Mortgage Words

ABANDONMENT

The voluntary surrender of rights of ownership (or a partial ownership interest, such as an easement) by failure to use the property, coupled with an intent to abandon
(or give up) ownership.

ABATEMENT

A reduction or decrease. This term usually applies to a temporary decrease in a property’s assessed valuation or real estate tax liability.

ABSTRACT (or Abstract of Title)

The condensed history of the title of a particular property as recorded in the county clerk’s office. Although an abstract is less detailed than a complete title search, it still usually includes a summary of the original land grant, all subsequent conveyances (sales, gifts, or transfers), and any encumbrances (liens, mortgages, etc.) affecting the property. It also includes a certification by the abstractor (or an attorney) that the history is complete and accurate. Abstracts still are used in some states, but title insurance is much more common today. "Title" is another word for "ownership".

ABUTTING

The joining or touching of neighboring parcels of land. Abutting properties have a common boundary.

ACCELERATED DEPRECIATION

A method of calculating the theoretical “using up” or “wearing out” of income property. This method is used most often for income tax purposes because it results in higher deductions sooner than would be achieved using the “straight-line” method. Any depreciation deducted in excess of that which could be claimed using the straight-line rate is subject to recapture as ordinary income whenever the property is sold. Recapture usually is limited, however, by the amount of any gain resulting from the sale.

ACCELERATION CLAUSE

A provision in a mortgage, note, or other loan document which makes the entire outstanding amount of the loan (together with any accrued interest) due and payable immediately if the borrower fails to make a payment or otherwise defaults on a requirement of the loan documents.

ACCEPTANCE FOR FILING

The formal filing and registration with the state’s attorney general or department of law of a final offering plan (a “black book” or prospectus) by a sponsor of a cooperative or condominium conversion. It is important to remember that an offering plan is never “approved”. Instead, it is “accepted” as having made adequate disclosure of all relevant information about the planned conversion. Once "accepted", an offering plan is filed in the public records.

ACCRETION

The gradual deposit of soil on the shore or bank of a waterway. Land added in this way generally becomes the property of the owner of the shoreline, except where statutes specify otherwise.

ACCRUALS

Amounts that have become due and payable but have not been paid yet. For example, interest and real estate taxes become “owed” daily but usually are paid monthly or semi-annually. Such amounts are “accrued” until their due date.

ACCRUED DEPRECIATION

The accumulated total of the annual amounts deducted from an asset’s income. These deductions usually are made to reduce income taxes and, presumably, are set aside for the eventual replacement of the asset. The annual deductions theoretically represent the gradual “wearing out” or “using up” of the asset over its estimated “useful life”.

ACKNOWLEDGMENT

A formal statement by someone who executed a legal document before an authorized public official affirming that they signed the document of their own free will. The “authorized official” usually is a notary public. All instruments must be “acknowledged” or “notarized” before they can be recorded in the public records. For example, deeds, land contracts, mortgages, liens, and other instruments affecting real property must be acknowledged before they can be recorded.

ACRE

A quantity of land, in any shape, equal to 160 square rods, 4,840 square yards, or 43,560 square feet.

ADJACENT

Lying near but not necessarily sharing a boundary.

ADJOINING

Contiguous, attaching, abutting; having a common boundary.

ADJUSTABLE RATE MORTGAGE (or “ARM”)

A mortgage loan whose interest rate changes periodically, according to the movement of a specified index. At each adjustment, the new interest rate is established by adding a predetermined spread (or increment of interest) to the specified index as of a certain date. ARM's also are referred to as adjustable mortgage loans (AML's) or variable rate mortgages (VRM's).

ADJUSTED GROSS INCOME

The total income of a building after an allowance for estimated vacancies but before operating expenses and debt payments.

ADJUSTMENT PERIOD

The length of time between interest rate changes on an adjustable rate mortgage. For example, the interest rate on a one-year ARM may be adjusted once each year, according to a predetermined formula.

AD VALOREM

According to value or assessment. For example, real estate taxes are “ad valorem” taxes.

ADVERSE POSSESSION

The right of a property’s occupant to acquire title (or ownership) of that property from the real owner through “actual”, “hostile”, “notorious”, “visible”, and “continuous” possession of the property for the length of time required by local law.

AFFIDAVIT

A written statement or declaration that is sworn to before a notary public or other authorized public official.

AFFIRM

To confirm, ratify, or verify that a statement or fact is true and accurate.

AGENT

A person who agrees, in writing, to conduct some business activity on behalf of another person (the “principal”). The agent has a fiduciary responsibility to the other person to conduct the specified business activity in an honest and prudent manner, and in the best interest of the principal.

AGING

A schedule of receivables showing how long they have been outstanding (e.g., 30, 60, 90 days, etc.)

AIR RIGHTS

Property rights which apply to the space above the land, or to that portion of the space which has not been utilized or developed fully under existing zoning ordinances.

AMORTIZATION

The gradual and systematic process of repaying the total amount borrowed in small installments over some period of time. This repayment period usually is longer than the life of the loan, unless the loan is self-amortizing or self-liquidating (in which case, the repayment period is the same as the term of the loan). The monthly payments for an amortizing loan include both interest on the outstanding balance plus some portion of that outstanding balance (or “principal”).

AMORTIZING LOAN

A loan whose monthly payments include interest on the outstanding balance plus some repayment of principal.

ANNUAL PERCENTAGE RATE (APR)

A term created by the Truth-in-Lending Act to represent the percentage relationship between the total of all finance charges (interest, loan fees, points, etc.) to the total amount of the loan. The APR reflects the effective cost of a mortgage loan as a yearly interest rate. The APR usually is higher than the stated loan interest rate because it includes not only interest but also loan discount points, bank fees, mortgage insurance premiums, and other loan charges. The term APR is used most commonly in reference to individual homeowner loans and rarely is used in connection with commercial or cooperative underlying mortgage loans.

ANNUITY

An amount of money earned, paid, or received at yearly or other regular intervals for a specified period of time.

APPLICATION

A written document completed by a prospective borrower and used by a lender to summarize and record certain important information concerning a proposed loan. This document, together with other relevant information, usually is reviewed by the lender's loan committee prior to the issuance of a loan commitment.

APPLICATION FEE

A sum of money paid by a borrower to a lender to cover the initial processing expenses related to a loan application. Application fees rarely exceed one percent (1.00%) of the loan amount and usually are much less. Some lenders charge an application fee; most do not.

APPRAISAL

A written estimate of a property's value prepared by a qualified expert, usually someone with the MAI (Member of the Appraisal Institute) professional designation. An appraisal will establish a current or "fair market value" for a property by comparing it to other, similar properties in three ways. First, the appraiser will estimate how much it would cost to construct a similar building today. This estimate is called the “replacement” or “construction cost” method. Second, the appraiser will estimate a current value based on recent sales of similar properties. This estimate is called the “market” or “comparable value” method. Finally, the appraiser will estimate the value of the property to an investor. This method estimates value based on a hypothetical net income after operating expenses but before debt payments. The appraiser uses this method because, in the event of a foreclosure, the property would become a rental with the lender as landlord! Finally, the appraiser applies a weighting factor to each of the three methods to arrive at a final, consolidated value for the property.

APPRECIATION

An increase in the value of a property due to economic or other causes, which increase may be either temporary or permanent.

APPURTENANCE

Something which belongs to a property and passes with it in any transaction (e.g., an easement or right-of-way).

ARREARS

This word has two meanings. First, “arrears” can indicate that a payment is due after a benefit has been received. For example, interest usually is paid “in arrears”, meaning that the amount of interest due relates to the loan amount outstanding during the previous period. The opposite of “in arrears” is “in advance” (e.g., rent usually is paid for the coming month). The second meaning of “arrears” refers to past-due amounts. For example, overdue rent usually is reported as “arrears”.

ASSEMBLAGE

The combining of two or more adjoining lots into one, larger tract. Such a combination often results in a total value greater than the sum of the individual property values.

ASSESSED VALUATION

The value that a taxing authority places on a property for purposes of taxation. This value may by higher than, lower than, or equal to the fair market value of the property. The taxing authority multiplies a property's assessed value (sometimes called its "AV" or "assessment") by the tax rate (sometimes called "millage") to determine the property's real estate taxes for the coming fiscal year.

ASSESSMENT

“Assessment” can mean the value placed on a property by an authorized public official for purposes of taxation. Alternatively, it can refer to a special charge imposed by a municipal taxing authority to pay for community improvements or other expenditures. The amount of each taxpayer’s charge is determined by the assessed value of the taxpayer’s property. Or this term can refer to special charges levied by a cooperative's board of directors on its shareholders to pay for expenditures not covered by the regular monthly maintenance charges.

ASSIGNEE

The person to whom the rights of another are transferred or assigned. The recipient of assigned or transferred rights.

ASSIGNMENT

In general, the transfer of a contract or legal rights from one person or entity to another. A common assignment is the transfer of an existing mortgage from the old lender to the new lender. This very often is done to reduce the amount of mortgage recording tax which the borrower must pay. A new lender will "take by assignment" an existing mortgage loan only if the documentation for the existing loan is properly drawn (in the opinion of the new lender) and the originals are available for transfer. The new lender is not obligated to accept an assignment.

ASSIGNOR

An entity which transfers some or all of its rights to another. The assigning party.

ASSUMPTION

In certain situations, a buyer of real estate is willing to take over “or assume” the obligations of the seller as regards the repayment of a loan encumbering the property being purchased. This is a convenient arrangement, since the seller's liability for the existing loan simply transfers to the buyer. This saves the buyer the trouble of finding a new loan to complete the purchase. Buying real estate by "assuming" an existing loan is not the same as buying real estate "subject to" an existing loan. In those cases, the buyer agrees to repay the existing loan, but the seller (former owner) remains liable for the payments if the buyer (new owner) does not make them. The term “assumption” is used very rarely in connection with commercial or cooperative underlying mortgage loans.

BALANCE SHEET

A financial statement that lists a person’s or an entity’s assets, liabilities, and capital (or equity). Total assets must equal (or “balance”) total liabilities plus total capital.

BALLOON

The unpaid (or unamortized) portion of the original loan amount which must be repaid in one lump sum at the end (or maturity) of the loan term.

Example:
A loan of $1 million at 10% interest for five years with 25-year amortization and a monthly payment of $9,807 would have a balloon payment of $941,638 due at the end of the fifth year (unless the loan had been prepaid or refinanced at an earlier date).

BALLOON NOTE

A loan document calling for periodic payments of interest and principal. The “principal” component of these payments is insufficient to fully repay the original amount of the note prior to maturity. Therefore, some of the principal (known as a “balloon”) is due at maturity.

BANKRUPTCY

A process under federal statutes that relieves a debtor (someone who owes money to others) from insurmountable debt. In most cases, virtually all of the bankrupt person’s property is distributed by the court to the creditors (those to whom money is owed) in full satisfaction of their respective debts, subject to certain local priorities and exemptions. Voluntary bankruptcy usually is requested by a debtor, involuntary bankruptcy normally is demanded by creditors.

BASE LINE

One of a set of imaginary lines running east and west which are used by surveyors as reference points in locating and describing land under the rectangular (or government) survey system.

BASIS

The financial interest or value that the Internal Revenue Service attributes to a property for purposes of determining either the annual depreciation or the gain or loss on a sale of an asset. If a property was acquired by purchase, the owner's basis is the cost of the property plus the value of any capital improvements made to the property by the owner, minus any depreciation allowable or actually taken. This new basis is called the “adjusted” basis.

BASIS POINT

This is a technical unit of measurement used by people who work in the financial markets. A basis point equals one one-hundredth of a percentage point. Alternatively, 1% contains 100 basis points.

BENCHMARK

A permanent reference mark established by surveyors. It usually is indicated by a wooden stake, a metal pin, and/or a stone monument.

BLANKET MORTGAGE

A mortgage covering more than one parcel of real estate. Blanket mortgages usually contain clauses which release individual parcels from the mortgage lien upon repayment of predetermined portions of the total debt.

BLOCK-AND-LOT DESCRIPTION

A method of identifying real estate that assigns numbers to each block in a city and then to each lot on every block. All numbers are shown on a map or subdivision plat duly recorded in the county clerk's office.

