Economics > Study Notes > FIN 3351 Finance 3351 Test 2 Vocab: Real Estate Finance Terms (All)

FIN 3351 Finance 3351 Test 2 Vocab: Real Estate Finance Terms

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Real Estate Finance Terms Chapter 4 Ad valorem taxes- property taxes that are based on the market value of the property Affordable housing allocation- a requirement that encourages or mandates a ... “reasonable and fair” component of new housing construction for lower-income families Assessed value- the value determined as the basis on which an owner’s property tax liability is calculated, usually a percentage of market value Board of adjustment- in local zoning law, a board of citizens, appointed by the governing body, to hear and make determinations on appeals for zoning variances. The board of adjustment is somewhat unique in that its determinations are final rather than merely recommendations to the governing body. They can be appealed only in court. Comprehensive plan¬- a local government’s general guide to a community’s growth and development based on the community’s goals and objectives Concurrency- the requirement that public facilities and services, including roads, sewers, and schools, be available at the same time new development is completed. Condemnation- the legal procedure involved with eminent domain, the right of government to acquire private property, without the owner’s consent, for public use in exchange for just compensation. Dedicated (property)- the conveyance of property from a private owner to government for public use. Common examples are the dedication of streets, parks, or other areas to local government in the course of subdivision development. Economic and environmental impact statements- studies of the effect that a new development will have on the economy or the environment of the region Effective tax rate- the tax liability divided by the property’s market value or sale price Eminent domain- the power of government in the United States to take private property for a public purpose by paying the owner just compensation Exclusionary zoning- zoning to tends to exclude lower-income groups and is prohibited Externalities- the unaccounted effects that a land use imposes on surrounding parcels Extraterritorial jurisdiction- control by a community of an area larger than the community or jurisdiction for planning and zoning purposes, granted by the state legislature, which allows local governments to plan and control urban development outside their boundaries until annexation can occur Growth moratorium- a temporary prohibition of further development in a community or jurisdiction Homestead exemption- a provision in some states that allows specified taxpayers (usually owners of their principal full-time residences) to apply for a deduction of a certain amount from the property’s assessed value in calculating the annual property tax liability Impact fee- a fee charged by a community and paid by a developer that is commensurate with the externalities created by a development. Intended to cover the development’s impact on such things as roads, sewer systems, schools and police and fire protection Inverse condemnation- action, initiated by a property owner against the government to recover the loss in property value attributed to government activity Just compensation- payment to an owner for property taken in condemnation proceedings, usually the market value of the property taken by the government in its exercise of eminent domain Millage rate- the dollars of tax per $1000 of property value. Mills- units used to state the amount of property tax assessment; the number of dollars per $1000 New urbanism- school of planning thought that seeks to revive residential neighborhood features of the preautomobile era, including sidewalks; houses with front porches located close to streets; narrow, grid pattern streets; and supporting nonresidential services interspersed within neighborhoods. Nonconforming use- a land use inconsistent with current zoning classification, but which is permitted to remain because it predated the current zoning. To be allowed to remain, the use must be uninterrupted, and the property structures cannot be substantially improved Performance standard- an approach to land use control that addresses concerns for urban systems such as traffic, watershed, green space air quality or other aspects of the environment through limits to detrimental activities PUD (planned use development)- a development project, often involving a mixture of land uses and densities not permitted by normal zoning. It is allowed because the entire development is viewed as an integrated whole Public purpose- in eminent domain cases, expansion by courts of the public use concept, no longer requiring actual physical use by the condemning agency to take the property Public use- in eminent domain, requirement of actual physical use by the condemning agency to justify condemnation Regulatory taking- under precedents of the U.S. Supreme Court, the degree of land regulation that is considered to constitute effective taking of the property. If this degree of regulation is