2012 Edition of book: Alabama Tax Sale Investing, now available
A B C D E F G H I J K L M N
O P Q R S
T U V W X Y Z
Antiterrorism and Effective Death Penalty Act of 1996 Federal law that requires all financial institutions (defined to include real estate settlement companies) to block funds in which Foreign Terrorist Organizations (FTOs) or their agents have an interest. Such financial institutions must notify the Office of Foreign Assets Control Compliance (OFAC) within ten (10) days of blocking any such funds. A list of FTOs and their agents are integrated into OFAC’s alphabetized master list of Specially Designated Nationals and Blocked Persons. The list is available, online, at http://www.treas.gov/offices/enforcement/ofac/sdn/ More information is available by calling 1-800-540-6322, or by going online to http://www.treas.gov/offices/enforcement/ofac/regulations/t11facbk.pdf
Bankruptcy remote Often seen in the context of a lender’s requirement for a “bankruptcy remote borrower” or a “bankruptcy remote entity,” it is an ownership structure that segregates all relevant assets and liabilities into one vehicle, usually to ensure some or all of three goals: (1) financial difficulties and potential bankruptcy of parent corporations, subsidiary corporations, sister properties or individual shareholders or partners will not force the subject entity into bankruptcy; (2) financial difficulties with operating expenses for a property will not result in a bankruptcy that includes the property itself, and the mortgage lender for the property; and (3) the placement of lender restrictions on management that effectively prohibit it from voluntarily filing for bankruptcy if the mortgage loan is in default. This is usually done through a requirement that an independent director’s vote be required before the entity can declare bankruptcy. (See independent director) Goal 3 can sometimes be circumvented by management engineering an involuntary bankruptcy.
Basic form Also called an HO-1, it is a property insurance policy that covers specified perils. Contrast with Broad Form (also called HO-2) and Comprehensive Form (also called HO-5 or all-risks policy). The 11 perils covered by the Basic form are: 1. Fire or lightening 2. Losses sustained while removing property from an endangered premises 3. Windstorm or hail 4. Explosion 5. Riot or civil commotion 6. Aircraft 7. Vehicles 8. Smoke 9. Vandalism and malicious mischief 10. Theft 11. Breakage of glass that is a part of the building
Beacon score Another name for a credit score, also called a FICO score. The name Beacon score came about because Equifax marketed the FICO scoring algorithm under the trade name BEACON. For more information about credit scores, and your own personal score, visit www.myfico.com, maintained by the Fair Isaac Corporation.
Blacked in A stage of home construction, it is the point reached when the following have been completed: framing, exterior doors, windows, electrical rough-in, HVAC rough-in, house wrap, wood burning fireplace and chimney set and framed, and felt paper on the roof. The felt paper is typically black, which is the reason for the expression.
BLEC Short for building local exchange carrier
Biometrics An identification system that relies on automated recognition of physical characteristics such as fingerprints or retinal scans. It is an increasingly popular basis for building and storage security and the determination of individualized access rights to various components of a building.
Blind pool A investment vehicle in which properties are purchased after receipt of investor money, so that investors cannot rely on specific property information when making their investing decision.
Bondable lease A lease that makes the tenant responsible for all property expenses and risks, including the normal triple-net lease categories of taxes, insurance and maintenance, plus the additional responsibilities for losses caused by casualty, structural defects, environmental contamination and condemnation. For that reason, a bondable lease is often called a “hell or high water lease” because the landlord has no responsibilities at all, come “hell or high water.”
Broad form Also called an HO-2, it is a property insurance policy that covers specified perils. Contrast with Basic Form (also called HO-1) and Comprehensive Form (also called HO-5 or all-risks policy). The 18 perils covered by the Broad form are: 1. Fire or lightening 2. Losses sustained while removing property from an endangered premises 3. Windstorm or hail 4. Explosion 5. Riot or civil commotion 6. Aircraft 7. Vehicles 8. Smoke 9. Vandalism and malicious mischief 10. Theft 11. Breakage of glass that is a part of the building 12. Falling objects 13. Weight of ice, snow, sleet 14. Collapse of building or any part of it 15. Sudden and accidental rearing asunder; cracking, burning, or bulging of a steam or hot water heating system or of appliances for heating water 16. Accidental discharge, leakage or overflow of water or steam from within a plumbing, heating, or air conditioning system or domestic appliance 17. Freezing of plumbing, heating, and air conditioning systems and domestic appliances 18. Sudden and accidental injury from artificially generated currents to electrical appliances, devices, fixtures and wiring
Building local exchange carrier A commercial office building or housing development which provides its own telecommunications services to tenants/owners and acts as their “telephone company.” Sometimes occupants are prohibited from obtaining services from outside companies, but other times such prohibitions violate state law.
