Concepts & Vocab

Question 1

Absorption schedule

Answer 1

The estimated schedule or rate at which properties for sale
or lease can be leased or rented in a given locality; usually used when
preparing a forecast of the sales or leasing rate to substantiate a development
plan and to obtain financing.

Question 2

Axial theory

Answer 2

A theory of land use development that suggests that land uses tend to
develop in relation to time-cost functions of transportation axes that radiate
from the central business district.

Question 3

Balloon loan

Answer 3

A loan that does not fully amortize over the term and requires a
lump-sum payment of remaining principal at maturity.

Question 4

Basis point

Answer 4

One hundredth of one percent, used to express differences in interest
rates.

Question 5

Binding constraint

Answer 5

Legally enforceable limit on the allowable development on a

given site.

Question 6

Bonding

Answer 6

A guarantee of completion or performance, typically issued by an
insurance company that will back up the bonded party in any lawsuit. In real
estate, contractors, for example, are often bonded as assurance that they will
complete the work.

Question 7

Bottom-up approach

Answer 7

An approach to developing an analysis based on the most

disaggregated data available.

Question 8

Break-even ratio

Answer 8

In finance, the point at which total income is equal to total
expenses.

Question 9

Brownfield.

Answer 9

site previously used for industrial or certain commercial uses and
possibly contaminated from those uses, but developable upon cleanup.

Question 10

Building efficiency ratio.

Answer 10

The ratio of net leasable area to gross leasable area.

Question 11

Building Owners and Managers Association International (BOMA)

Answer 11

A trade

association of owners and managers of apartment and office buildings.

Question 12

Buildout.

Answer 12

Construction of specific interior finishes to a tenant’s specifications.

Question 13

Business improvement district (BID)

Answer 13

A public/private partnership in which the
business owners in a district, through legislative approval, contribute funds
through a special tax to the maintenance, development, and marketing of their
commercial area.

Question 14

Capital market.

Answer 14

Financial marketplace in which savings (from individuals,
companies, or pension funds) are aggregated by financial intermediaries and
allocated to real investors.

Question 15

Capture rate.

Answer 15

Forecasted rate of absorption in a targeted market segment for a
proposed project, based on an analysis of supply and demand.

Question 16

CERCLA (Comprehensive Environmental Response, Compensation, and
Liability Act of 1980)

Answer 16

Legislation adopted to provide partial funding for the
cleanup of environmentally contaminated sites by requiring the party
responsible for the contamination to undertake cleanup efforts or provide
compensation for cleanup costs; also known as the Superfund law.

Question 17

Codevelopment.

Answer 17

Term that refers to the combined development of real estate by
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the private sector and government, where the public sector assumes risks or
costs normally borne by private developers.

Question 18

Commercial paper

Answer 18

Short-term negotiable financial instruments, usually

unsecured, such as promissory notes, bank checks, bills, and acceptances.

Question 19

Commitment letter

Answer 19

A written agreement by a lender to loan a specific amount of

money at a specified interest rate within a particular period of time.

Question 20

Community development block grants (CDBGs).

Answer 20

Federal grants received by cities
that may be used for a variety of community development activities; based on
a formula that considers population, extent of poverty, and housing
overpopulation.

Question 21

Community development corporations (CDCs)

Answer 21

Entrepreneurial institutions
combining public and private resources to aid in the development of
socioeconomically disadvantaged areas.

Question 22

Community Reinvestment Act (CRA)

Answer 22

Legislation enacted in 1978 that directs
federal agencies with supervisory authority over depository lenders to
consider a lender’s record in serving local credit needs when making decisions
about the expansion plans of depository institutions.

Question 23

Comparable property

Answer 23

Another property with which a subject property can be

compared to reach an estimate of market value.

Question 24

Concentric zone theory

Answer 24

Urban development theory that holds that because
mobility is paramount to community growth, land uses tend to be arranged in
a series of concentric, circular zones around a city’s central business district.

Question 25

Concession.

Answer 25

Discount given to prospective tenants to induce them to sign a lease, typically in the form of some free rent, cash for improvements furnished by the tenant, and so on.