BEARER

The holder of a legal document or financial instrument. A lender usually is the bearer of a note secured by a mortgage until the loan has been repaid in full. However, an original lender could sell the note to another entity at any time, without affecting the debt or obligation of the borrower in any meaningful way.

BONA FIDE

A Latin term meaning “in good faith” or without fraud.

BORROWER

A person or entity that receives money from another person or entity in the form of a loan, together with an obligation to repay the amount received (the “principal”), plus interest at a predetermined rate. The borrower may formalize this promise to repay by signing a legal document called a note. The obligation can be secured further by placing a lien (or “mortgage”) on the property of the borrower until the loan has been repaid in full.

BOROUGH

A part of a city having authority over certain local matters. The best known boroughs are the five parts of New York City (The Bronx, Brooklyn, Manhattan, Queens, and Staten Island).

BREECH OF CONTRACT

Violation of any of the terms or conditions of a contract without legal excuse; for example, failure to make a loan payment when it is due.

BREAK-EVEN (or Break-Even Point)

In financial terms, break-even exists when a property's income equals its expenses. However, “income” and “expense” can be defined differently in different contexts (e.g., “accounting” income, “cash” income, “out-of-pocket” expenses, etc.). A cooperative apartment corporation usually operates on a break- even basis “before tax”. After deducting depreciation, a cooperative normally shows an “after tax” loss.

BRIDGE LOAN

A very short-term balloon loan used by borrowers to span (or “bridge”) the period between the due date or maturity of one loan and the closing of a new one. Bridge loans usually have variable interest rates based on a spread above the Prime Rate (e.g., Prime + 2%). Alternatively, a loan which provides funding until an expected future event occurs. For example, bridge loans often are used to complete the purchase of a property before a conventional permanent mortgage loan can be put in place.

BROKER

A person who acts in a fiduciary manner on behalf of others to complete a specific transaction in exchange for a fee or commission.

BUILDING CODE

A series of laws and ordinances adopted by a municipal legislative body to regulate and control the construction and alteration of buildings. Most urban areas have extensive building codes. A building code will regulate such things as the type and strength of building materials as well as the size and number of fixtures required in each space. New York State has a master building code that local areas may adopt as their official ordinance. Any municipality which adopts the state’s master code must do so by affirmative action, i.e., by passing a local law. The constitutional basis for building codes is found in the government’s police power, i.e., the power of the state (as delegated to local government) to regulate certain activities in order to protect the health, safety, and welfare of its citizens. This is the same constitutional theory that permits zoning laws.

BULLET LOAN

A short-term balloon loan, usually without amortization (i.e., an “interest only” loan).

BUSINESS CYCLE

The upward and downward fluctuations in business activity through the stages of economic expansion and recession. Interest rates usually (though not always) rise during expansions in response to the demand for credit, inflation, and other economic factors. Rates tend to fall during recession as those same factors decrease.

BUYDOWN

A payment to a lender by the seller, buyer, or a third party to entice the lender to reduce the interest rate during the early years of a loan. A buydown usually applies only to the first few years of the loan.

BY-LAWS

The framework of rules and regulations adopted by a corporation to govern its internal operations. The by-laws define the authority of the corporation’s officers and its board of directors.

CAP

The maximum level to which the interest rate on an adjustable-rate loan may be increased. A cap may apply to each adjustment and/or to the sum of all adjustments over the entire term of the loan. Caps are common on individual homeowner loans but are rare on commercial or cooperative underlying mortgage loans.

CAPITAL GAINS

Gains realized from the sale of capital assets. Generally, the difference between acquisition cost and selling price, increased by certain capital improvements and reduced by certain deductible expenses. This term is used mainly in reference to income taxes.

CAPITAL IMPROVEMENT

Any significant and permanent improvement to a property, especially those which extend the property’s useful life or increase its value. Smaller short-term improvements, such as repairs or regular maintenance, are considered to be normal operating expenses and not capital improvements. For example, a roof replacement is a capital improvement; roof patching is a repair expense.

CAPITALIZATION

A mathematical process that uses a desired rate of return to estimate the market value of a property as a multiple of its annual net income. This estimate of market value can be expressed in formula form as:

Market Value = Annual Net Income (in dollars) divided by desired percentage Rate of Return (in decimal form)

Example: A property with an annual net income of $100,000 (after
all expenses except debt service) would have a value of $1 million to an
investor seeking a 10% annual rate of return.

Market Value = $100,000 ÷ 0.10 = $1,000,000

CAPITALIZATION RATE

The rate of return that a property's net income generates on its owner's investment. (10% in the above example).

CARRYING CHARGES

This term has several meanings. First, it can refer to the monthly payments collected by a condominium association from its unit owners. Alternatively, it can describe the monthly shortfall funded by a sponsor, investor, or holder of unsold shares when an individual apartment’s maintenance charge exceeds the rent collected from its tenant. Lastly, it can describe the costs of owning and operating a property whenever its income does not fully cover its expenses, e.g., between acquisition and full (or almost full) occupancy.

CASH FLOW

The net spendable income from a property. It is calculated by deducting all operating expenses, fixed costs, and debt service from the property's gross collected income. If the total deductions exceed the gross income, the property is said to have "negative cash flow". This term also is applied when the rents on sponsor apartments are less than the corresponding maintenance charges.

CENTRAL AIR CONDITIONING

A system that provides cooling throughout the building from machines in one location.

CERTIFICATE OF DEPOSIT (or “CD”)

A receipt issued by a bank for a cash deposit of a large even-dollar amount for a predetermined period (ranging from a week to several years) during which the deposit will earn a fixed rate of interest. At maturity, the bank returns the original amount deposited plus accumulated interest. Early withdrawals from such investments are subject to interest penalties. It is advisable to limit CD purchases to federally-insured institutions in amounts of $100,000 or less.

CERTIFICATE OF OCCUPANCY

A certificate issued by a local building department to a builder, renovator, or owner stating that the building meets local standards for construction, durability, and safety, and that the property is acceptable for use and/or occupancy by the general public.

CERTIFICATE OF TITLE

A statement, usually from an attorney or other examiner of the public records, regarding the current title or ownership of a property.

CERTIFIED PROPERTY MANAGER (CPM)

A professional designation awarded to certain property managers who are members of the Institute of Real Estate Management (IREM) and who have passed a series of training courses and written examinations.

CERTIFIED REAL ESTATE APPRAISER (CREA)

A professional designation granted to certain members of the National Association of Real Estate Appraisers (NAREA) who have passed a series of training courses and written examinations.

CERTIORARI

A Latin word that describes the legal proceeding employed to reduce a property's real estate taxes. It involves a formal comparison of the property's assessed valuation to that of neighboring properties with the goal of rectifying any inconsistencies.

CHAIN OF TITLE

The history of sales or other conveyances during the life of a property, starting from some accepted date or event in the past and ending with the current ownership.

CHATTEL

An item of “personal” (as opposed to “real) property: furniture, goods, merchandise, animals, an automobile. A chattel is not real estate (unless it qualifies as a fixture – something which is permanently affixed or attached to a property). Thus, chattels do not pass with a property when it is sold nor are they encumbered by liens or mortgages.

CLOSING

The legal process through which a real estate transaction (for example, a mortgage loan refinancing or the purchase or sale of a house or apartment) is completed. The activities at a closing include the signing of all relevant documents and the transfer of monies involved. For a cooperative apartment corporation, it is the date on which ownership of the building passed from the sponsor to the cooperative.

CLOSING COSTS

Usually refers to the expenses paid by a borrower at the closing of a real estate transaction. For a mortgage loan closing, these costs include commitment and/or origination fees, legal fees (for both borrower and lender), title insurance, recording and filing fees, charges for searches and credit reports, surveys, engineering and environmental inspections, and appraisals. Also usually included are prepayment penalties, "short" interest (interest from the date of closing to the end of the month), and escrows for real estate taxes, hazard insurance, and urgent repairs (if any).

CLOSING STATEMENT

A detailed report about the closing. It usually includes an accounting of all funds disbursed and received; any changes, credits, or adjustments that were made; and any deposits or escrows that were created. Also, the report normally includes a list of all those who attended and copies of all documents and checks.

CLOUD ON TITLE

Any claim, document, encumbrance, or unreleased lien that may affect the quality or certainty of the ownership of a property. A “cloud on title” usually would be discovered in a title search.

COINSURANCE

The sharing of an insurance policy’s risk by more than one insurer. Usually, one insurer is liable for losses up to a certain amount and the other insurer (or the property’s owner) liable for losses over that amount. Most insurance policies covering real property contain a clause that requires the property’s owner to maintain coverage in an amount equal to or greater than 80% of the property's actual replacement cost. If the property owner does not maintain at least this level of coverage, compensation in the event of a loss may be reduced proportionately. For example, if an owner carries insurance covering only 70% of replacement cost, the insurance company will pay only 70% of any claim (less the policy’s deductible, if any). However, if the owner’s policy covers 80% of replacement cost, the insurance company will pay 100% of any claim (less the deductible, if any).

COLLATERAL

Something of value pledged to a lender to secure the repayment of a loan.

COMMINGLING

The illegal act of a real estate professional who mixes client deposits with personal funds. Real estate professionals are required by law to maintain a separate trust account for any money received from clients. Commissions and payments for services are excluded from this requirement.

COMMISSION

The compensation paid to a broker for services rendered, such as the purchase or sale of a property or the refinancing of a mortgage loan. This payment commonly is calculated as a percentage of the total dollar value of the transaction, but always is subject to negotiation between the parties.

COMMITMENT

A binding offer from a lender to a borrower to make a loan on certain terms. Such offers automatically expire after a short period of time if not accepted by the borrower. Some lenders charge a “commitment” or “origination” fee to issue this pledge in a "commitment letter".

COMMITMENT FEE (or “Origination Fee” or “Points”)

Any fee paid by a potential borrower to a lender for the lender’s written promise to lend money at a specified interest rate for a specified period on certain defined terms.

COMMON ELEMENTS

Parts of a property (such as a cooperative or condominium) which are necessary or useful for the operation or maintenance of the property or for the safety, welfare, or enjoyment of its residents. Such parts are owned jointly, with each unit owner having an undivided ownership interest in the common parts. This term also is used to describe the public areas of a property (e.g., hallways, gardens, laundry rooms, etc.).

COMPARABLES

Properties used as benchmarks to determine the value of a specific property.

CONCESSIONS

Extras given by the landlord, which may include free rent, higher construction allowances, free parking or moving costs.

CONDOMINIUM

A form of real estate ownership in which the property owner receives absolute title to a particular unit or space in the property plus an undivided proportionate interest in certain common areas. The common areas are owned jointly with the other unit owners, and are operated and maintained by an association of which all unit owners are members. Each condominium unit is separately-owned space whose interior surfaces (walls, floors, and ceilings) serve as its boundaries. While seemingly similar, the cooperative form of ownership is quite different legally from the condominium form of ownership. In a cooperative, the entire property is owned by a corporation which, in turn, rents units to its shareholders. Shareholders do not own their units. Instead, they own shares of stock in the cooperative apartment corporation.

CONDEMNATION

The taking of private property by a governmental entity for public use. The exercise of this “right of public domain” requires that the owner be paid “fair market value” for the property taken.

CONFORMING LOAN

A term used to describe home mortgages which are eligible for sale to either Fannie Mae (“FNMA”, the Federal National Mortgage Association) or Freddie Mac (“FHLMC”, the Federal Home Loan Mortgage Corporation) because they “conform” to certain underwriting standards. These agencies purchase traditional fixed-rate, constant-payment first mortgage loans from lenders and brokers across the country. Congress sets the maximum dollar limits for such loans.

CONSIDERATION

Anything of value which is given by one party to induce another party to enter into a contract. It usually is money but it may also be services, other property, or even love and affection!

CONSTRUCTIVE EVICTION

Wrongful action by a landlord (the “lessor”) which constitutes a substantial interference with, or interruption of, a tenant's (the “lessee”) use and enjoyment of rented property.

CONSTRUCTION LOAN

Financing which provides funding to develop and build real property. Such loans generally are replaced by long-term financing upon completion of construction.

