Real Estate Finance and Investments Terminology

Comprehensive vocabulary flashcards covering real estate finance, mortgage markets, valuation, investment analysis, and property law based on lecture notes.

Promissory note

Evidence of a debt and the borrower's promise to repay. It identifies the amount, interest rate, payment obligations and maturity.

Mortgage

Security document pledging designated real property as collateral for a debt, giving the lender an interest securing repayment.

Mortgagor

Borrower/debtor who gives the mortgage to the lender.

Mortgagee

Lender/creditor who receives the mortgage from the borrower.

Underwater loan

Loan balance exceeds the property's value, leaving negative owner equity.

Primary mortgage market

Market in which lenders originate new loans directly to property borrowers.

Secondary mortgage market

Market for buying, selling and financing existing mortgage loans or mortgage securities. It replenishes originators' funds and moves capital to areas of loan demand.

Mortgage servicer

Entity that collects payments and administers the loan. Duties may include escrow payments, delinquency workouts and foreclosure. It can differ from the originator or loan owner.

Underwriting

Assessment of the borrower, collateral and loan terms to decide whether a loan meets lending criteria.

Securitization

Pooling loans and turning their cash flows into securities that investors can hold or trade.

Mortgage backed security or MBS

Security whose cash flows depend on payments from a mortgage pool. Pooling and guarantees change risk allocation but do not eliminate every risk.

Pass-through security

Security that passes underlying mortgage cash flows to investors after applicable fees and adjustments.

Government sponsored enterprise or GSE

Congress-chartered enterprise serving a specified public financing purpose. The course distinguishes its implied support from an agency guarantee.

Conventional loan

Loan not insured or guaranteed by the government. It can be conforming or nonconforming; a $20\%$ down payment is not its defining requirement.

Conforming loan

Conventional loan meeting Fannie/Freddie size limits and underwriting requirements. The lecture also calls it A paper.

Jumbo loan

Loan exceeding the applicable conforming size limit.

Private mortgage insurance or PMI

Private insurance protecting the lender against borrower default. The lecture associates it with conventional loans having less than $20\%$ down.

Loan to value or LTV

Loan amount divided by property value. Higher LTV means a smaller borrower equity cushion.

Payment to income or PTI

Monthly mortgage payment divided by monthly borrower income. Higher PTI means a greater payment burden.

Fannie Mae or FNMA

Federal National Mortgage Association. Purchases conforming residential loans and securitizes/guarantees mortgage cash flows to support lending liquidity. Lecture emphasizes larger originators.

Freddie Mac or FHLMC

Federal Home Loan Mortgage Corporation. Competes with Fannie and supports liquidity through conforming loan purchases and securitization/guarantees. Lecture emphasizes smaller lenders.

Farmer Mac or FAMC

Federal Agricultural Mortgage Corporation. Creates a secondary market for agricultural and rural mortgages. Farmer Mac I covers qualified loans/obligations; Farmer Mac II covers eligible USDA-guaranteed loan portions.

Federal Home Loan Bank System or FHLBanks

Member-owned cooperative banks supplying advances and other credit to member lenders such as banks, thrifts, insurers and credit unions.

Farm Credit System

Borrower-owned cooperative network financing agricultural and rural communities, primarily through bonds and capital. Distinguish its direct agricultural lending role from Farmer Mac's secondary-market role.

Ginnie Mae or GNMA

Government National Mortgage Association within HUD. Guarantees timely principal and interest on eligible privately issued MBS. It does not originate or buy loans or issue the MBS itself.

FHA

Federal Housing Administration within HUD. Insures eligible loans from approved lenders against borrower default. The lecture uses $96.5\%$ LTV and $3.5\%$ down as an example.

VA

Department of Veterans Affairs. Guarantees eligible private-lender loans for service members, veterans and qualifying surviving spouses. The lecture emphasizes no-down-payment financing and no PMI.

FHFA

Federal Housing Finance Agency. The lecture identifies it as Fannie/Freddie's conservator and the regulator evaluating conforming limits.

Fixed rate mortgage or FRM

Loan whose contract interest rate stays constant over its term. A fully amortizing FRM normally also has a constant scheduled payment.

Fully amortizing constant payment loan

Equal periodic payments retire the loan by maturity. Interest decreases and the principal component increases over time.

Balloon payment

Remaining principal paid in a lump sum when the loan matures or reaches its balloon date.

Negative amortization

Payment is below interest due, so unpaid interest is added to principal and the balance grows.

Constant amortization or constant principal

Same dollar amount of principal repaid each period. Interest and total payment decline as the balance falls.

Debt service

Required principal and interest payments for a period. Annual debt service is the total of that year's loan payments.

Nominal mortgage interest rate

Quoted mortgage rate. Course components: real interest rate + expected inflation + mortgage risk premium.

Prepayment risk

Risk of early borrower repayment, ending expected cash flows and possibly forcing reinvestment at a lower rate.