Cession deed A deed that grants street rights to local government
Comprehensive form Also called an HO-5, it is a property insurance policy that covers all perils except those specifically listed and excluded in the policy. Contrast with Basic Form (also called HO-1) and Comprehensive Form (also called HO-5 or all-risks policy).
Correspondent relationship A relationship in which a large lender agrees to buy loans from a mortgage banker, or to consider loan requests generated by a mortgage banker.
Credit lease transaction A financing arrangement in which the borrower/property owner of income producing properties obtains a loan secured by a bondable lease from a tenant with an acceptable Standard & Poor’s credit rating.
Curtain wall An exterior wall that does not provide any structural assistance; it is not load-bearing. A typical funding stage on a construction loan is when the curtain walls have been completed.
Coverage The borrower’s strength in being able to meet loan payment obligations. Ratios include debt coverage ratio, debt equity ratio, and cash-on-cash.
C.L.U.E.® Report The initials stand for Comprehensive Loss Underwriting Exchange. C.L.U.E.® reports contain all history of insurance claims made for a particular property over the past five years. Wise sellers will order a report before marketing their property, to make sure there are no mistakes and to fortify disclosures made to potential buyers. Wise buyers will order a report as part of their due diligence when making an offer on a property, to make sure there have not been any undisclosed catastrophic losses, or losses indicating a property defect. Reports can be ordered online at the ChoiceTrust web site of www.choicetrust.com
Charrette Also spelled “charette,” and often called a design charrette. It is an urban planning tool that involves bringing all stakeholders—government, developers, local residents—together for intensive planning meetings to identify all goals and competing needs, reconcile them, and arrive at mutually acceptable solutions. The charrette is an alternative to the traditional stop-and-go method of allowing stakeholders to object at various stages of the development, thereby putting all activity on hold until the objections have been overcome or the deal killed.
Co-location Sometimes also called co-tenancy, it is a strategy used by many retailers to enter a market after some other, perceived as stronger, retailer has opened a location. If, for example, Lowes Home Improvement opens a store in a suburban area, other retailers such as Office Depot or Stein Mart are generally confident that they share enough demographic characteristics with Lowes that they may also enter that market. Their site selection criteria might note a preference to co-locate with Lowe’s.
Dark fiber The optical fiber infrastructure necessary for extremely high speed communications, dark fiber has been installed ahead of demand and never used. Its opposite is “lit fiber” which is currently in use and leasable to users. Especially after the dot.com busts of the late 1990’s, thousands of miles of dark fiber remain unutilized. Some investors are buying up dark fiber throughout the United States, leading observers to believe that the fiber will soon be made operational. Investment decisions to purchase raw land should probably include identification of nearby dark fiber and an evaluation of the possibility that it will soon be “lit.”
Datum (1) any point, line, or surface that serves as a reference point for measurements of something else. (2) A model of the surface of the earth, based on survey measurements of reference points. In the United States, the most common datum are the North American Datum of 1927 and the North American Datum of 1983. The two have completely different methodologies, so it is important to specify which datum is being used when referencing points. It is not a matter of one being more up-to-date than the other, they are simply different.
Deeded time share ownership The ownership of a timeshare unit for the rest of one’s life, or for a designated period of time. The owner has real property rights, and may rent, sell, exchange or bequeath their unit to anyone they choose. Contrast with right to use vacation intervals.