CONSTRUCTIVE NOTICE

A legal concept under which an individual is assumed to know something which could have been discovered through normal diligence. The posting of information in the public records constitutes “constructive notice” to everyone.

CONTINGENCY

A condition in a contract which must be satisfied before the contract is binding. For instance, a loan commitment may be contingent upon the borrower removing asbestos or replacing windows. Likewise, a sales agreement may be contingent upon the buyer obtaining financing.

CONTRACT

An agreement between competent parties to do or not do certain things in exchange for “consideration” (money or something else of value). A contract gives each party certain rights and/or responsibilities with respect to the other party as long as the terms of the contract are satisfied. A fully-executed loan commitment is a binding contract between a lender and a borrower.

CONVENTIONAL LOAN

A mortgage loan which is not guaranteed or insured by an agency such as Fannie Mae or Freddie Mac.

COOPERATIVE

A form of real estate ownership in which the entire property is owned, operated, and maintained by a corporation whose shareholders each receive a proprietary lease entitling them to occupy and/or use specific space within the property. A cooperative apartment corporation is a regular “C” corporation under IRS regulations, just like Exxon or IBM. Therefore, the “ownership” of a cooperative is very similar to the ownership of shares in any business corporation, with certain special rights attached. Legally, the cooperative apartment corporation is the “landlord/lessor” and each resident of the property is a “tenant/lessee”.

CORPORATION

A legal entity whose rights of existence and operation are essentially the same as those of an individual person. The entity continues to exist until it "dies" by being dissolved through specific legal procedures.

COVENANTS

Promises written in documents such as deeds, leases, and mortgages.

CPI ADJUSTMENTS

When the rent of a tenant is increased in relation to increases in the Consumer Price Index (CPI).

CREDIT REPORT

A detailed review of a person’s credit history which grades their credit worthiness.

CORRELATION

The last step in an appraisal in which the appraiser reviews all of the information gathered through various procedures, compares the results of the three main appraisal methods, and derives a final dollar estimate of the subject property's market value.

COST APPROACH

One of the three methods generally used by appraisers to estimate the current market value of a property. This method adds an estimated market value for the land (as if it were vacant) to the estimated current reproduction or replacement cost of the building (less depreciation and other adjustments).

CREDIT LINE

An agreement between a lender and a borrower which allows the borrower to withdraw any amount of money, up to a predetermined maximum total amount, whenever the borrower chooses. Each month, the lender sends the borrower a bill for interest on the amount outstanding at that time. A “revolving” credit line allows a borrower to withdraw and repay funds in any amount (up to the stated maximum) as often as the borrower wishes.

CURRENT VALUE

The “current fair market value”, as estimated by an appraiser.

DAMAGES

An amount of money owed to one party who has sustained an injury or loss due to the actions or inactions of another party.

DEBIT

An amount charged to, or owed by, one of the parties involved in a business transaction.

DEBT

An amount of money owed by one party to another.

DEBT COVERAGE (or Debt Coverage Ratio)

This is a technical term that describes a property's ability to "cover" its loan payments. It usually is expressed as a ratio of (a) the property's net available cash flow after paying all of its real out-of-pocket cash expenses (not including its mortgage payment) to (b) its total loan payment (including interest and principal but not escrows). Most lenders require that a borrower's net available cash flow exceed its loan payment by 10% to 30%. In other words, most lenders look for a debt coverage ratio of 1.10 to 1.30.

DEBT SERVICE

The amount of money that a borrower must pay every month in order to meet the requirements of the original loan documents and repay the amount borrowed with interest.

DECLARATION OF EFFECTIVENESS

The formal notice given by a sponsor of a cooperative conversion that it has obtained the minimum number of purchasers required for the share offering to be valid and the cooperative apartment corporation to become operative.

DEED

The written legal document that transfers ownership of a property from one party to another. Deeds convey title to a property and, therefore, should be recorded at the county clerk's office.

DEED RESTRICTIONS

Language that may be put in deeds which imposes restrictions or limitations on how the property being conveyed may be used. Such restrictions usually become part of the title and pass with the property in all future transactions.

DEFEASANCE (or Defeasance Clause)

This term has several meanings. First, this term may refer to a provision in a deed or related instrument which, once activated or satisfied, renders the deed or related instrument void. For example, certain rights granted by a lease may expire upon the occurrence or non-occurrence of a certain event. The lien granted in a mortgage is extinguished once the loan has been repaid. Another use of this term describes a form of prepayment penalty under which the borrower must purchase in the open market and deliver to the lender a quantity of high-grade securities (usually U.S. Treasuries) whose maturity and interest payments match those of the loan being prepaid. Since prepayment usually is precipitated by a drop in market rates, a prepaying borrower often must purchase a higher dollar amount of securities than the loan amount being prepaid in order to provide the same income stream to the lender.

DEFAULT

The failure to fulfill a duty or promise, or to discharge an obligation, or to otherwise comply with the terms of an agreement, contract, note, or other legal document. Failure to make a loan payment when due usually constitutes default under the terms of the note.

DEFICIENCY JUDGMENT

When a borrower fails to repay a loan (i.e., defaults), the lender usually begins a legal procedure called foreclosure. If completed, this procedure will allow the lender to take possession of the property originally given as collateral for the loan and auction it off to the highest bidder. If the proceeds of the auction are insufficient to repay the loan, the lender then usually will obtain a ruling from the court against all of the other assets of the borrower. This ruling, called a deficiency judgment, allows the lender to seize and sell other assets of the borrower until the loan has been repaid in full (including accrued interest and related legal costs).

DELINQUENCY

The state of being delinquent in an obligation.

DELINQUENT

Unpaid, past due. A loan is delinquent as soon as a monthly payment is past due, and it remains delinquent until the overdue payment (plus accrued interest and any related penalties) is made. If this payment is not made within a reasonable period of time (usually 30 days), the loan will be declared “in default.”

DEMAND NOTE

A note that requires the borrower to repay the amount borrowed (plus accrued interest) whenever the original lender (or current holder of the note) demands repayment.

DENSITY ZONING

Municipal ordinances that limit the number of houses per acre that may be built within a particular area.

DEPOSIT

An amount of money given to bind a transaction or to show "good faith.”

DEPRECIATION

Depreciation can result from any of three reasons: economic changes, functional obsolescence, or physical deterioration. Changes in the socio-economic make-up of persons purchasing property in an area or changes in land use within that area may cause “economic depreciation.” An old property with out-of date facilities or obsolete technology may suffer “functional depreciation.” A poorly maintained property, or one whose tenants inflict excessive “wear and tear,” or a property constantly exposed to harsh weather may suffer “physical depreciation.” Current IRS rules allow an annual expense deduction from a property's income to account for this continual loss in value.

DISCLOSURE

The act of making something known or public. The statements and representations contained in an offering plan are reviewed to determine if they provide adequate and accurate information. The (federal) Martin Act and various state regulations set the standards for disclosure in securities offerings and are enforced by the state’s attorney general.

DISCOUNT POINTS

An amount paid up-front by a borrower to compensate a lender for a below-market interest rate. Discount points are, in effect, prepaid interest. Discount points are most commonly associated with individual homeowner loans and are rarely encountered in commercial or cooperative underlying mortgage loan transactions.

DUE DILIGENCE

Analysis and data gathering performed in conjunction with the proposed sale or acquisition of an existing property or the making of a new loan on such a project.

DUE ON SALE

A clause found in most loan documents that requires the borrower to repay the loan in full if the related property is sold.

EARLY RATE LOCK

Some lenders will allow a borrower to lock the interest rate on their new loan during the application process before a commitment has been issued. This typically requires that the borrower submit a “good faith” or “early rate lock” deposit equal to 3% of the new loan amount to secure the new interest rate. This deposit usually is refunded at closing. Early rate lock may benefit a borrower during periods of rapidly rising interest rates.

EASEMENT

A right held by (or given to) one party to use the property of another party (e.g., a driveway) for a specific purpose. An easement may be temporary or permanent.

ECONOMIC LIFE

The period over which a property will produce an economic return for its owner. This period may be different from the actual physical life of the property.

EGRESS

An exit, outlet, or way out of a property.

ECONOMIC OBSOLESCENCE

An appraisal term that refers to a loss in the value of a property due to economic factors outside the property itself. For example, the construction of a sewage treatment plant across the street from an apartment building probably would decrease the value of the apartment building.

EFFECTIVE DATE

The date on which the sponsor of a cooperative conversion formally reports sales of shares in the apartment corporation equal to at least 15% of the total number of shares offered for sale and declares the offering plan (and, hence, the conversion) to be "effective."

EFFECTIVE GROSS INCOME

Gross market income less projected vacancy and collection losses.

EMPLOYEE

Someone who works for and under the supervision of another. Employers are obligated by law to withhold income and social security taxes from the compensation of their employees.

ENCROACHMENT

The extension of part of a building or fixture (e.g., a fence) beyond the legal boundaries of its property onto the property of another.

ENCUMBRANCE

Any claim or lien against a property. Unpaid real estate taxes, any recorded mortgage, or a filed contractor claim for non-payment are examples of encumbrances.

ENDORSEMENT

The signing of one’s name on a legal document. The signature may be accompanied by additional words that limit either the use of the signed document by the bearer or the authority granted by the signature to the bearer.

EQUALIZATION

The raising or lowering of assessed values in a particular county or taxing district to make them equal to assessments in other counties or districts so that all properties are taxed equitably.

EQUALIZATION FACTOR

A factor by which the assessed value of a property is multiplied to arrive at a value for the property that is in line with state-wide tax assessments. The local ad valorem tax then would be applied to this adjusted value to calculate each property’s taxes.

EQUITY

The difference between the current market value of a property and the total of all liens and claims against it. This is another name for the owner's net ownership interest in a property.

EQUITY LINE

A credit line based on the amount of equity that an owner has in a property. Amounts borrowed under an equity credit line usually are secured by a second mortgage on the property.

ESCROW

A trust arrangement under which one party deposits money or other things of value with another party according to the terms of an agreement between them. For example, a mortgage loan may require that the borrower deposit with the lender each month an amount equal to one twelfth of the annual real estate taxes for the property covered by the mortgage. Lenders usually demand tax escrows to protect their interest in the property until the loan is repaid, since taxes exert the only claim on property that is higher in rank than a lender’s first mortgage lien. Some lenders also collect escrow amounts for insurance since the lender wants to make sure that the proper insurance coverage is fully paid so, in the event of a fire or other calamity, the collateral can be repaired or the loan paid off.

ESTOPPEL CERTIFICATE

A document in which a borrower certifies to another party the current amount owed on a mortgage loan, the rate of interest charged on that loan, its maturity date, and other relevant information. Alternatively, a statement given by a tenant to the landlord or a lender stating the rent due, the date the last rent was paid, the lease expiration date, and other financial aspects of the lease.

EVICTION

A legal process to remove a person who is occupying a property.

EVIDENCE OF TITLE

Proof of ownership of a property. This can be manifested by a certificate of title, a title insurance policy, an abstract of title with lawyer's opinion, or a Torrens registration certificate.

EXPENSE STOP

An agreed set dollar amount below which the landlord pays all operating costs and taxes; the tenant pays all operating costs and taxes above the agreed dollar amount.

EXPENSES

Short-term costs (such as minor repairs, regular maintenance, and renting costs) that are deducted from a property's gross rental income for tax purposes. Permanent improvements to a property (or replacement of any of its major components) are capital improvements, not expenses. The cost of capital improvements is added to the property's basis and depreciated over an extended period. Capital improvements cannot be deducted as operating expenses for tax purposes.

FANNIE MAE (the “Federal National Mortgage Association” or “FNMA”)

A publicly-traded corporation created by Congress to support the secondary mortgage market for mortgage loans. Fannie Mae purchases and sells residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the Veterans Administration (“VA”), as well as certain uninsured mortgage loans. Fannie Mae then sells bonds backed by pools of these mortgage loans. These securities are not guaranteed by the U.S. Government and all interest paid on them is fully taxable.

FEDERAL DISCOUNT RATE

The rate of interest at which member banks can borrow money from the Federal Reserve.