Question 26

Construction lender

Answer 26

``` Entity or individual providing interim financing during the construction phase(s) of the real estate development process. ```

Question 27

Construction loan.

Answer 27

A loan made, usually by a commercial bank, to a builder to be used for the construction of improvements on real estate and typically running for six months to two years.

Question 28

Contingent interest

Answer 28

A form of equity participation by lenders enabling them to receive an additional return if the income property securing the loan exceeds its projected profit or cash flow goals.

Question 29

Convertible loan

Answer 29

A loan in which the lender, in addition to receiving a stated interest rate, reserves the right to convert its debt on a project to equity and thereby participate in the profits.

Question 30

Covenant.

Answer 30

A restriction on real property that is binding, regardless of changes in ownership, because it is attached to the title. Used generally in covenants, conditions, and restrictions.

Question 31

Covenants, conditions, and restrictions (CC&Rs)

Answer 31

Limitations or restrictions placed on real estate (such as size of a building, character of landscaping, or color of house paint), usually decided by a homeowners association.

Question 32

Critical path method (CPM).

Answer 32

A network analysis method that visually displays the activities involved in completing a project and shows the relationship between the activities. This display can show how a delay in one activity will affect other activities.

Question 33

Debt (service) coverage ratio

Answer 33

The ratio of the annual net operating income of a | property to the annual debt service of the mortgage on the property.

Question 34

Deed restrictions

Answer 34

Private form of land use regulation using covenants or | conditions placed on the title to a property; for example, minimum lot sizes.

Question 35

Density bonus

Answer 35

A zoning tool that permits developers to build at a higher density in exchange for providing some benefit to the community.

Question 36

Discounted cash flow.

Answer 36

Present value of monies to be received in the future; | determined by multiplying projected cash flows by the discount factor.

Question 37

Draw.

Answer 37

The lender’s release of construction loan funds in accordance with set procedures for providing portions of the total amount as each stage of construction is satisfactorily completed.

Question 38

Effective rent

Answer 38

Rental income after deductions for financial concessions such as no-rent periods during a lease term.

Question 39

Enterprise concept

Answer 39

The idea that encouraging private enterprise will facilitate economic revitalization or other socioeconomic goals. Encourages owners to look at real estate as another type of private enterprise.

Question 40

Equity.

Answer 40

That portion of an ownership interest in real property or other securities that is owned outright, that is, above amounts financed.

Question 41

Equity kicker

Answer 41

A provision in the loan terms that guarantees the lender a percentage of the property’s appreciation over some specified time or a percentage of income from the property or both.

Question 42

Estoppel letter.

Answer 42

U.S. dollars deposited in European foreign banks and used as a medium of international credit.

Question 43

Exactions.

Answer 43

Fee or payment-in-kind required of a developer by a local jurisdiction for approval of development plans, in accordance with state and local legislation regarding the provision of public facilities and amenities.

Question 44

Fast-tracking

Answer 44

A method of project management in which construction of a project actually begins before all details are finalized.

Question 45

Feasibility study

Answer 45

A combination of a market study and an economic study that provides the investor with knowledge of both the environment where the project exists and the expected returns from investment in it.

Question 46

Floor amount

Answer 46

Initial portion of a floor-to-ceiling mortgage loan, advanced when certain conditions—for example, construction of core and shell—are met.

Question 47

Floor/area ratio.

Answer 47

The ratio of floor area to land area, expressed as a percentage or a 662 decimal number, that is determined by dividing the total floor area of the building by the area of the lot; typically used as a formula to regulate building volume.

Question 48

Floor load.

Answer 48

The weight that the floor of a building is able to support if such weight is evenly distributed; measured in pounds per square foot.

Question 49

Garden apartments

Answer 49

Two- or three-story multifamily housing featuring low | density, ample open space around buildings, and convenient on-site parking.

Question 50

General contractor

Answer 50

Person or firm that supervises a construction project under | contract to the owner; also known as the “prime contractor.”

Question 51

General obligation bond

Answer 51

Municipal bond backed by the full faith and credit of the | issuer as opposed to being backed by a particular project

Question 52

Gross income multiplier.

Answer 52

Rule-of-thumb calculation to estimate the value of residential property, derived by dividing the sale price of comparable properties by their gross annual or monthly rent.

Question 53

Gross leasing activity.

Answer 53

The sum of all leases signed during a given time period, | including renewals and leases signed in new buildings.

Question 54

Guaranteed investment contract (GIC).

Answer 54

A written guarantee to an investor of a | certain yield for a defined period of time.

Question 55

Hard costs.

Answer 55

In new construction, includes payments for land, labor, materials, improvements, and the contractor’s fee.

Question 56

Income kicker

Answer 56

A provision in loan terms that guarantees the lender’s receipt of a portion of gross income over an established minimum, for example, 10 percent of the first year’s gross rent receipts.

Question 57

Internal rate of return (IRR).

Answer 57

The discount rate at which an investment has zero | net present value (that is, the yield to the investor).

Question 58

Joint venture

Answer 58

An association of two or more firms or individuals to carry on a single business enterprise for profit.

Question 59

Junk bond

Answer 59

Any bond (a long-term debt obligation of a corporation or a government) with a relatively low rating. The lower the rating, the more speculative or risky the investment. Returns can be much higher than for a less speculative investment, however. Bonds are rated by credit-rating companies, the best known being Standard & Poor’s.

Question 60

Lease-up

Answer 60

Period during which a real estate rental property is marketed, leasing agreements are signed, and tenants begin to move in.

Question 61

Leverage.

Answer 61

The use of borrowed funds to finance a project.

Question 62

Levered.

Answer 62