reached, the government must compensate the property owner for loss of value Smart growth- planning concept similar to new urbanism, and also emphasizing “compact” urban development Special assessments- property taxes levied to finance special improvements to benefit adjacent property owners. For example, property owners in a subdivision could be forced to pay for the installment of sanitary sewers Taxable value- the assessed value less any applicable exemptions, to determine the amount of property tax owed. Tax assessor- the local public official in charge of determining the taxable value of property in the jurisdiction as the basis for property taxation. In some states this official is called the county property appraiser Tax base- all of the taxable properties in a jurisdiction Tax-exempt properties- properties against which local jurisdictions may not levy taxes, usually including churches, synagogues, public schools, and government property Tax rate-the number of dollars of property tax divided by the taxable values of the properties. The percentage that, when multiplied by a property’s taxable value, will yield the tax liability. Toxic waste- hazardous materials such as asbestos, fiberglass, lead paint, radon, PCBs, leaking underground storage tanks, Urban service area- an area delineated around a community within which the local government plans to provide public services and facilities and beyond which urban development is discouraged or prohibited Variance- a permitted deviation for a particular property from the applicable zoning requirements. To be granted only when the zoning ordinance imposes undue hardship to the property owner. Chapter 7 Accrued depreciation- in cost appraisal, the identification and measurement of reductions in the current market value of a property from today’s reproduction cost Adjustments- additions or subtractions from a comparable sale price or cost which are required to make the comparable property more directly comparable to the subject property Appraisal – an unbiased written estimate of the fair market value of a property Appraisal report- the document the appraiser submits to the client and contains the appraisers final estimate of market value, the data upon which the estimate is based, and the calculations used to arrive at the estimate Arm’s length transaction- a transaction between two parties that have no relationship with each other and who are negotiating on behalf of their own best interests. A fairly negotiated transaction and reasonably representative of market value Comparable properties- properties similar to the subject property used in the sales comparison approach to calculate a single indicated value for the subject property Elements of comparison- the relevant characteristics used to compare and adjust the sale prices of the comparable properties in the sales comparison approach External obsolescence – losses of property value caused by forces or conditions beyond the borders of the property. The losses are deducted from a building’s reproduction cost in the cost approach to estimating market value Functional obsolescence- losses in value of a building relative to its reproduction cost because the building is not consistent with modern standards or with current tastes of the market Highest and best use- the use of a property found to be 1. Legally permissible, 2. Physically possible, 3. Financially feasible, and 4. Maximally productive Indicated value- the final value estimate for the subject property resulting form application of one of the major approaches in the appraisal process Investment value- asset, as defined in the US internal revenue code, owned primarily for earning an investment return- especially capital appreciation- as opposed to an asset that is held for use in one’s trade or business. Raw land and developed lots are real estate examples of investment properties Market conditions- the relationship between supply and demand for a particular type of real estate in a local market at a specified point in time Market value- the price a property should sell for in a competitive market when there has been a normal offering time, no coercion, arm’s length bargaining, typical financing, and informed buyers and sellers Nonrealty items- items of personal property Physical deterioration- loss of value of a building from its reproduction cost, resulting from wear and tear over time Property adjustments- five sale price adjustments made to comparable property transaction prices: location, physical characteristics, legal characteristics, use and nonrealty items. Reconciliation- the process of forming a single point estimate from two or more numbers. It is used widely in the appraisal process. For example, in the sales comparison approach to develop a single indicated value from several final adjusted sale prices of comparables, and in final reconciliation to develop a final estimate of value from two or more indicated values Repeat-sale analysis- estimation of the rate of property appreciation through statistical examination of properties that have sold twice during the sample period. Normally the analysis is by