FEDERAL RESERVE

The central banking system that regulates the monetary affairs of the nation.

FREDDIE MAC (the “Federal Home Loan Mortgage Corporation” or “FHLMC”)

A publicly-traded corporation originally created by Congress to purchase individual residential mortgage loans which are insured by the Federal Housing Administration (“FHA”) or guaranteed by the Veterans Administration (“VA”), as well as certain uninsured individual and commercial mortgage loans. Freddie Mac then sells bonds (called “participation certificates”) whose principal and interest payments are guaranteed by FHLMC.

FDIC (the “Federal Deposit Insurance Corporation”)

A federal corporation that insures the owners of individual savings and checking accounts in member banks against loss, up to a maximum amount (usually a total of $100,000 per institution).

FHA (the “Federal Housing Administration”)

The mortgage insurance division of the Department of Housing and Urban Development (“HUD”). This federal agency insures certain residential first mortgage loans, enabling lenders to lend home buyers up to a very high percentage of a home’s purchase price and lend landlords up to a very high percentage of an apartment building’s value.

FHA LOAN

A loan insured by the Federal Housing Administration and made by an approved lender in accordance with FHA regulations.

FIDUCIARY

A person (usually referred to as an “agent”) who, because of a formal relationship with another person (usually referred to as a “principal”), has a duty to act primarily for that other person’s benefit. A real estate broker or salesperson is a fiduciary for the people who hire them to sell their properties. Attorneys are fiduciaries for their clients. Guardians of minors, estate executors, and trust administrators also are fiduciaries. Board members are fiduciaries for their co-op’s shareholders. Any fiduciary must act at all times in the best interest of his client.

Duties owed by an agent to his principal include:

  • Duty of Loyalty: An agent must act at all times solely in the best interests of his principal and to the exclusion of all other interests, including the agent’s own self-interest.
  • Duty of Obedience: An agent is obligated to obey promptly and efficiently all lawful instructions of his principal.
  • Duty of Disclosure: An agent is obligated to disclose to his principal all relevant and material information, unless it was obtained through a previous fiduciary relationship.
  • Duty of Confidentiality: An agent is obligated to safeguard his principal’s confidence and secrets.
  • Duty of Reasonable Care and Diligence: An agent is obligated to use reasonable care and diligence in pursuing the principal’s affairs.
  • Duty of Accounting: An agent is obligated to account fully for all money or property that is entrusted to his care.

FINANCE CHARGE

The total cost that a borrower must pay to a lender to get a loan. It includes interest, origination fees or points, plus any other fees paid directly to the lender.

FINANCIAL STATEMENT

An accounting statement showing the assets and liabilities of a person or company. Generally used for large loans or in other instances when a credit report does not provide sufficient information.

FIRST REFUSAL RIGHT

A right given by one party (“A”) to another party (“B”) under which party A must first give party B the chance to complete a transaction on the same terms as party A would have given to a third party (“C”). For example, a landlord (“A”) may give a lessee (“B”) the first chance to buy the landlord’s property if he decides to sell. In this case, the landlord must have a legitimate offer from a third party (“C”) for the lessee to match or refuse. If the lessee refuses, the landlord then can sell the property to the third party.

FHLB (the “Federal Home Loan Bank”)

A government-chartered institution that issues securities backed by pools of home and other mortgage loans purchased from member banks. The interest on these securities is exempt from local, municipal, and state (but not federal) taxes. However, these securities are not guaranteed by the U.S. Government.

FIRST MORTGAGE

A publicly-recorded document that gives a lender a claim or lien against a property that is superior to, and has priority over, all other claims (except real estate taxes) subsequently recorded against the property.

FIXED RATE

An interest rate that does not change during the term of the loan.

FIXTURE

Any item that is permanently fixed or attached to a property. In a sale, fixtures are assumed to transfer with the property to the new owner.

FORECLOSURE

A legal procedure by which a lender exercises the rights created by a mortgage to assume ownership of a property given as collateral for a loan on which the borrower has defaulted. Once the lender assumes ownership, it normally auctions off the property to the highest bidder. If the proceeds of this auction are insufficient to fully pay off the loan, the lender usually goes back to court to get a residual claim (called a “deficiency judgment”) against the other assets of the borrower.

FORWARD (or “Forward Commitment”)

Some borrowers would like to refinance their current loan before it matures, but they are prohibited from doing so by the prepayment provisions of their existing loan. In certain instances, such borrowers may nonetheless be able to lock in a favorable interest rate on a new loan by securing a forward commitment from their existing or another lender. This new loan will close when the borrower’s existing loan matures, As a general rule, forwards are impractical (and very expensive) when the remaining time on the borrower’s existing loan is longer than 6 to 12 months.

FRAUD

The intentional misrepresentation of some important fact in order to induce another party to act as if the important fact were true.

FUNCTIONAL OBSOLESCENCE

An appraisal term that refers to a loss in the value of a property due to functional or usage problems, often caused by age or poor design.

GENERAL CONTRACTOR

A construction specialist who signs a formal contract with a property owner to complete a defined task for a fixed fee. The general contractor (or "GC") often signs several smaller fixed-fee contracts with other contractors (“subcontractors”) to complete segments of the total task. The GC oversees the work of these subcontractors and keeps any savings realized or pays any cost overruns generated during the course of the job. The work of a general contractor sometimes is covered by a special insurance policy (a “performance bond”) that pays for a second general contractor to finish the job if the first general contractor doesn’t.

GENERAL PARTNERSHIP

A partnership whose partners assume the full risk of the activities of their partnership.

GINNIE MAE (The “Government National Mortgage Association” or ‘GNMA”)

A federally-charted institution that issues securities backed by pools of residential mortgage loans which are guaranteed by the U.S. Government. Interest paid on these securities is fully taxable.

GOOD FAITH (or “Good Faith Deposit”)

Most lenders require that a borrower deposit a sum of money to demonstrate that they are serious about requesting a new loan and that they intend to proceed (in “good faith”) through the application process to a loan closing. Some lenders request a good faith deposit at application. Other lenders ask for one at commitment acceptance. Still others require one at rate lock. In most cases, good faith deposits are refunded at closing.

GRACE PERIOD

A period of time running from the due date up to (but not including) the default date, during which a person still can make a payment without penalty or late fee. For mortgage loans, the grace period usually spans the first five or ten days of each month.

GRADUATED LEASE

A lease which provides for an increase in rent at stated intervals. Such conditions are most common for commercial tenants under long-term leases.

GRADUATED PAYMENT MORTGAGE LOAN

A mortgage loan with monthly payments that start at a below-market level and increase annually at a predetermined rate. Such mortgage loans rarely are granted for commercial or cooperative underlying mortgage purposes.

GRANT

A technical term used in deeds to indicate the transfer of ownership.

GRANTEE

The party to whom ownership of a property is transferred, usually the buyer.

GRANTOR

The party who transfers ownership of a property, usually the seller.

GRI (Graduate of the Real Estate Institute)

The is a professional designation granted to a member of the National Association of Realtors (i.e., a Realtor) who has passed courses in law, finance, ethics, and accepted real estate practice.

GROSS INCOME

The total income, either actual or estimated, derived from a business or property.

GROSS LEASE

A type of lease under which the landlord pays all property charges that regularly are incurred through ownership, such as taxes, insurance, operating expenses, maintenance, and repairs. Most residential leases are gross leases; most commercial leases are not. Typically, commercial leases are “net”, “net-net”, or “triple-net”.

GROSS MONTHLY INCOME

Total monthly income before taxes and other deductions.

GROSS RENT MULTIPLIER

A figure that, when multiplied by the annual gross rental income, will determine the theoretical market value of a property. This general rule of thumb can vary from a low of 2 to 10 or higher (‘GRM”) depending on the particular type, condition, and location of property being valued. For example, a property with an annual gross rental income of $100,000 would have an estimated market value of $700,000 if the accepted GRM were 7.

GROUND LEASE

A lease of land only. Under a ground lease, the tenant usually owns the building (or is required to construct a building) on the leased land. Such leases usually are long-term triple-net leases, with the tenant responsible for all of the expenses of ownership.

GROUT

Thin mortar used in masonry work to fill the joints between bricks, blocks, floor pavers, wall tiles, etc.

GUARANTY

An agreement by one party to pay the debt or fulfill the obligation of second party in the event that the second party does not perform as required. A simple guaranty differs from a surety agreement in that there first must be a failure to pay or perform before the simple guaranty can be called into effect. A surety agreement assures timely payment.

HARD MONEY

This is a term used to describe relatively expensive forms of financing provided by specialized lenders to high-risk borrowers or projects. Such loans typically carry interest rates as much as 3% to 5% above traditional mortgage rates, with origination fees (points) ranging from 3% to 10% of the total loan amount.

HAZARD INSURANCE

A contract under which an insurance company agrees, in exchange for an amount of money called a "premium", to reimburse the insured party for specific losses incurred at a particular covered property as a result of certain defined events or "hazards." Most mortgage lenders require that borrowers pay a full year’s premium in advance at closing and then pay one-twelfth of their annual insurance premium as part of each month's mortgage payment. The lender holds these monthly insurance installments in an “escrow account” until the next annual premium is due. A similar procedure is followed by most lenders for real estate taxes, water charges, and sewage disposal fees.

HIGHEST AND BEST USE

A term used by appraisers to describe the specific use for a property that would produce the greatest net income to its owner and, consequently, create the highest market value for the property.

HOLDBACK

The portion of a loan’s proceeds retained by the lender at closing and held until a specified contingency is satisfied. In the sale of a VA- or FHA-insured home, for example, a lender may hold back funds for improvements necessary to bring the property up to VA or FHA standards. In a multifamily or commercial property, a lender may withhold funds to remove violations or to complete specific repairs. Usually, 150% to 200% of the estimated amount needed for such repairs is held back and a certain amount of time is given for their completion. If the repairs are not completed within the allotted time, the lender can use the withheld funds to make them. In construction financing, funds are held back until a predetermined percentage of a subdivision has been sold or until a scheduled portion of a building has been constructed and/or leased.

HOLDER OF UNSOLD SHARES

The individual or entity (usually the “sponsor” of a conversion) which owns those shares not purchased under the initial offering plan. All such shares retain their character as “unsold shares” (regardless of subsequent transfer) until either:

  1. such shares are purchased by a bona fide owner-occupant, or
  2. the holder of such shares (or a member of his or her family) becomes a bona fide occupant of the apartment to which the shares are allocated.

HOLDOVER TENANT

A tenant who retains possession of leased property after their lease has expired. If a landlord continues to accept rent from such a tenant beyond the lease’s expiration, the landlord is assumed to acknowledge and agree to the tenant's continued occupancy -- usually on a month-to-month basis.

HUD (The Department of Housing and Urban Development)

HUD is an agency of the Federal Housing Authority (FHA) that insures loans made by authorized lenders on various types of housing.

HYPOTHECATE

To place a mortgage on a property by pledging it as collateral for a loan.

IMPROVEMENT

Technically, any structure erected on raw land. An improvement could be a road, a building, or a fence. More commonly, this term refers to the addition or replacement of a major component of a building.

INCOME APPROACH

An appraisal term that describes a way of estimating the value of a property through capitalization of the net income stream expected to be produced by that property during its remaining useful life.

INDEPENDENT CONTRACTOR

Someone who is hired by another person to perform a certain job, but who is subject to the control and direction of that other person only as to the completion of that job and not as to the way in which the job is completed. Independent contractors usually set their own hours, pay all of their own expenses, provide their own benefits and retirement programs, and make their own tax and social security payments. Most real estate agents and mortgage brokers are independent contractors.

INDEX

The basis that many lenders use to determine the interest rate on their loans. For convenience, most lenders choose as their index a financial indicator which is reported regularly in the financial pages of major newspapers. Commonly used indexes are the rate on U.S. Treasury securities, the Federal Home Loan Bank "advance rate", and the "prime rate." The lender combines their index with a “spread” (usually expressed in “basis points” or fractions of a percentage point) to determine the interest rate for each loan. For example, a five-year loan could be "priced" using the rate on 5-year U.S. Treasury notes as an index and then adding a spread of 250 basis points (2.50%) to get the actual interest rate.