With use of debt financing. Unlevered is before debt financing is taken into account.

Question 63

LIBOR (London interbank offered rate).

Answer 63

An interest rate frequently used as an index in adjustable mortgage loans; most often the interest rate on three- or six-month euro deposits.

Question 64

Lien.

Answer 64

The right to hold property as security until the debt that it secures is paid. A mortgage is one type of lien.

Question 65

Limited partnership

Answer 65

A partnership that restricts the personal liability of the | partners to the amount of their investment.

Question 66

Linkage.

Answer 66

Typically, a payment to a municipality for some needed development that is not necessarily profitable for a developer (say, low-income housing) in exchange for the right to develop more profitable, high-density buildings (say, commercial development).

Question 67

Loan placement analysis.

Answer 67

The decision by a lender to hold a loan or to sell the loan in the secondary market, or the decision not to make a loan if the lender is unwilling to hold it and no secondary market exists.

Question 68

Mechanic’s lien

Answer 68

A claim that attaches to real estate to protect the right to compensation of one who performs labor or provides materials in connection with construction.

Question 69

Miniperm loan.

Answer 69

A short-term loan (usually five years) meant to be an interim loan between a construction loan and a permanent loan. A miniperm loan is usually securitized like any other loan; the interest rate could be less onerous than a construction loan but not as favorable as a permanent loan.

Question 70

Money market instruments

Answer 70

Investment tools such as U.S. Treasury bills and | commercial paper used by money markets.

Question 71

Mortgage-backed security.

Answer 71

A type of bond or note that is based on pools of mortgage loans or collateralized by the cash flows from the principal and interest payments of a set of mortgage loans.

Question 72

Money markets

Answer 72

Name given to financial markets for short-term investment | instruments that mature in one year or less.

Question 73

Mortgage loan constant

Answer 73

Percentage of the original loan balance represented by | the constant periodic mortgage payment.

Question 74

Multifamily housing

Answer 74

Structures that house more than one family in separate units | (apartments). Can be high rises, low rises, garden apartments, or townhouses.

Question 75

Net absorption.

Answer 75

The change in square feet of occupied inventory over a specified period of time, including the addition or deletion of building stock during that period of time.

Question 76

Net operating income (NOI)

Answer 76

Cash flow from rental income on a property after | operating expenses are deducted from gross income.

Question 77

Net present income

Answer 77

The value of an income-producing property at a given | discount rate, minus the original investment cost.

Question 78

Nonrecourse loan

Answer 78

A loan that, in the event of default by the borrower, limits the lender to foreclosure of the mortgage and acquisition of the real estate; that is, the lender waives any personal liability by the borrower.

Question 79

Operating expense ratio

Answer 79

The ratio of operating expenses to either potential gross | income or effective gross income.

Question 80

Participation loan

Answer 80

A mortgage wherein one or more lenders have a share in a | mortgage with the lead or originating lender.

Question 81

Passive investor

Answer 81

An investor who seeks no active role in construction or operation of a building but merely seeks to invest funds to earn a return. Institutional investors such as pension funds are typically passive investors.

Question 82

Pass-through

Answer 82

Lease provision whereby certain costs flow through directly to the tenant rather than to the owner (for example, property tax increases on a long-term lease).

Question 83

Pass-through certificate

Answer 83

An investment instrument in which the periodic debt service payments on a package of mortgage loans are paid out (passed through) to the investors owning the instrument.

Question 84

Prepayment or callability risk.

Answer 84

The risk that a borrower will pay off a loan before it has matured, thus depriving the lender of additional interest payments.

Question 85

Present value

Answer 85

The current value of an income-producing asset, estimated by | discounting all expected future cash flows over the holding period.

Question 86

Profitability ratios

Answer 86

A set of single-period ratios that indicate the capacity of a project to produce income relative to the capital investment required to obtain that income.

Question 87

Rational nexus

Answer 87

A reasonable connection between impact fees and improvements that will be made with those fees. Jurisdictions must be able to justify the fees they charge developers by showing that the fees will be spent on improvements related to the development

Question 88

Real estate investment trust (REIT)

Answer 88

A tax-free ownership entity that provides liquidity and limited liability. Ownership is evidenced by shares of beneficial interest similar to shares of common stock.

Question 89

Recourse loan

Answer 89

A loan offering no protection to the borrower against personal liability for the debt, thus putting at risk the borrower’s personal assets in addition to any collateral securing the loan.

Question 90

Repos.

Answer 90

Short-term repurchase agreements between financial institutions.

Question 91

Retainage.

Answer 91

A portion of the amount due under a construction contract that the owner withholds until the job is completed in accordance with plans and specifications; usually a percentage of the total contract price.

Question 92

Risk-free interest rate

Answer 92

A short-term, base interest rate calculated before various | risk premiums are added; approximated by the rate on U.S. Treasury bills.

Question 93

Securitization.

Answer 93

The pooling of mortgages for securities offerings.

Question 94

Sensitivity analysis

Answer 94

A cost-benefit examination of the features and aspects of a real estate development project such as operating costs, amenities, management costs, and visual appeal, and the impact of adjustments to them on the value of the project.

Question 95

Soft costs.

Answer 95

Outlays for interest, origination fees, appraisals, and other third-party charges associated with real estate development.

Question 96

Subordination clause

Answer 96

Clause in which one party agrees, under certain conditions, | to yield its priority to another mortgagee.

Question 97

Subprime rate

Answer 97

A rate that is at least three points above the current prime rate for a bond of comparable maturity. Loans at subprime rates are costlier and higher risk, and are generally given by commercial banks to customers who have poor or insufficient credit.

Question 98

Syndication

Answer 98