statistical regression Replacement cost- the cost to build a new building of equal utility that is not an exact physical replica of the existing building Reproduction cost- the cost to build a new building that is exactly like an existing building in every physical detail Restricted appraisal report- provides a minimal discussion of the appraisal with large numbers of references to internal file documentation. If the client just wants to know what the property is worth and does not intend to provide the appraisal to anyone for use or reference, a restricted report may be sufficient Self-contained appraisal report- includes all the detail and information that were relevant to deriving market value or the other conclusions within the report. Most self-contained appraisal reports use the “narrative” reporting option. The narrative appraisal report is the longest and most formal format for reporting and explaining appraisal conclusions and contains a step-by-step description of the facts and methods used to determine value. Self-contained narrative reports are typical in appraisals of major income producing properties Subject property- the property for which an appraisal of fair market value is produced Summary appraisal report- this report summarizes the conclusions of the appraisal. The majority of the data and the techniques are kept in the appraisers work file. Most summary appraisal reports use the “form” reporting option. Forms reports are much shorter than narrative reports, and their frequent standardization creates efficiency and convenience. Form reports are generally required by mortgage lenders when households are purchasing or refinancing a single-family home. Transactional adjustments- in an appraisal, adjustments to comparable property transaction prices that concern the nature and terms of the deal Transaction price- the prices observed on sold properties Uniform Standards of Professional Appraisal Practice (UPSAP)- rules governing the appraisal process and reporting of appraisals that are developed by the Appraisal Standards Board of the Appraisal Foundation. Appraisers are obligated by law to follow these rules and guidelines. Chapter 8 Capital Expenditures (CAPX)- expenditures for replacements and alterations to a building (or improvement) that materially prolong its life and increase its value Contract Rent- the rent specified in the lease contract Direct Capitalization- the process of estimating the value of a property by dividing a property’s annual net operating income by an overall capitalization rate Direct Market Extraction- method of estimating the approximate capitalization rate from comparable property sales Effective Gross Income (EGI)- the total annual income the rental property produces after subtracting vacancy losses and adding miscellaneous income Effective Gross income multiplier (EGIM)- the ratio of the sale prices to the annual effective gross income of the income-producing property Fee Simple estate- the complete ownership of a property; may be either absolute or conditional Going-in cap rate (R0)- the overall capitalization rate; the ratio of the first-year net operating income to the overall value (or purchase price) of the property Going-out cap rate (Rt)- the ratio of the estimated net operating income in the year following sale to the overall value of the property at the time of the sale Income Capitalization- the process of converting periodic income into a value estimate Internal rate of return (IRR) – the rate of interest (discount) that equates the present value of the cash inflows to the present value of the cash outflows; that is, the rate of discount that makes the net present value equal to zero Leased Fee estate- the bundle of rights possessed by the landlord in a leased property, made up primarily of the right to receive rental payments during the lease term and ultimately to repossess the property at the end of the lease term Market Rent- the rent that could be obtained by renting a property on the open market Natural Vacancy Rate- the proportion of potential gross income not collected when the use (rental) market is in equilibrium Net operating Income (NOI)- the type of income to a property used in direct capitalization, calculated by deducting from potential gross income vacancy and collection losses and adding other income to obtain effective gross income. From this amount all operating expenses are subtracted, including management expense and a reserve for replacements and other nonrecurring expenses. Net Sale Proceeds (NSP)- the expected sale price less selling expenses Operating Expenses (OE) – the expenses owners incur in operating their property Overall Capitalization rate (R0)- the type of capitalization rate used in direct capitalization, calculated by dividing comparable properties net operating incomes by their selling price Potential gross income (PGI)- the total annual income the property would produce if it were fully rented and had no collection losses Pro forma- a cash flow forecast prepared to facilitate discounted cash flow analysis Reconstructed operating statement- a statement of property income and expenses