INGRESS

The place or means of entering a property. The entrance.

IN REM

A legal procedure against a property (as distinguished from procedures against a person). This is the procedure usually followed by a municipal authority to assume ownership of a property for non-payment of taxes.

INSTITUTIONAL LENDERS

Banks, savings and loan associations, and other entities whose ordinary line of business is making loans to the general public.

INSTRUMENT

A written legal document.

INSURABLE TITLE

A form of ownership which a title company will insure.

INSURED LOAN

A loan whose interest and principal payments are guaranteed by a governmental agency (like the FHA or VA) or by a private entity.

INTEREST

The fee charged by lenders for the temporary use of borrowed money.

INTEREST CAP

The maximum increase allowed for the interest rate on an adjustable rate mortgage loan (ARM). For example, if an ARM had a beginning interest rate of 12% and a 5% cap, the loan’s interest rate could not be increased above 17% at any time during the loan’s term.

INTEREST RATE

The return paid by banks and other institutions for the temporary use of depositors’ money. Alternatively, the formula used to calculate the fee charged by lenders for the temporary use of borrowed money. Interest rates are expressed most commonly as a percentage. That percentage then is multiplied by the amount borrowed to determine the amount of interest which is due.

INTERIM FINANCING

A short-term loan made to cover the period between the expiration of one loan (or the start of a project’s construction) and the closing of a new long-term loan. Also called “bridge” financing.

INVESTMENT PROPERTY

Real estate which is purchased for its rental income rather than for use as a personal residence, shelter, or owner/occupied business location.

IRREVOCABLE

Something which cannot be withdrawn, recalled, or retaken.

JUDGMENT

A court ruling which fixes the amount of money that one entity must pay to another to satisfy a claim.

JUNIOR MORTGAGE

A lien against real property, such as a second or third mortgage, which is subordinate in rights and priority to an existing lien on the same property. The priority of mortgages and other liens usually is determined by the date of recording in the public records which are maintained at the county clerk’s office.

KICKER

A payment to a lender, in addition to points and interest, that increases the total return to the lender. Kickers are usually paid at the end of a loan based on some formula, such as a percentage of apartment sales prices.

LAND

The earth's surface, extending downward to the center of the earth and upward infinitely into space.

LAND CONTRACT

A contract for the sale of real estate in which the purchaser pays the seller in periodic installments. The purchaser takes possession of the property, but title is retained by the seller until final payment is made.

LANDLORD

The owner of real property who rents it to another, usually under a lease.

LATE CHARGE

A penalty imposed by a creditor on a debtor who fails to make a payment when due. Late charges usually are not tax deductible. In most states, late charges either are limited by statute or must be “reasonable.”

LEASE

A written or oral contract between a landlord (the lessor) and a tenant (the lessee) governing the use and/or occupation of the landlord’s property by the tenant. This contract usually transfers to the tenant the right of exclusive possession and use of the subject property for a specified period of time in exchange for the payment of a stated rent. By state law, leases for longer than a certain period of time (generally one year) must be in writing to be enforceable.

LEASEHOLD (or Leasehold Estate)

A tenant's right, granted under a lease, to occupy certain real estate during the term of the lease. Leaseholds generally are considered to be the personal (and not real) property of the tenant.

LEGAL DESCRIPTION

A means of identifying a property which is legally sufficient to distinguish it from every other property. Generally speaking, a street address alone is not considered a secure legal description. Today, there are three common methods used to legally describe a property: block and lot numbers, government surveys, or delineation by metes and bounds.

LESSEE

The tenant or occupant of property, usually under a lease.

LESSOR

The landlord; the owner of real property who rents it to a tenant, usually under a lease.

LETTER OF CREDIT

A contract in which a bank promises to pay the bearer a specified some of money (the “face” amount of the letter of credit) upon the occurrence or non-occurrence of some stated event or upon the bearer’s presentation of certain documents.

LEVERAGE

The use of borrowed money to finance part or all of the purchase or ownership of an investment.

LIBOR (the “London Inter-Bank Offer Rate”)

LIBOR is an index that is calculated by Thompson Reuters and published by the British Bankers’ Association in London each morning. It is an average of inter-bank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year. LIBOR rates function as benchmarks rather than actual rates. The actual rates at which banks lend to one another vary throughout each day. Many lenders use LIBOR as an index for setting the interest rate on loans.

LICENSE

Formal permission granted by a governing body which allows an entity to engage in certain specified activities.

LIEN

A legal claim by one party against the property of another party as security for the payment of a debt. A mortgage creates a lien, or encumbrance, against the property of the borrower. Liens frequently are recorded at the county clerk's office, and the order in which they are recorded normally determines their priority. Recorded liens usually show up on a title search.

LIEN THEORY

The law in some states (including New York) interprets a mortgage as being solely a lien. Therefore, the holder of the mortgage (the mortgagee) has no rights of possession against the property. In the event of default by the borrower (the mortgagor), the mortgagee must foreclosure on the lien and then sell the property at auction to recover the amount of his loan. If the sale does not generate enough money to repay his loan, the mortgagee must return to court to get a judgment against the other assets of the borrower.

LIEN WAIVER

A document, usually signed by a contractor, which acknowledges partial or full payment for work performed at, and/or materials delivered to, a property and releases the property’s owner from any legal claims up to the dollar amount stated in the waiver.

LIQUIDATED DAMAGES

An amount of money specified in a contract which is to be paid to one party should the other party breach the contract.

LIQUIDITY

The ability to sell an asset for a cash price reasonably close to the asset’s true market value within a relatively short period of time.

LIMITED PARTNERSHIP

A business arrangement in which the operation of the business is administered by one or more “general” partners and funded, by and large, by “limited” (or “silent”) partners. In most cases, general partners are fully liable for all losses of the partnership, while limited partners are responsible for losses only to the extent of their investment.

LIS PENDENS

A recorded legal document which gives public (“constructive”) notice that a legal action has been filed against a particular property in state or federal court.

LOAN COMMITMENT

A written contract issued by a lender in which the lender agrees to make a loan for a specified amount on specified terms.

LOAN CONSTANT

The annual percentage which determines a loan’s fixed yearly debt service. Debt service includes interest at the stated rate plus any amortization. Dividing a loan’s annual debt service by twelve gives its monthly payment.

Example: A $1,000,000 loan at 7.00% with 30-year amortization has a “constant” of 7.98% and a monthly payment of $6,653.

LOAN-TO-VALUE (LTV)

The relationship between the appraised value of a property (as denominator) and the amount of a mortgage loan (as numerator), usually expressed as a percentage.

LOCATIONAL OBSOLESCENCE

Reduction in a property's value caused by factors outside the subject property (e.g., regional, social, or environmental problems).

LOSS FACTOR

Denotes the percentage of a building’s total space which is not rentable (e.g., elevator shafts, etc.).

LOT-AND-BLOCK DESCRIPTION

A system of identifying property which lays a grid over a city or region and assigns block numbers to individual cells in that grid and lot numbers to each individual parcel of land within that cell. The grid and its block and lot numbers usually are recorded in the public records at the county clerk’s office.

MAI (Member of the Appraisal Institute)

A professional designation awarded to appraisers who have accumulated a certain level of experience, taken the required educational courses, and passed a series of rigorous examinations. As a condition of making a loan, most lenders require that an MAI certify that the subject property has a certain minimum value.

MAINTENANCE CHARGES

The monthly rent collected by a cooperative apartment corporation (as landlord) from a shareholder (as a tenant under a propriety lease) of an apartment in the cooperative's building. The resident tenant usually is the owner of the shares that the apartment corporation assigned to his apartment. Maintenance charges are calculated by dividing the total cost of operating the cooperative by the total number of shares outstanding. The per share cost of operation is then multiplied by the shares allocated to each apartment to determine the rent (or “maintenance”) for that apartment.

MANAGEMENT AGREEMENT

A written contract between the owner of a property and a professional management firm that specifies the manager's duties, responsibilities, and authority in operating the property on behalf of the owner.

MARGIN (or Spread)

The number of basis points that a lender adds to an index to determine the interest rate on a loan. One percentage point (i.e., 1.00%) contains 100 basis points.

Example: A 5-year loan priced at “175 over” the 5-year Treasury would have a rate of 7.00% if 5-year Treasury securities were trading at 5.25% (5.25% + 1.75% = 7.00%).

MARKET

A place (either real or virtual) where goods and services can be bought and sold, thereby establishing fair prices through the interplay of supply and demand.

MARKETABLE TITLE

“Good” title; without prohibitive encumbrances and reasonably free from the risk of litigation over possible defects.

MARKET COMPARISON APPROACH

The process of estimating the value of a particular property by examining recent sales of similar properties (“comparables” or “comps”), adjusting for differences in age, condition, size, circumstances of sale, etc. The appraiser then averages the adjusted “comp” values to arrive at an estimated value for the subject property. Also called the “Market Value or Sales Approach.”

MARKET PRICE

The actual selling price of a property in a normal, “arms length” transaction.

MARKET VALUE

The highest price that a ready, willing, and able buyer would pay and the lowest price that a ready and willing seller would accept, both being fully informed about the property and market and neither being under any pressure to complete the transaction. The market value may be different from the price that a particular property actually can achieve at a given point in time.

MATURITY

The date on which the entire unpaid balance of a loan must be repaid to the lender; the “due date.”

MECHANIC'S LIEN

A statutory claim against a property created in favor of contractors, laborers, and materialmen who have performed work or furnished materials in the construction or repair of that property.

METES-AND-BOUNDS DESCRIPTION

A legal method of describing of a parcel of land that begins at a well-marked point and then, using directions and distances, follows the parcel's boundaries around the tract back to the place of beginning.

MONTH-TO-MONTH TENANCY

A periodic tenancy under which the tenant rents for one month at a time. In the absence of a rental agreement (oral or written), a tenancy is generally considered to be month-to-month.

MONTHLY PAYMENT

For most loans, the monthly payment includes both principal and interest, plus escrow amounts for real estate taxes and hazard insurance (“PITI” = principal, interest, taxes, and insurance).

MONUMENT

A fixed natural or artificial object used to establish real estate boundaries for a metes-and-bounds description.

MORTGAGE

A legal document which gives the lender a lien against, or a security interest in, the property of the borrower until the loan has been repaid according to the terms of the loan note. The loan note is the document which defines all of the terms of the loan and governs its repayment. The loan mortgage governs what happens if the borrower defaults, i.e., fails to repay the loan note. Both documents usually are recorded by either the lender's attorney or the title insurance representative at the county clerk's office. If properly recorded, every mortgage will show up on a title search.

There is a hierarchy among mortgages and other liens. The holder of a first mortgage has first claim on the assets of a borrower in the event of a foreclosure. This means that the proceeds of a foreclosure sale go first to repay the outstanding balance of the first mortgage loan (plus accrued interest and any other costs or penalties), with any remaining money being used to repay second and lesser (or subordinate) mortgage loans. It should be noted, however, that real estate taxes have a claim above all others---even above that of a first mortgage! That is why virtually all lenders require an escrow account for the payment of real estate taxes and collect such escrows as part of each monthly loan payment. This escrow procedure assures the lender that the property’s real estate taxes always will be paid on time.

MORTGAGE BANKER

A company that provides mortgage financing with its own funds, rather than simply bringing together a lender and a borrower, as does a mortgage broker. However, even though the mortgage banker uses its own funds to close loans, these funds generally are borrowed under a credit line arrangement. After closing, the mortgage loans usually are sold to investors (e.g., insurance companies, pension funds, etc.) and the proceeds used to pay back the credit line. This “make loan-sell loan” process replenishes the mortgage banker’s funds, allowing it to make more loans.

MORTGAGE BROKER

One who, for a fee, brings together a borrower and a lender, negotiates the terms of a loan, and handles all of the necessary paperwork. Sometimes called a loan broker.

MORTGAGE COMMITMENT (or Loan Commitment)

A formal, written indication by a lender that it will give a mortgage loan of specific amount to a particular borrower on specified terms to be secured by an identified property.