Defeasance In commercial real estate lending involving CMBSs, it is the process of obtaining the release of collateral through the substitution of U.S. government securities for the real estate that formerly served as security for the loan. The redemption of the principal and interest from the securities is sufficient to continue servicing the original loan. This is important because that particular real estate loan will normally be part of a pool of loans which have been securitized, so that many levels of investors may have been guaranteed money generated by the principal and interest repayments. If the loan is paid off early, it will wreak havoc with the entire structure. As a result, the loan stays in place and, through the process of defeasance, the property owner is able to either sell the real estate or refinance. There are many companies in the market place that specialize in defeasance services for real estate borrowers.
Defeasance clause A clause in a mortgage providing that when the loan has been paid in full, all of the lender’s interests in the property or rights to the property will end. The concept is more widely applicable than the word defeasance, defined above.
Defeasance fee A type of prepayment fee paid on a commercial loan, designed to provide the lender with a lump sum (consisting of the entire principal balance of the loan plus the defeasance fee) sufficient to purchase U.S. government securities in an amount to duplicate the yield from the loan, had it not been paid off. The use of a defeasance fee in loan documents is known as the “yield maintenance approach” and should be contrasted with simple defeasance, which involves a substitution of collateral.
Defease To retire outstanding debt. In real estate lending, it is usually important to know if the borrower will need to defease a prior lender, because that prior lender may have substantial prepayment penalties—defeasance fees—built into their loan documents.
Delaware Statutory Trust (DST) An unincorporated association created by a trust agreement under which a property is held, managed, administered, invested and/or operated by a trustee for the benefit of someone who is entitled to the beneficial interest. The entity is created in Delaware, through the filing of a certificate of trust, but the beneficial owners, and the real estate, may be in any state. The DST is a way for multiple investors to hold interests in real property while still retaining the ability to take advantage of a 1031 tax deferred exchange. Another method is the TIC vehicle (tenancy in common properties) but TIC lending is often cumbersome, time-consuming and expensive, as compared to making loans to a DST.
Delegated Underwriting and Servicing Lenders (DUS Lenders) Mortgage lenders approved by Fannie Mae to underwrite, close and deliver loans to Fannie Mae without pre-approval for each transaction. Because the loan does not have to go through a separate Fannie Mae approval process, closings can be extremely quick and efficient. A list of DUS Lenders can be found at the Fannie Mae web site, at https://www.efanniemae.com/mf/refmaterials/lenderinfo/duslenders.jsp
Delever Reduce debt on real property by making extraordinary payments, not just the regular mortgage payments.
De-malling The process of revitalizing a mall by demolishing small shops, obliterating all interior common spaces and food courts, enlarging spaces once occupied by department stores, and adding more entrances into the parking lots. The property’s identity as a “mall” is destroyed, converted to another style of retail development.
Demo Shorthand for demolish, meaning to remove some or all of the prior improvements in or upon property in order to construct something different. Inexperienced tenants and/or developers who plan to modify structures often grossly underestimate the expenses involving to demo the property, which include not only the labor to remove improvements, but also large expenses associated with disposal of the debris and protection against any possibly hazardous contaminants such as asbestos.
Destination store A retail establishment that has such unique features that it acts as a magnet, drawing customers from outside the normal trade area. IKEA and Bass Pro Shops are both recognized destination stores, having the flexibility to obtain large amounts of inexpensive land by buying ahead of growth, instead of in the center of a retail-intensive area.
DUS Lenders Short for Delegated Underwriting and Servicing Lenders
Electronic Signatures in Global and National Commerce Act A federal law found at 15 U.S.C. §7001 et seq. The law was enacted in 2000, but had retroactive effect. Generally speaking, it provides that a signature, contract, or other record cannot be denied legal effect merely because it exists solely in electronic form. The federal law preempts state law, unless a state has passed an approved version of the Uniform Electronic Transactions Act (UETA), giving similar effect to electronic signatures and transactions. (Note, the UETA was defined in the print version of the encyclopedia, but is also included below for ease of cross reference.) Enhancement period When there is a public sale of a bond, such as a low income housing bond, a financial services firm “enhances’ the bond by adding its credit to the transaction, so the bond can receive a much better credit rating than the developer would be able to get on his or her own. The bond is then sold to third parties. The enhancement period is the time period of the enhancement commitment. As an example, some companies provide enhancement for 17 years for low income housing bonds. This is calculated by allowing two years for construction, and then 15 years for the low-income housing tax credit compliance period. ESIGN Short for Electronic Signatures in Global and National Commerce Act.