formatted for the purposes of appraisal and investment analysis. Differs from typical management operating statement in the treatment of certain expenses, including management fees, mortgage payments, and vacancy and collection losses Reversion- the cash proceeds from sale Selling Expenses (SE) – costs associated with the disposition of a property Terminal capitalization rate (Rt)- rate used to convert annual net cash at the end of an expected holding period into an estimate of future sale price Terminal Value (Vt)- the sale price at the end of the expected holding period Chapter 10 Alt-A loan- a home loan for borrowers who fall short of qualifying for a standard (prime) home loan. The use of the term varies. Roughly, it prefers to loans better than subprime, but below prime in borrower qualifications and loan terms. Most alt A loans differ from prime loans by the absence of complete documentation of borrower’s income assets Conforming conventional loan- a conventional loan that meets the standards required for purchase in the secondary market by Fannie Mae or Freddie Mac Conventional mortgage loan- mortgage loans that do not enjoy government backing in the form of FHA insurance or a VA guarantee Fannie Mae- government sponsored enterprise; one of the largest purchasers of residential mortgages in the secondary market Federal Housing Administration- a government sponsored housing finance agency that operates in the primary market by providing a default insurance program as ell as other housing programs and initiatives FHA mortgage insurance- government sponsored mortgage insurance that protects lenders from any loss after foreclosure and conveyance of title to the property to the US department of Housing and Urban development (HUD). Insurance premium is paid by the mortgage borrower Freddie Mac- a government sponsored enterprise and along with Fannie Mae one of the largest purchasers of residential mortgages in the secondary market Government-sponsored enterprise (GSE)- a term that refers to Fannie Mae, Freddie Mac, and several other less important government entities created by acts of Congress to promote an active secondary market for home mortgages Home equity loans- second mortgages, used to finance home improvements and other purchases, where homeowners can borrow against the accumulated equity in the home Hybrid ARM- an adjustable rate mortgage loan that provides for an initial period of fixed interest charges, hence fixed payments, before the interest rate becomes adjustable. The fixed interest rate period typically ranges from three to ten years. Interest-only amortizing mortgage- a mortgage loan that is interest only for some years, perhaps 10 or 15, after which the payment increases to an amount sufficient to fully amortize the loan in the remaining term. Interest-only balloon mortgage- a mortgage that is interest only for its full term and then must be refinanced or paid off in full Jumbo loans- nonconforming loans that exceed the maximum loan amount for purchase by Fannie Mae or Freddie Mac. Because these loans cannot be purchased by one of the GSEs, they usually carry a slightly higher interest rate Mortgage insurance premium (MIP)- upfront insurance premium required by FHA insured loans Nonconforming conventional loan- a conventional loan that does not satisfy one or more underwriting standards required for purchase in the secondary market by Fannie Mae or Freddie Mac Option ARM- an adjustable rate mortgage loan that offers the borrower a variety of payment choices. The choices typically include a payment to fully amortize (pay off) the loan, in 15 years, one to fully amortize the loan in 30 years, an interest-only payment, and a payment at an artificially low level such that unpaid interest is added to the outstanding balance each month. The loan often begins with a below market interest rate for a few months. Primary mortgage market- the loan origination market where borrowers and lenders negotiate mortgage terms Private mortgage insurance (PMI)- insurance offered by private companies that reimburse the lender for capital losses in the event of default by the borrower Purchase-money mortgage- typically a mortgage loan where the seller lends all or part of the purchase price of a property to the purchaser, and the loan is secured by a mortgage, created simultaneously with conveyance of ownership Secondary mortgage market- the market where mortgage originators can divest their holdings and existing mortgages are resold Subprime loan- loans made to homeowners who do not qualify for standard (prime) home loans. Subprime loans can have high fees and costly prepayment penalties that “lock in” the borrower to a high interest rate. VA-guaranteed loan- a government guaranteed loan designed to help veterans obtain home mortgage loans for which they might not otherwise qualify Veterans Affairs (VA)- a US government Department whose purpose is to help veterans readjust to civilian life Chapter 11 Affordable housing loan- a requirement that encourages or mandates a “reasonable and fair” component of new housing constructing for lower-income families Automated underwriting- a