MORTGAGEE

The lender; the entity making the loan and taking back a mortgage as security for the repayment of that loan.

MORTGAGE INSURANCE

Insurance written by an independent mortgage insurance company to protect the mortgage lender against loss in the event of a default by the borrower. Mortgage insurance reduces the risk to the lender, thus enabling the lender to lend a higher percentage of the property’s value.

MORTGAGE INSURANCE PREMIUM (MIP)

The price of mortgage insurance protecting the lender but paid for by the borrower.

MORTGAGE RECORDING TAX

New York State, various counties, and some cities charge lenders a fee to record a mortgage in the public record. Virtually all lenders pass this fee on to the borrower as part of their loan’s closing costs. Lending institutions with Federal charters (e.g., NCB) generally are exempt from this tax.

MORTGAGE REDUCTION CERTIFICATE

A document executed by an existing lender which states the status (current, past due, etc.) and remaining balance on a mortgage note as of the date of the document. Such a certificate may be required by a new lender as part of the documentation necessary to take an existing mortgage loan by assignment in order to save on the mortgage recording tax.

MONETARY POLICY

Our government’s regulation of the amount of money in circulation through the open market activities of institutions such as the Federal Reserve Board and the U.S. Treasury.

MONTH-TO-MONTH TENANCY

A periodic tenancy under which the tenant rents for one month at a time. In the absence of a rental agreement (oral or written), a tenancy is generally considered to be month-to-month.

MONTHLY PAYMENT

For most loans, the monthly payment includes both principal and interest, plus escrow amounts for real estate taxes and hazard insurance (“PITI” = principal, interest, taxes, and insurance).

MONUMENT

A fixed natural or artificial object used to establish real estate boundaries for a metes-and-bounds description.

MORTGAGE

A legal document which gives the lender a lien against, or a security interest in, the property of the borrower until the loan has been repaid according to the terms of the loan note. The loan note is the document which defines all of the terms of the loan and governs its repayment. The loan mortgage governs what happens if the borrower defaults, i.e., fails to repay the loan note. Both documents usually are recorded by either the lender's attorney or the title insurance representative at the county clerk's office. If properly recorded, every mortgage will show up on a title search.

There is a hierarchy among mortgages and other liens. The holder of a first mortgage has first claim on the assets of a borrower in the event of a foreclosure. This means that the proceeds of a foreclosure sale go first to repay the outstanding balance of the first mortgage loan (plus accrued interest and any other costs or penalties), with any remaining money being used to repay second and lesser (or subordinate) mortgage loans. It should be noted, however, that real estate taxes have a claim above all others---even above that of a first mortgage! That is why virtually all lenders require an escrow account for the payment of real estate taxes and collect such escrows as part of each monthly loan payment. This escrow procedure assures the lender that the property’s real estate taxes always will be paid on time.

MORTGAGE BANKER

A company that provides mortgage financing with its own funds, rather than simply bringing together a lender and a borrower, as does a mortgage broker. However, even though the mortgage banker uses its own funds to close loans, these funds generally are borrowed under a credit line arrangement. After closing, the mortgage loans usually are sold to investors (e.g., insurance companies, pension funds, etc.) and the proceeds used to pay back the credit line. This “make loan-sell loan” process replenishes the mortgage banker’s funds, allowing it to make more loans.

MORTGAGE BROKER

One who, for a fee, brings together a borrower and a lender, negotiates the terms of a loan, and handles all of the necessary paperwork. Sometimes called a loan broker.

MORTGAGE COMMITMENT (or Loan Commitment)

A formal, written indication by a lender that it will give a mortgage loan of specific amount to a particular borrower on specified terms to be secured by an identified property.

MORTGAGEE

The lender; the entity making the loan and taking back a mortgage as security for the repayment of that loan.

MORTGAGE INSURANCE

Insurance written by an independent mortgage insurance company to protect the mortgage lender against loss in the event of a default by the borrower. Mortgage insurance reduces the risk to the lender, thus enabling the lender to lend a higher percentage of the property’s value.

MORTGAGE INSURANCE PREMIUM (MIP)

The price of mortgage insurance protecting the lender but paid for by the borrower.

MORTGAGE RECORDING TAX

New York State, various counties, and some cities charge lenders a fee to record a mortgage in the public record. Virtually all lenders pass this fee on to the borrower as part of their loan’s closing costs. Lending institutions with Federal charters (e.g., NCB) generally are exempt from this tax.

MORTGAGE REDUCTION CERTIFICATE

A document executed by an existing lender which states the status (current, past due, etc.) and remaining balance on a mortgage note as of the date of the document. Such a certificate may be required by a new lender as part of the documentation necessary to take an existing mortgage loan by assignment in order to save on the mortgage recording tax.

MORTGAGE SERVICING

Includes all of the necessary duties of a lender, such as collecting payments, processing escrows, foreclosing in the event of default, and releasing liens upon payment in full. Some lenders service their own loans, while others hire another company to service loans on their behalf.

MORTGAGOR

The borrower; the entity that owns a property and pledges it to a lender as security for the repayment of a loan.

MUTUAL SAVINGS BANK

An institution owned by its depositors, whose ownership is evidenced by certificates of deposit rather than shares of stock. This form of ownership does not affect the day-to-day activities of the bank in any material way.

NEGATIVE AMORTIZATION

A situation that exists whenever a loan's monthly payment is smaller than the interest due for that month, and the excess interest is added to the outstanding principal balance. This increase in loan amount can occur with "fixed pay rate" loans (i.e., variable rate loans whose payment rate is less that the actual interest rate) or loans with buy-downs or introductory "teaser" rates. Such loans erode a borrower’s equity and can leave them owing much more than they originally borrowed. It usually is wise to avoid such loans.

NEGATIVE CASH FLOW

If your expenses (or disbursements) exceed your income (or receipts), your cash flow will be negative. Sponsors and holders of unsold shares suffer negative cash flow when the maintenance charges on their shares exceed the rent collected from tenants in the corresponding apartments.

NEGATIVE PLEDGE

A promise made by one party not to do something that would be adverse to another party. For example, a lender which is considering a new underlying mortgage loan for a partially-sold cooperative might require a promise from the sponsor that it will not use the unsold shares as collateral for any other financing. such a promise is called a “negative pledge.”

NET LEASE

A lease requiring the tenant to pay not only rent but also all of the operating and maintenance costs of the property (e.g., taxes, insurance, utilities, repairs, etc.).

NET WORTH

The difference between the total assets and total liabilities of an individual, corporation, or other entity.

NON-CONFORMING

A mortgage loan that does not conform to standardized limits (e.g., total loan amount, loan-to-value ratio, loan term, etc.).

NON-CONFORMING USE

A use of property that normally would be prohibited under current zoning regulations, but which is allowed presently, either because it had been a legal use under previous zoning ordinances or because such use predated the creation of the current zoning ordinance. Such non-conforming uses are said to “grandfathered” under the current zoning, and may continue for as long as they exist in their current form. However, if they are torn down or substantially damaged, they cannot be replaced. Any new structure must comply fully with the current zoning regulations.

NON-RECOURSE

A term that defines the limits of a lender's claim against the assets of a borrower. A recourse loan includes all of the borrower’s assets as collateral. A non-recourse loan gives the lender a security interest only in the asset that has been pledged as collateral. All of the borrower’s other assets, however, are exempt from the lender’s security interest. In real estate loans, this right of claim is registered against the property through the recorded mortgage document, and it remains as an encumbrance or lien on that property until the loan is fully paid.

NOTARY PUBLIC

A public officer who is authorized to witness and certify the execution of certain classes of documents (e.g., affidavits, deeds, contracts, mortgages, etc.).

NOTE

The legal document in which the borrower promises to repay the loan to the lender according to the specified terms. Most loan documents are recorded in the public records at the county clerk's office.

O & M MANUAL (“Operations & Maintenance Manual”)

Older buildings may contain lead paint, asbestos pipe insulation, mold, radon, and other potential environmental hazards. Some lenders require that such buildings develop and document specific procedures for protecting their residents, visitors, and the surrounding environment from existing potential hazards, as well as detailed guidelines that must be observed whenever potentially hazardous materials are removed or disturbed. The manual also must specify the appropriate methods for safe disposal of any potentially hazardous materials which are removed from the property.

OBLIGEE

The entity for which another entity promises to perform some activity according to a written agreement.

OBLIGOR

The entity which promises to perform some activity for another entity according to a written agreement.

OBSOLESCENCE

A term used by real estate appraisers which refers to aspects of a property which are out-of-date or otherwise detract from its value.

OPEN MORTGAGE

A mortgage loan which has matured or is past due. Such a loan is "open" to foreclosure at any time.

OPEN-END MORTGAGE

A mortgage loan whose amount may be increased in specified increments up to a maximum amount. The full loan amount outstanding at any point in time is secured by a mortgage on the corresponding property. This mortgage accommodates changes in the total loan amount and automatically adjusts its lien accordingly.

OPTION

An agreement between two parties to keep open for a set period of time an offer by one party to do something for the other party. After the defined period of time has elapsed, the option expires, along with whatever rights and responsibilities each party had under the option.

ORIGINATION FEE

The charge collected by a lender for evaluating and processing a loan application, usually expressed as a percentage of the total amount of the proposed loan. Some lenders charge both an application fee for evaluating a loan request plus an “origination” or "commitment" fee for approving the loan application and issuing an commitment letter.

PARTIAL RELEASE

The removal of a portion of a property from a mortgage lien. For example, the developer of a subdivision might obtain a partial release for each lot that is sold in exchange for a predetermined percentage of the sales proceeds being used to pay down his development loan.

PARTICIPATING LOAN

A loan in which the lender receives, in addition to interest, a portion of the collateral property’s income or sales proceeds.

PARTICIPATION

One bank’s purchase of a share in a loan originated by another bank.

PARTNERSHIP

An association of two or more entities which operate a business or property as
co-owners. Under the law, a partnership is regarded as a group of entities rather than as a single entity (as a corporation would be). A general partnership is a form of joint venture in which each general partner shares fully in the administration, profits, and losses of the operation. In a limited partnership, a general partner manages the operations of a business which has been funded (largely or entirely) by a limited (or “silent”) partner. Limited partners are exposed to partnership losses only to the extent of their investment in the partnership; any excess loss is absorbed by the general partner(s).

PARTY WALL

A wall which is located on the boundary line between two adjoining properties and which is “used” by the owners of both properties.

PAR VALUE

The nominal (or “face”) value of stocks, bonds, mortgages, etc.

PAYMENT CAP

The maximum amount allowed for the monthly payment of an adjustable-rate mortgage loan.

PAYOFF

The amount needed to pay in full the outstanding balance (plus any accrued interest) of an existing loan.

PENSION FUND

(1) The accumulated capital and investment earnings held by a private or public organization to pay for the present and future retirement benefits of its employees, or (2) the department within an organization which is responsible for such monies, their collection, investment, and ultimate disbursement to beneficiaries.

PERCENTAGE POINT

One divided by one hundred.

PERCENTAGE LEASE

A lease, most commonly used for commercial property, whose rent payment is determined by the tenant's gross revenues. Such leases typically stipulate a minimum monthly rent plus a percentage of any gross revenues above a certain base amount.

PERMANENT

A “permanent” is a mortgage loan for five years or longer.

PERSONAL PROPERTY

Those items not permanently affixed to, or forming a part of, real property. For example, moveable items like furniture, artwork, automobiles, and clothing are called personal property (or “personalty”).

PHYSICAL DETERIORATION

The reduction in a property's value due to a decline in physical condition. This can be caused by action of the elements or by ordinary “wear and tear.”

PITI

Principal, Interest, (real estate) Taxes, and (hazard) Insurance. These are the most common components of a monthly mortgage payment.

PLAINTIFF

One who starts a lawsuit against another.

PLAT

A map of a town, neighborhood, or subdivision indicating the location and exact boundaries of individual properties.

POINT

A unit of measure used for various loan charges. One “point” equals one percent (1.00%) of the loan amount.

POINT OF BEGINNING

The starting point of a survey in a metes-and-bounds legal description, usually located at one corner of the parcel being described. All metes-and-bounds descriptions must start at this point and follow the boundaries of the parcel back to this point.