Exclusive authority to purchase A contract employed by buyers’ brokers, in which the potential buyer describes generally the property it wishes to purchase and agrees to refer all inquiries to the broker rather than pursue purchase opportunities on its own, grants the broker authority to make inquiries regarding such properties, and provides for alternate compensation in the event a property seller is not willing to pay a commission, or a seller’s agent is not willing to split a commission with the buyer’s broker.
Fictional depreciation Depreciation deductions allowed under relevant income tax laws. Contrast with true depreciation, which is the loss in value of an improvement due to deterioration, functional obsolescence, and/or changes in the area that impact the value of the improvement.
First tier cities There is no consensus regarding what distinguishes a first tier city, a second tier city, and a third tier city. To some extent, the definition depends on the perspective of the definer. For meeting planners, a first tier city might be defined with reference to convention facilities, number of available hotel rooms, ease of mass transportation, walking distance among hotels in a defined area, and proximity to recreational facilities. For a large corporation seeking a new corporate headquarters, a first tier city might be any one with a population greater than 1 million. Others might define the term as requiring a population larger than 2.5 million. In all instances, one should not rely upon someone’s unqualified statements of a need for locations in a first tier market, or a desire to avoid second tier markets. Instead, one should determine the goals sought to be met, and find communities that meet those goals.
Fleas A slang expression for property defects and problems. A seemingly undesirable property is called a “dog property.” The problems that make it a dog are called fleas.
Geographic Information Systems (GIS) A system of computers, software, and databases for storing, manipulating, analyzing, and displaying data in a geographic context. An example of a GIS report would be one that pinpoints a potential retail site on a map, displays all streets within a one mile radius and all major arteries within a five mile radius, shows daily traffic counts on important roads, and identifies and locates all competitors within a five mile radius. Attached reports would show current and projected demographic characteristics within 1-, 3- and 5-miles of the proposed site and important key economic indicators such as the number of branch banks in the area, the number of fast food outlets, the number of housing starts, and important construction projects given permits but not yet under construction. ESRI, a leading provider of GIS software and services, maintains a portal to GIS information and resources at www.gis.com
GIS See Geographic Information Systems
Going dark A slang expression used when a retailer closes its doors at a particular location, but continues paying the rent for the remainder of its lease term. Many shopping center leases prohibit important anchor tenants from going dark, and require them to stay open for business during the entire term of their lease. This is because the other, “satellite”, tenants, depend on the traffic flow generated by the anchors to sustain their own businesses.
Good Neighbor Next Door A program of the US Department of Housing and Urban Development, it offers incentives for certain persons to purchase HUD homes in designated revitalization areas. The program is available to teachers, law enforcement personnel, firefighters and emergency medical personnel, replacing the former Officer Next Door and Teacher Next Door programs. Qualified persons receive a discount of up to 50% off the price of a HUD-owned home. HUD holds a mortgage for the amount of the discount, but the mortgage is forgiven (tax free) if the property owner lives in the property as their principal residence for at least 36 months. If the property owner leaves the profession that qualified them for the program, but fulfills their 3-year residency requirement, they still receive the full benefits. At the end of the 3-year commitment, a property owner may sell the property and retain all profits. More information is available at the HUD website, http://www.hud.gov/offices/hsg/sfh/reo/goodn/gnndabot.cfm
Government contractor defense A defense to a contractor when it is sued because of damage resulting from work it performed for the government, according to government specifications. The origins of the defense arose from the U.S. Supreme Court case of Yearsley v. W. A. Ross Construction Co. , 309 U.S. 18 (1940), in which a property owner suffered erosion damage to its land after the contractor built river dikes for the government. The Supreme Court held that if the contractor performed its work under proper authority from the government, then the contractor could not be held liable, but the government could be responsible for a taking of property that required just compensation under the 5th Amendment to the Constitution.