``` The process of acquiring and combining equity investments from multiple sources (for example, syndicating units in a limited partnership). ```

Question 99

Takeout commitment

Answer 99

The permanent loan commitment for a project to be | constructed.

Question 100

Takeout loan

Answer 100

The long-term financing that replaces or “takes out” the | construction loan.

Question 101

Temporary financing.

Answer 101

Short-term financing, usually for land acquisition, | preconstruction infrastructure, and construction of improvements.

Question 102

Term or maturity risk premium

Answer 102

Risk premium charged by lenders to compensate | for the opportunity costs of long-term loans.

Question 103

Tilt-up construction

Answer 103

Concrete elements such as wall panels that are cast horizontally, adjacent to the building footprint, then tilted up to final vertical position when hardened.

Question 104

Top-down approach

Answer 104

An approach to analysis that is based on the use of | aggregated data first.

Question 105

Transfer package

Answer 105

Documentation compiled at the time a project is sold or transferred to an asset manager that attempts to measure objectively the project’s standing in the marketplace in order to provide a benchmark for the asset manager’s future performance.

Question 106

Transferable development rights

Answer 106

A method of allowing landowners to sever development rights for a tract of land and sell those rights to develop, which then can be assigned to another tract of land to enable higher-density development. For example, the “sending area” may be farmland, ensuring that it will never be developed, and the “receiving area” may be an urban area with a strong demand for development, which can then benefit from the allowance of greater density.