POOL

An investment vehicle created to combine the money or assets of members of a specified group.

PORTFOLIO

The collection of investments (e.g., stocks, bonds, mortgage loans, real estate, etc.) held by an entity. A “portfolio lender” does not sell the loans it makes, but instead keeps them “in portfolio” until they mature or are prepaid.

POWER OF ATTORNEY

A written document authorizing one person (the “attorney-in-fact”) to act as an agent on behalf of another person (the “principal”) for the purpose(s) indicated in the document. A “general” power of attorney authorizes the agent to conduct any business for the principal, while a “specific” power of attorney limits the agent’s powers to those specified in the document.

PRELIMINARY TITLE REPORT

The results of an ownership search by a title company prior to issuing a commitment to insure clear, unencumbered title to a lender and/or owner.

PREPAYMENT

Paying off a loan before it is due.

PREPAYMENT CLAUSE

A statement of the terms upon which a borrower may pay part or all of the outstanding balance of a loan at any time prior to maturity (i.e., the “due date”).

PREPAYMENT PENALTY

The charge imposed by a lender on a borrower who pays off some or all of a loan before it is due. This penalty compensates the lender for interest and other charges that it would have collected had the loan not been repaid early.

PRESENT VALUE

The current value of payment(s) to be made or received in the future. This value is calculated by “discounting” the future payment(s) to account for the interest that could be earned on a fictitious single payment invested now at the assumed discount rate for the period of time over which the real payment(s) are to be made or received.

PRICE

The amount of money paid for an item.

PRIMARY MORTGAGE MARKET

The term used to describe the “market” in which mortgage loans are originated. The “secondary market” is where such loans are bought and sold by investors.

PRIME RATE

Historically, the “best” rate of interest available to a lending institution’s most preferred customers. Today, the prime rate is used more often as a general indicator of interest rates than as a lending index. However, many banks still set the interest rates on short-term business loans (e.g., revolving credit lines for co-ops) at a spread above or below their quoted prime rate.

PRINCIPAL

The loan amount; the original amount borrowed.

PRINCIPAL BALANCE

The remaining amount due on a debt.

PRINCIPAL MERIDIAN

One of 35 north and south survey lines established as part of the “rectangular” (federal government) survey system.

PRIORITY

The order in position or time. The priority of liens generally is determined by the chronological order in which the describing documents were recorded. Tax liens, however, have priority over all others – even over other liens recorded earlier.

PRIVATE MORTGAGE INSURANCE (PMI)

Insurance protecting a lender (the “mortgagee”) in the event of default by a borrower (the “mortgagor”). This insurance is similar to insurance issued by a government agency such as FHA, except that it is issued by a private insurance company. The premiums for PMI are paid by the borrower and are included in the monthly mortgage payment.

PROCESSING

The preparation of a mortgage loan application and its supporting documentation for consideration by a lender.

PROFIT-AND-LOSS STATEMENT

A financial report detailing an individual’s or an entity’s revenue and expenses for a given period of time.

PROPERTY MANAGER

Someone who is paid to manage real estate for the owner. Typical duties might include collecting rents, maintaining the property, and accounting for all receipts and expenditures.

PROPERTY TAXES

Taxes levied on all property within the taxing body’s jurisdiction. Tax rates and taxing bodies vary from place to place, and depend on the level of services provided by the respective governmental body.

PROPRIETARY LEASE

The agreement between a cooperative apartment corporation (as landlord) and the purchaser of shares in that corporation (as tenant) which defines the rights of each party with respect to the use and occupancy of the apartment to which the purchased shares have been allocated under the terms of the offering plan.

PRORATION

Also called apportionment or adjustment. The division of certain expenses, costs, and/or income between a buyer and a seller. This division usually occurs at the closing of a sale.

PURCHASE CONTRACT

A written agreement between a buyer and a seller, governing the price, timing, and other terms of the transfer of ownership to a property. Also known as a sales contract.

PURCHASE-MONEY MORTGAGE (PMM)

A promissory note secured by a mortgage given by a buyer (the “mortgagor”) to a seller (the “mortgagee”) as part of the purchase price of a property. Sometimes called a “Purchase Mortgage” (a “PM”).

QUARTER SECTION

One quarter of a section. A section is a parcel of land containing 640 acres. Hence, a quarter section (commonly called a “quarter”) is a parcel containing 160 acres.

QUESTION

A subject of uncertainty, confusion, or misunderstanding. Alternatively, to ask for answers or clarification.

Please call (800) 777-4422 for certain, non-confusing, and easily-understood answers to all of your questions regarding underlying mortgage loans, credit lines, the refinancing process, and capital improvement loans.

QUIET ENJOYMENT

A clause found in most leases which obligates the landlord to allow the tenant peaceful, uninterrupted use of the property covered by the lease -- as long as the tenant fulfills all of his obligations under the lease (pays rent, etc.).

QUITCLAIM DEED

A deed which contains absolutely no warranties or guarantees as to the seller’s interest in the property being sold. A quitclaim deed transfers whatever interest (if any) the seller has in the property to the buyer, without any representation whatsoever that the seller has a valid interest to transfer or that he has the right to transfer such interest.

RANGE

A strip of land six miles wide, extending north and south, and numbered east and west according to its distance from the principal meridian in the rectangular (government survey) system of land description.

RATE INDEX

An index used to adjust the interest rate of an adjustable rate mortgage loan (ARM). For example: U.S. Treasury securities with a 1-year maturity (T-bills). T-bill rates may be obtained weekly from the Federal Reserve’s Statistical Release H.15 (519), daily from the Wall Street Journal, or from the financial pages of other major publications.

RATE OF RETURN

The annual return on an investment in some asset, like income property, expressed as a percentage.

RATING

A formal assessment of a borrower’s financial strength and creditworthiness that is performed by an independent company which specializes in that service.

REAL ESTATE

Land. A portion of the earth's surface extending downward to the center of the earth and upward infinitely into space, and including all things permanently attached thereto, whether by nature or by a person. Any interest in land is called “realty” or “real property.”

REAL ESTATE BROKER

Any person, partnership, association, or corporation that sells (or offers to sell), buys (or offers to buy), or negotiates the purchase, sale, or exchange of real property on behalf of others in exchange for compensation. No one may conduct any of the above activities legally without a valid real estate broker’s license or a valid salesperson’s license registered under a licensed real estate broker in good standing.

REAL ESTATE INVESTMENT TRUST (REIT)

Ownership of real estate by a group of at least 100 individuals who purchase certificates of ownership in a trust which, in turn, invests the money contributed by the individuals in real property. The trust distributes any profits to the investors free of corporate income tax.

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

A Federal law requiring lenders to provide individual home mortgage borrowers with advance information on estimated settlement (i.e., closing) costs and required escrow account balances.

REAL PROPERTY

The earth's surface, extending downward to the center of the earth and upward into space, including all things permanently attached to it by nature or by a person. Also called “real estate” or “realty.”

REALTOR

A registered trademark term reserved for the sole use of active members of local real estate associations affiliated with the National Association of REALTORS.

REALTY

Real estate or real property.

REBATE

A retroactive discount on the price of a product or service, or a reduction in an interest charge, which is given after the respective transaction has been completed. Any rebate should be disclosed fully to all parties involved in the transaction. Hidden rebates or “kickbacks” usually are illegal or at least unethical.

RECEIVER

A court-appointed custodian who holds (and often operates) property on behalf of the court, pending a final disposition of the matter before the court.

RECONCILIATION

The final step in the appraisal process during which the appraiser combines the three estimates of value calculated in the market data, cost, and income approaches to value and then arrives at one consolidated estimate of the fair market value of the subject property.

RECORDING

The act of entering in the public records at the appropriate County Clerk’s office documents affecting or conveying interests in real estate. Until recorded, a deed or mortgage generally is not protected against subsequent purchasers or mortgages.

RECOURSE

A term that refers to a lender's claim against the personal assets of a borrower. A recourse loan gives the lender a security interest not only in the property on which the loan has been made, but also in all of the other assets of the borrower. In the event of the borrower's default and foreclosure, the lender may sell the subject property, plus as many of the borrower's other assets as may be necessary, to repay the borrower’s loan obligation, including any legal fees or other foreclosure costs.

RECTANGULAR SURVEY SYSTEM

A system established in 1785 by the federal government to describe all of the land in the country through maps which reference each plot by its distance from principal meridians (north-south lines) and base lines (east-west lines).

REDLINING

A illegal practice in which a lending institution ceases or restricts its lending in certain areas of a community.

REFINANCING

The repayment of an existing debt from the proceeds of a new loan, using the same property as collateral.

REGRESSION

A decrease in the value of a particular property due to the use or condition of surrounding properties. This is an appraisal principle which states that, between dissimilar properties, the value of the better property will be affected adversely by the property of lesser quality.

REGULATION Z

A federal law requiring credit institutions to inform borrowers of the true total cost of obtaining credit; commonly called the “Truth-in-Lending Act”.

RELEASE CLAUSE

A clause in a loan document which frees the borrower from part or all of an obligation, as specified in the loan terms, upon the occurrence of some event or the borrower's performance of some activity.

REMAINING ECONOMIC LIFE

The estimated period over which a property’s existing improvements continue to contribute to the value of that property.

RENEGOTIABLE RATE MORTGAGE

A mortgage loan in which the interest rate may increase or decrease at specified intervals, within certain limits, based upon an economic indicator; also called an “adjustable rate mortgage” or “ARM.”

RENT

A fixed, periodic payment made by the tenant of a property to the owner or landlord in exchange for the right to possess and use the property, for a defined period of time, subject to certain conditions, all of which usually is defined in a document called a “lease.”

RENT SCHEDULE

A detailed listing of each apartment in a building, together with the tenants’ names, monthly rents, lease expiration dates, security deposits, and other relevant information.

RENT STRIKE LEGISLATION:

New York laws which allow tenants of multiple dwellings to withhold rent from their landlord because of his failure to remedy property conditions which are dangerous to the life, health, or safety of the tenants. To initiate such an action, at least one-third of the tenants must agree to pay their rent directly to the court until the matter is resolved.

Example: The tenants association of a large multiple-dwelling in New York City has an action against their landlord because of his failure to properly heat their apartments and his delay in correcting several fire and safety hazards in the building.

Until the tenants’ lawsuit is decided by the court, they pay their rent to a court-appointed trustee instead of to the landlord.

REPLACEMENT COSTS

An appraisal term that describes the cost to rebuild a property at current prices. The reconstructed property would not necessarily be an exact duplicate of the subject property, but it would contain all of the essential elements and serve the same purpose or function as the original.

REPRODUCTION COST

An appraisal term for the construction cost at current prices of an exact duplicate of the subject property.

RESTRICTIVE CONVENANT

Clauses in a property’s deed which limit how that property may be used or to whom it may be sold. These limitations usually become a permanent part of the deed and pass with it to subsequent owners. However, to be enforceable, such deed restrictions must be “reasonable.”

Example: Mrs. A, a teetotaler, sold a property to Mr. B. Prior to the sale, Mrs. A had modified the property’s deed with a restrictive covenant prohibiting the sale of intoxicating beverages on or from the property.

Courts generally have upheld such restrictive covenants against legal arguments which allege that they constitute an unreasonable restraint on the use of the property.

RESCISSION

Annulling a contract in such a way as to return each party to their respective pre-contract status.

REVENUE STAMPS

A method of taxing the transfer or mortgaging of real property. Payment of the tax is evidenced by documentary stamps attached to the property’s deed or to the lender’s mortgage. If the respective document does not have the appropriate number of stamps, the county clerk will not accept it for recording.

REVERSIONARY RIGHT

An owner’s right to regain possession of leased property at the end of the lease.

RIGHT OF FIRST REFUSAL

A right granted by Mr. A to Mrs. B for a defined transaction, which right gives
Mrs. B an opportunity to match the terms offered at some future time to Mr. A by Mrs. C. If Mrs. B matches Mrs. C’s terms, Mr. A must complete the defined transaction with Mrs. B instead of with Mrs. C.