Green development Development that prioritizes environmental sustainability, even if the economic and social burden might be greater than traditionally thought reasonably practical under the circumstances. In the long run, however, green development will usually yield greater cost savings to compensate for initially high expenditures. For example, a geothermal heating and cooling system might cost 15- to 20-percent more than a traditional system to purchase and install, but the annual energy cost savings can be significant, not to mention the absence of noise pollution and aesthetic blight from exterior air exchangers. As another example, landscaped areas that rely on locally hardy and low maintenance plants rather than grassy lawns will quickly result in savings for grass cutting, irrigation and sprinkler systems, and administration of lawn chemicals. Additionally, such an approach encourages local wildlife by providing food stuffs and shelter, thereby contributing to the aesthetic pleasure in the design. The Environmental Protection Agency (EPA) has more information at http://www.epa.gov/opptintr/greenbuilding/
Green lender A lender which recognizes and supports the importance of green development and energy efficient building design and actively seeks out loan opportunities for such projects. Mortgage loan purchaser Fannie Mae has three products that allow borrowers to qualify for larger loans than normal (with larger monthly mortgage payments) to buy energy efficient homes, because of the recognition that monthly utility expenses will be lower than normal and the savings can be used to help pay larger mortgage payments. Those three products are the Community Home Performance Power, the Flexible Home Performance Power, and the HomeStyle Energy Efficient Mortgage (EEM). Local initiatives, such as the Colorado Built Green Mortgage also provide mortgage money for qualifying projects. For more information, see the web site of the Home Builders Association of Metro Denver, at http://www.builtgreen.org/lenders/default.htm
Gulf Coast Recovery Act Federal legislation providing tax and other relief for victims of the worst ravages of the 2005 hurricane season. Popularly called the GO Zone Act. For more information, visit the IRS web site at www.irs.govand obtain Publication 4492: “Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma”
Hard lockbox A loan servicing arrangement that calls for all tenant rent payments to be made to an address controlled by the lender, rather than directly to the borrower/property owner or manager. The lender then deposits all rent money to a specific account, pays itself the monthly debt service as loan payments come due, and possibly maintains reserves for taxes, insurance and repairs. The lender then releases excess funds to the borrower. Many loan arrangements require the establishment of a hard lockbox at the outset. Other loans require the borrower to maintain a bank account at a specified financial institution, and further allow the lender to convert the regular deposit account into a hard lockbox account if the borrower defaults.
Half-back effect After Florida, Alabama, Mississippi and Louisiana were particularly ravaged by the 2005 hurricane season, residents began to see dramatic increases in insurance premiums and in real estate taxes (because of the massive drain of rebuilding infrastructure). Many also became tired of the constant stress of possible storm damage, and then clean up after a storm. As a result, large numbers of those people are selling their coastal properties and moving several hundred miles inland to large recreational lakes around the southeastern United States. In other words, the former “snow birds” who flocked to the coast, are now returning “half way back” to the snow belt and settling, instead, in the still relatively warm climates of Georgia, Alabama, Tennessee and the Carolinas.
Hell or high water lease See Bondable lease
HO-1 See Basic form
HO-2 See Broad form
HO-3 See Special form
HO-4 See Tenant’s policy
HO-5 See Comprehensive form
HO-6 An insurance policy for condominium unit owners.
HO-7 An insurance policy for mobile home owners.
HO-8 An insurance policy that provides coverage for older homes. Most older homes would be prohibitively expensive to replace with their original quality or age of components, such as antique beveled glass windows, ornately carved wood trim, and other such features. As a result, coverage under the HO-8 insures for actual cash value, not replacement cost.
Hostage value A theory that loan collateral has a value to the borrower far in excess of the value to the lender, so that a borrower will work very hard to avoid default and foreclosure even though it might not make any economic sense to do so. Homeowners have a high emotional attachment to their homes, which translates to a high hostage value for the lender. Vacation homes have a low hostage value, which is why the default rates are higher and, as a result, the interest rates on mortgage loans for such properties are higher.
Hot desking The practice of providing work surfaces and computer terminals for employees to use as needed, but with no assigned stations and no expectation of exclusivity. The concept is particularly attractive for employers with workers who have flexible office hours, or who travel extensively and are in the office infrequently. The hot desking concept dramatically changes traditional calculations regarding the amount of office space required for operations, reducing space needs to the point that formerly unaffordable locations could now become practical for many companies.
