specified in a contract.

TITLE: Evidence that the owner of land is in lawful possession thereof; evidence of ownership.

TITLE COMPANY: One in the business of examining title to real estate and/ or issuing title insurance.

TORT: A wrongful act that is neither a crime nor a breach of contract, but that renders the perpetrator liable to the victim for damages.

TRUST DEED: Deed given by borrower to beneficiary to be held pending fulfillment of an obligation, which is ordinarily repayment of a loan to a beneficiary.

USURY: Claiming a rate of interest greater than that permitted by law. Many states have usury laws which forbid the charging of excessive rates for certain types of loans.

VENDEE: A buyer.

VENDOR: A seller.

VESTED: Bestowed upon someone.

VARIABLE RATE MORTGAGE (VRM): A long-term mortgage loan applied to residences under which the interest rate may be adjusted on a 6-month basis over the term of the loan.

WAIVER: The voluntary renunciation, abandonment, or surrender of some claim, right, or privilege.

WRAPAROUND MORTGAGE: A loan in which an existing loan is retained and an additional loan, larger than the existing loan, is made. The new lender accepts the obligation to make payments on the old loan. The existing loan generally carries an interest rate below the rate available on new loans. Consequently, the yield to the wraparound lender is higher than the rate charged on the new loan. Sellers are the most common wraparound lenders.

YIELD: A measurement of the rate of earnings from investment.

ZONING: Specifications issued by city or county authorities describing the type of use of proprieties in specific areas.

CAPITAL AND FINANCING TERMS

DEFINITIONS