RIGHT OF SURVIVORSHIP

A right granted as part of the purchase of a property by two or more “joint tenants.” Upon the death of a joint tenant, his or her interest passes automatically to the surviving joint tenant(s).

RIGHT OF WAY

A strip of land which is used as a roadbed, either for a street or a railway. This term also may be used to describe the right to pass over land owned by another.

RIPARIAN

Land which comes in contact with water (e.g., a river, stream, or lake). Because of such contact, the owner is entitled to access and use the water. The owner of such land is called a “riparian owner”; the rights of use are called “riparian rights.”

Example: Mr. A purchased a waterfront lot on Bass Lake. One morning, Mr. A went out in his boat to do some serious fishing. He anchored his boat about 30 feet from the shore in front of Mrs. B’s lot. Mrs. B stormed out of her cottage and told Mr. A to “get out of there.” Unfortunately for Mrs. B, Mr. A may fish in front of Mrs. B’s lot – he is not trespassing. As a riparian owner, Mr. A has the right to boat and fish over the entire lake, just as Mrs. B does, even though each riparian land owner around the lake owns a slice of the lake from their lot boundaries to the middle of the lake.

SALE AND LEASEBACK

A transaction in which an owner sells his property and, as part of the same transaction, signs a long-term lease to remain in possession of the premises.

SATISFACTION

The recordable document issued by a lender verifying full payment of a mortgage debt.

SAVINGS AND LOAN ASSOCIATION

Originally an association chartered to hold savings and make real estate loans. As a general rule, they are Federally insured and regulated. Active in long-term financing rather than construction loans. Recent changes in federal controls have enabled these associations to offer checking accounts, consumer loans, and other services traditionally offered by banks.

SECOND MORTGAGE

A legal document that conveys to the lender rights and claims similar to those in a first mortgage. However, these rights and claims are secondary, subordinate to, and will be satisfied after those of the holder of the first mortgage.

SECONDARY FINANCING

A loan, secured by a mortgage or trust deed, whose lien (or claim) is junior (or secondary) to that of another mortgage or trust deed.

SECONDARY MORTGAGE MARKET

A market for the purchase and sale of existing mortgages which was created to provide greater liquidity for mortgage lenders. Mortgages are first made or originated in the primary mortgage market.

SECTION

A portion of a township under the rectangular survey (government survey) system. A township is divided into 36 sections, numbered 1 to 36. A section is a square with mile-long sides and an area of one square mile, or 640 acres.

SECURITY DEPOSIT

An amount of money paid by the tenant to the landlord to be held as security for successful performance of the lease until it expires.

SELLING AGENT

The entity that represented the sponsor at the time of conversion in the sale of shares in the new apartment corporation.

SERVICING

The receipt of monthly payments from the borrowers, the keeping of records as to prepayment of principal, and the remittance of the appropriate principal and interest to the investor who owns the loan.

SETBACK

The amount of space local zoning regulations require between a lot line and a building line.

SETTLEMENT SERVICES

Services provided by the lender at the closing of a loan.

SHORT INTEREST

Loan interest is usually paid in arrears, i.e., on the first of every month in the amount due for the previous month. However, lenders will typically collect the interest due from the date of closing to the end of the month in which closing occurs as part of the cost of closing. This interest is called "short interest" since it is usually less than a full month's amount.

SHORT TERM

A short term loan is any loan of five years or less. Most short term loans carry terms of one year or less.

SMALL BUSINESS ADMINISTRATION

A federal agency whose function is to advise and assist small businesses. It provides loan guaranties for small businesses, minorities and veterans as well as small firms that have suffered catastrophes.

SPECIAL ASSESSMENT

A tax levy customarily imposed against only those specific parcels of real estate that will benefit from a proposed public improvement like a street or sewer.

In a cooperative or condominium, a special assessment is a charge levied on all shareholders/unit owners in addition to monthly maintenance/common charges in order to raise funds for some special purpose.

SPECIFIC LIEN

A lien affecting or attaching only to a certain, specific parcel of land or piece of property.

SPECIFIC PERFORMANCE

A remedy obtained in court by which one party to a contract may force the other party to perform according to the specific agreements contained in the contract. For example, in a real estate sale/purchase transaction, if the buyer or seller proves his case, the court may order that the other party must “specifically perform” his part of the purchase agreement, i.e., he must sell or buy, whichever the case may be.

Before a court will order specific performance there must be a valid purchase agreement existing between the parties. Then, if one of the parties to the purchase agreement refuses, without cause, to go through with the sale, the court may order that party to do what he agreed to do in the purchase agreement – to buy or to sell the property.

The idea behind this remedy of specific performance is that land is unique and that other legal remedies would be inadequate. Thus, the court is forcing Party A to keep his part of the bargain and to perform his part of the purchase agreement – to “specifically perform” his agreement to sell the property to Party B on the stated terms.

Thus, buyers and sellers of real estate must be made to realize that when they sign a purchase agreement or accept an offer that they can be made or ordered to perform the agreement by a court. It should be stated that a court will not order or decree performance of a purchase agreement which contains conditions which have failed to materialize through no fault of the parties.

SPONSOR

The entity that created the cooperative apartment corporation and converted the apartment building from rental to cooperative ownership.

SPOT ZONING

A change in a local zoning ordinance to permit a particular use that is inconsistent with the area’s zoning classification. Spot zoning is not favored in the law.

SPREAD

The number of basis points or fractions of a percentage point that a lender adds to an index, such as the prime rate, to determine or "price" the interest rate for a loan.

SQUARE FOOTAGE

The most common method of calculation is the one published by the American National Standard Institute Inc. Rentable footage is the space on a floor less the elevator shafts, stairwells and other penetrations, measured from the inside of the exterior wall, or glass line if the exterior wall is 50 percent or more glass. The usable footage is the rentable footage less restrooms, lobby and halls.

STANDBY COMMITMENT

The lender makes a commitment while not expecting to fund unless the project gets into trouble. The terms are usually rough. While no actual funding is usually involved, a developer can use a standby commitment to get a construction loan. Some lenders write standbys which are more affordable than others.

STANDING LOAN

Loans on improved property for a period not exceeding five years. Usually not amortized. “Standing” conveys the purpose of the loan. The object is to provide funds to pay off the construction lender or other first mortgage holder.

STATUTE OF FRAUDS

That part of a state law that requires certain instrument, such as deeds, real estate sales contracts, and certain leases, to be in writing in order to be legally enforceable.

STATUTE OF LIMITATIONS

The law that dictates to the period of time within which certain actions must be brought to court.

STATUTORY LIEN

A lien imposed on property by statute - a tax lien, for example - in contrast to an equitable lien, which arises out of common law.

STRAIGHT LINE METHOD

A method of calculating depreciation for tax purposes, computed by dividing the adjusted basis of property by the estimated number of years of remaining useful life.

SUBCONTRACTOR

A company or tradesperson hired by a general contractor, construction manager, or property owner to perform a certain part of a larger construction, repair, or maintenance project.

SUBLESSEE

A tenant that subleases space in a building from an existing tenant (sublessor) in the building.

SUBLESSOR

An existing tenant in a building that subleases its space to another firm.

SUBLETTING

The leasing of premises by a lessee to a third party for part of the lessee's remaining term.

SUBORDINATE

To make subject or junior to. For example: A loan on vacant land is made subject to a subsequent construction loan.

SUBORDINATION

Relegation to a lesser position, usually referring to claims, liens, mortgages, rights, or security interests. A signed agreement acknowledging that one’s claim or interest is inferior to another’s; the act of agreeing to take a secondary position.

SUBORDINATION AGREEMENT

A written agreement between holders of liens on a property that changes the priority of mortgage, judgment, and other liens under certain circumstances.

SUBROGATION

The substitution of one creditor for another, with the substituted person succeeding to the legal rights and claims of the original claimant. Subrogation is used by title insurers to acquire from the injured party rights to sue in order to recover any claims they have paid.

SUBSCRIPTION AGREEMENT

The contract between the cooperative apartment corporation and a buyer to respectively sell and buy the shares of stock in the corporation that entitle the purchaser to a proprietary lease for a specific apartment in the cooperative's building.

SUBSTITUTION

An appraisal principal that states that the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property, assuming that no costly delay is encountered in making the substitution.

SUPPLY

The amount of goods available in the market to be sold at a given price. This term is often coupled with demand.

SURETY BOND

An agreement by an insurance or bonding company to be responsible for certain possible defaults, debts, or obligations contracted for by an insured party. In essence, such a policy insures one's personal and/or financial integrity. In the real estate business, a surety bond in generally used to ensure that a particular project will be completed at a certain date or that a contract will be performed as stated.

SURRENDER

The cancellation of an agreement or contract, such as a lease, by mutual consent of the parties to that agreement.

SURVEY

The measurement and description of land by a registered surveyor. A survey usually shows the location and site of any buildings on the land as well as any easements, encroachments, or other significant items which could affect title or value.

SWEAT EQUITY

A program which allows a purchaser to do work on the property in place of all or part of the down payment and other costs of purchase.

SYNDICATE

A combination of people or firms formed to accomplish a business venture of mutual interest by pooling resources. In a real estate investment syndicate, the parties own and/or develop property, with the main profit generally arising from the sale of the property. An association of individuals, formed for the purpose of carrying on some particular business venture in which the members are mutually interested.

TENANT

The occupant and/or user of a property under rights granted by the owner, usually in a lease.

TENANT SHAREHOLDER

The owner of a specified number of shares of stock in a cooperative apartment corporation. The tenant shareholder is entitled to by a proprietary lease to occupy a particular apartment in the cooperatives building.

TERM

The time period during which (or at the end of which) a loan must be repaid.

TITLE

The legal document which shows who owns a property. "Title" is just another word for "ownership".

TITLE POLICY

An insurance policy purchased by the borrower and listing the lender as an additional beneficiary. This policy insures the lender
and the owner against any defects in the borrowers ownership up the limit stated in the policy.

TITLE SEARCH

An investigation of public records of the sequence of ownership or "chain of title" to a property to verify the current ownership. A search may also uncover liens or claims against that property.

UNDERWRITING

The analysis of the risk involved in a particular loan on a specific property and the setting of an interest rate and other terms for that loan to provide a return to the lender commensurate with the perceived risk.

UST (“Underground Storage Tank”)

Many cooperative apartment buildings are heated with fuel oil (usually #2, #4, or #6), and that oil is stored in a tank. The integrity of that tank is of interest to most lenders, due to the potential environmental risks associated with leaks. Above-ground storage tanks (including those located in a building’s basement but above the basement floor) are relatively easy to inspect. Tanks buried underground are not so easy to inspect. Therefore, most lenders will request much more information about buried tanks and may, in certain instances, require a tank pressure test to assure that the tank and all related underground piping are sound.

USURY

Charging a rate of interest that exceeds the maximum rate allowed by law.

VALUE

The worth of a particular property, good, or service as determined by a freely operating market. It is equal to the amount of money, goods, or services which two parties are willing to exchange for ownership of the item in question.

VARIABLE RATE MORTGAGE (VRM)

A mortgage loan in which the interest rate may increase or decrease at specified intervals within certain limits, based upon an economic indicator. Also called an adjustable rate mortgage (ARM).

VARIANCE

Permission obtained from zoning authorities to build a structure or conduct a use that is expressly prohibited by the current zoning laws, i.e. an exception from the zoning ordinances.

VENDEE

A buyer.

VENDOR

A seller.

WAIVER

The intentional or voluntary relinquishment of a known claim or right.

WRAPAROUND MORTGAGE LOAN

A method of refinancing in which the new mortgage loan is placed in a secondary, or subordinate position. The new mortgage loan includes and "wraps around" the unpaid principal balance of the first mortgage loan plus whatever additional sums are advanced by the new lender. In essence, it is an additional mortgage loan through which a new lender refinances a borrower by lending an amount over the existing first mortgage loan amount without disturbing the existence of that first mortgage loan.

YIELD MAINTENANCE

A form of prepayment penalty that pays the lender the present value of the remaining interest that it would have received had the borrower not prepaid their loan (i.e., it “maintains the yield” on the lender’s investment).

ZONING ORDINANCE

An exercise of police power by a municipality to regulate control the character and use of a property and within its jurisdiction.