Points and origination charges

Upfront loan finance charges. One point equals $1\%$ of the loan face amount. They can cover origination costs, compensate for risk or alter the rate/yield tradeoff.

Annual percentage rate or APR

Annualized borrowing cost incorporating specified finance charges. In the class problem, solve yield on net funds received, using payments based on the face loan.

Adjustable rate mortgage or ARM

Residential loan whose rate resets according to contractual rules tied to a market rate/index. Payments can change after the initial period.

Margin

Contractual spread added to the index to determine the composite rate, when specified.

Composite or fully indexed rate

Index plus margin before applying relevant caps or floors.

Periodic rate cap

Limit on a rate change at one reset. A $2$-point cap on a $7\%$ rate limits an upward reset to $$9\%$.

Lifetime rate cap

Limit on total rate increases over the loan's life, usually measured relative to the initial rate.

Payment cap

Limit on a payment increase. It limits cash paid, not necessarily the interest rate, and can cause negative amortization.

Payment shock

Large payment increase after a reset, which can strain borrower cash flow.

Funding mismatch or maturity gap

Exposure from financing long-term fixed-rate loans with funding whose costs can change sooner. ARMs help loan income adjust with funding costs.

Capitalization effect

Net benefit of public services relative to their taxes/fees becoming reflected in property prices.

Wealth effect

Changes in perceived asset wealth, such as home equity appreciation, affecting household spending.

Appraisal

Professional estimate of the most probable price under competitive market conditions. It helps assess collateral value and LTV.

Cost or replacement cost approach

Estimate based on cost new minus depreciation/obsolescence plus land value. Useful for new/special-use property and insurance estimates.

Physical depreciation

Loss of building value from deterioration, wear or aging.

Functional obsolescence

Loss of value because design/features no longer suit users' needs.

External obsolescence

Loss of value caused by conditions outside the property, such as adverse neighborhood changes.

Gross rent multiplier or GRM

Market-derived multiple applied to the relevant gross rental income to estimate property value.

Net operating income or NOI

Property operating revenue less operating costs. Separate it from debt service and taxable income. Ivey excludes interest/debt service, income tax and depreciation; some lecture slides use different conventions.

Capital expenditures or CAPEX

Spending on major improvements/replacements needed to maintain or enhance property competitiveness.

Leverage

Use of debt to finance investment. It magnifies equity gains and losses.

Capitalization rate or cap rate

Ratio of property NOI to value. Used to estimate value as NOI divided by cap rate. Higher cap rates imply lower value for unchanged NOI.

Highest and best use

Feasible property use producing the greatest economic value; the overview frames it as the use with the highest positive NPV.

Capital stack

Mix of debt and equity financing claims supporting an investment.

Waterfall

Contractual order and rules for distributing cash among investors.

Promote or carried interest

Additional profit share awarded to the operating partner when agreed performance conditions are met.

Preferred return

Return threshold allocated to investors before a specified additional profit-sharing tier applies.

Appraisal smoothing

Reported returns can appear less volatile when appraisals adjust gradually rather than reflecting continuous transaction prices.

Correlation

Measure of how two variables move together, from $-1$ to $+1$. Low or negative asset-return correlations can support diversification.

REIT

Real Estate Investment Trust, a vehicle for indirect property/mortgage investment. Publicly traded REIT returns can have more stock-market exposure than direct property returns.

Expense stop

Contractual limit on the landlord's covered expense burden, usually PSF. Tenant reimburses expenses above it. A higher stop shifts more expense burden to landlord and generally supports higher base rent.

Common area maintenance or CAM

Costs of maintaining shared areas such as lobbies, mallways, hallways and parking, allocated under the lease.

Rentable area

Space on which rent is charged, including any allocated share of common areas.

Load factor

Ratio of total rentable to total usable space used to allocate common area to tenants in the lecture convention.

Loss to lease

Gap between current market rents and rents under existing leases. The class gross example also includes vacancy; match the requested comparison.

Effective rent

Equivalent level periodic rent with the same PV as a given rent schedule. Allows economic comparison of uneven rents and concessions.

Breakpoint

Sales threshold above which the contract's percentage-rent provision applies.

Co-tenancy clause

Provision linking a tenant's obligations or rent relief to the presence of an anchor or other defined tenant/occupancy conditions.

Net double-net and triple-net lease

Tenant pays base rent plus one, two or all three major categories of taxes, insurance and maintenance, according to the contract.

Sale and leaseback

Owner sells property and leases it back, obtaining cash while continuing use.

Tenancy at sufferance

Continued occupancy without consent after the lawful right ends.

Constructive eviction

Concerns landlord-created conditions making premises unsuitable; the lecture emphasizes tenant departure while the condition exists.

Fee simple

The most complete ownership form of a freehold estate, lasting indefinitely.

Reversion

Returns possession to the original owner after an intervening interest ends.

Remainder

Gives the future interest to a third party after an intervening interest ends.

Quitclaim deed

Conveys whatever interest exists without title warranties.