loan underwriting approach that exploits the combination of cyber-technology and the vast lending experience imbedded in the giant loan portfolios of Freddie Mac, Fannie Mae and other large mortgage lenders Collateral- property pledged as security for a debt Commercial banks- depository institutions primarily engaged in the business of making short-term loans to businesses for inventory financing and other working capital needs Conduits- agencies and private companies that pool mortgages and sell mortgage-backed securities, using the pool of mortgages originated or purchased as the collateral for the mortgage backed security Credit scoring- the statistical evaluation of borrower creditworthiness that has largely replaced the use of credit reports and the subjective examination of payment punctuality and debt balances Credit unions- depository institutions that are restricted by their charters to serving a group of people who can show a common bond such as employees of a corporation, government unit, labor union, or trade association Disintermediation- reference to the occurrence of conditions when the growth of deposits in banks and savings associations becomes negative, due to other, more attractive, direct investment opportunities Fallout risk- the potential loss of borrowers from the origination pipeline if mortgage interest rates decline after the loan commitment, but before the closing of the loan, which results in borrowers choosing not to close or “take down” the loan Forward commitment- a contract binding a mortgage lender or investor to purchase or fund a loan on predetermined terms at a future date Government national mortgage Association (GNMA)- a federal government agency that promotes affordable housing by buying subsidized mortgages in the secondary market. This agency also guarantees mortgage backed securities issued by private FHA and VA lenders Housing expense ratio- a ratio used to assess the ability of a borrower to pay debt; defined as the monthly payment of principal and interest on the loan plus monthly payments into an escrow account toward property taxes and hazard insurance divided by the borrower’s gross monthly income Interest rate risk- the risk that changes in the general level of interest rates will affect the pricing of all securities and investments Loan servicing- all actions and activities associated with administering a mortgage loan, including collection of payments, monitoring insurance and tax obligations, and notification of delinquent borrowers. This function is often provided by an entity different from the entity that owns the mortgage. Loan underwriting- involves an analysis by the lender of the riskiness of the promised mortgage payments. Requires analysis of the potential borrower’s willingness and ability to make scheduled mortgage payments Mortgage bankers- full-service mortgage companies that process, close, provide funding, and sell the loans they originate in the secondary mortgage market, and service loans for loan investors. Mortgage brokers- an intermediary between those who demand mortgage funds, and those who supply the funds. Brokers arrange mortgage loans for a fee, but do not originate or service the loans. Mortgage pipeline- an originating lender’s approved, but currently underfunded, loan commitments plus loans funded but unsold Pipeline risk- the time between making a loan commitment and selling the loan. The mortgage banker is exposed to considerable risk during this period PITI- the monthly payment of principal and interest on a home mortgage loan, plus monthly payments into an escrow account toward annual property taxes and hazard insurance Portfolio lenders- financial institutions such as banks that fund mortgage loans and then hold the loans as investments Prime- referring to “qualifying” home mortgages. The specific use of the term varies. Some use prime to refer to loans where the borrower has a FICO score of 660 or higher. Others also include FHA and VA mortgage loans. Still others distinguish prime by the type of lender. Standby forward commitment- in mortgage lending, forward commitments where the mortgage banker has the right, but not the obligation to sell a prespecified dollar amount of a certain loan type at a prespecified price to the seller of the commitment Thrifts- depository institutions that evolved primarily to collect and invest household savings. Usually the term encompasses (former) savings and loan associations and savings banks, but not credit unions. Thrifts invested largely in home mortgage loans, and for well over a century, until about 1980, were the backbone of home mortgage finance in the United States Total debt ratio- one of two common ratios used by home mortgage lenders to determine a borrower’s ability to pay a debt; defined as PITI and other long-term obligations divided by the borrower’s gross monthly income. Warehousing- the provision by commercial banks of short-term funds to mortgage banking companies to enable them to originate and fund mortgage loans until they can be sold in the secondary mortgage market [Show More]

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