ISO 14000 Management standards that assist companies in designing systems and procedures to reduce the environmental impact of their operations. The focus is on the design process itself, not on a particular product or practice. Third party organizations provide certification of compliance with ISO 14000. More information is available at the web site of the International Organization for Standardization, www.iso.org
Independent director In the context of a lender requirement for a bankruptcy-remote entity, it is usually understood to mean a member of the board of directors who was not at the time of appointment, nor during his or her tenure any of the following:
In the dry A stage of home construction, it is the point reached when the following have been completed: framing, exterior doors, windows, electrical rough-in, HVAC rough-in, house wrap, wood burning fireplace and chimney set and framed, and felt paper on the roof. The felt paper is typically black, which is the reason for the alternate expression, “blacked in.”
Kick the bricks (1) An expression used by real estate investment enthusiasts, it is meant to indicate a preference for tangible property for which the investor may “kick the bricks” as opposed to less tangible investments such as stocks, bonds, derivatives, and others. (2) A slang expression indicating the need to perform physical inspections of property before purchase, or during construction. Example: “Don’t leave all details to your general contractor. You must visit the property and kick the bricks, often.”
Land court property A description for property which has been recorded under a particular system, being the land court system of the state of Hawaii. The system is similar to the Torrens system used in other states. All ownership information, liens, easements, and other such matters are recorded with the land court, which notes them in a file for that particular property. Title recorded under the land court system is guaranteed valid by the State of Hawaii.
MACRS (pronounced makers) short for Modified Accelerated Cost Recover System
Mini-perm A construction loan that may be automatically converted to permanent financing that does not fully amortize. Typically, monthly loan payments are calculated as if the loan would fully amortize—be paid in full—by the end of 20 years, but there is a balloon after three years when the entire principal balance is due.
Mixed use development A development that includes several uses within one complex or site, usually some combination of shopping mall, mid-rise office space, hotel, apartments, condos, civic center and/or convention center.
Modified Accelerated Cost Recovery System (MACRS) The tax depreciation method authorized by the Tax Reform Act of 1986. The IRS divides property into general classes, depending on its description and use. Each class has its own pre-defined time period over which properties may be depreciated. For example, residential rental properties are depreciated over 27.5 years and other depreciable real estate over 39 years. For some classes of personal property, but not for real estate, the taxpayer may take accelerated depreciation, writing off larger expenses in the early years. For more information, visit the IRS web site at www.irs.gov and obtain Publication 946: How to Depreciate Property.
MXD Short for mixed use development
NFL cities Rather than rely on vague definitions and differences among first tier cities and second tier cities, some companies define their target locations as NFL cities, or cities that have an NFL franchise. That shorthand description seems to evidence a confidence that cities which can support an NFL franchise can also support the needs of the particular company.
Non-consolidation opinion letter Typically a requirement for commercial real estate mortgage loan in excess of $15 million, the letter is from the borrower’s attorney and generally states that in the event of bankruptcy, assets of the borrower and any controlling parties will not be consolidated. If a lender can show that it relied on a non-consolidation opinion letter when approving the loan, then it has a strong argument that any bankruptcy court should disregard the consolidation, if one has occured.
Non-recourse carve-out guarantee An exception to a loan agreement that looks solely to the collateral for security, and will not attempt to pursue individual property owners, partners, or shareholders for the debt. The non-recourse carve-out guarantees provide that individuals will be liable under certain specified circumstances, such as bankruptcy filing, unapproved transfer of a partner or shareholder’s interest, environmental contamination of the property securing the loan, a tenant in common filing a partition action to sell the property and divide the proceeds, or certain described instances of mismanagement or wrongdoing. One should consult with accounting and possibly legal professionals regarding the necessity to disclose non-recourse carve-out guarantees as contingent liabilities on financial statements. See, also, springing liability, below.
OFAC see Office of Foreign Assets Control
Office of Foreign Assets Control (OFAC) According to its Mission Statement, “[t]he Office of Foreign Assets Control ("OFAC") of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction.” Its connection with real estate is because of its stance that real estate settlement companies are “financial institutions” and all financial institutions have obligations to block funds and other property belonging to certain individuals and groups listed on the OFAC web site. For more information, visit www.treas.gov/ofac
Officer Next Door Former program of the US Department of Housing and Urban Development, is has been replaced by the Good Neighbor Next Door program. See that entry, above, for details.
Off market opportunities Properties not currently listed with a real estate broker, but known or suspected to be available for purchase at the right price. Many buyers’ brokers specialize in off market opportunities for their clients.
Patriot Act See USA Patriot Act
Preemption A legal principle that a conflict between the laws of the federal government and the laws of a particular state will be resolved by employing the federal rule, not the state rule. The ultimate decision maker regarding the existence of federal preemption is the United States Supreme Court. Pronouncements over the years on a wide variety of topics have varied, depending on the court’s prevailing philosophy of states’ rights versus federalism. In the field of real estate related activities, the Court has held that almost everything having to do with the construction and real estate lending industries has such a connection to interstate commerce that federal law requiring enforcement of arbitration clauses in those contracts will preempt state laws that prohibit enforcement of arbitration clauses, for example. In another example, the federal Real Estate Settlement and Procedures Act (RESPA) has been held to preempt state laws, if those laws are in conflict with RESPA, but to allow enforcement of state laws that supplement, or create additional responsibilities, to RESPA.
Preferred equity arrangement A capitalization mechanism in which one invests money in a property or business in return for receiving a priority over other owners in the payment of dividends or upon receipt of proceeds upon liquidation of the asset. The preferred equity owner will receive their money after secured lenders, but before other equity owners.
Private placement bond A financing mechanism that obtains money from private or institutional investors via the issuance of tax exempt bonds that are not publicly underwritten or issued. The private placement bond is popular for low income housing development because of the ease and speed of use, relatively low transaction fees, and the ability to use the mechanism for projects smaller than the recommended minimum size for public bond projects. On the negative size, the interest rates on private placement bonds are usually one-half to one per cent higher than publicly underwritten bonds, because there is no enhancement period.
Private Property Rights Implementation Act of 2006 Legislation currently making its way through the Congressional approval process. The Act seeks to remedy the unfair situation resulting from three United States Supreme Court Decisions. Williamson County v. Hamilton Bank, 473 U.S. 172 (1985) requires property owners to exhaust all State remedies before they file suit in federal court contesting a state’s exercise of eminent domain rights. The Catch-22 is, San Remo Hotel v. City and County of San Francisco, 545 U.S. 323 (2005), holds that once a state court has ruled on a property owner’s claims regarding eminent domain, the federal courts must defer to the state court and dismiss any federal lawsuit filed by the aggrieved property owner! In another local government ploy, the 1997 Supreme Court case of City of Chicago v. International College of Surgeons, 522 U.S. 156 (1997) allows municipalities to force transfer to eminent domain cases to federal court, and THEN obtain a dismissal because the property owner did not exhaust his or her state court remedies! The Private Property Rights Implementation Act of 2006 removes these obstacles, and would allow property owners to file suit in federal court if they have a valid civil rights claim under the 5th Amendment.
Protecting Tenants at Foreclosure Act Federal legislation with an effective date of May 20, 2009. It is Chapter 7 of the Helping Families Save Their Homes Act. The PTFA provides that for any federally related transaction mortgage, and for any other mortgage on residential property, tenants have certain rights after a foreclosure. Protections are for bona fide tenants only--those paying rents relatively close to market rent and not a last-minute phony lease right before the foreclosure. Also, the tenant cannot be the borrower or his/her immediate family. If the tenant has no lease, the new post-foreclosure own must give the tenant 90-days notice to vacate. If the tenant does have a lease, they are entitled to occupy the premises until the end of the lease term. The only exception is if the immediate successor plans to use the property as their principal residence. In that case, they need only give the prior tenant 90-days notice to vacate. Problems: The Act says it applies to the "immediate successor" after the foreclosure. That would usually be the foreclosure purchaser. But, what if the purchaser is the lender, and the lender then sells the property to an investor 3 days later? Is the investor an "immediate successor?" Technically, no. But, no one knows for sure. The other major problem is the language saying the tenant has the right to occupy the premises. The Act does not say the tenant must pay rent. It does not prevent the tenant from moving out early. It does not say what obligations owner or tenant might owe to each other. Under many states' laws, a new owner of residential rental property has the obligation to return the tenant's deposit at lease end. Typically, a foreclosure destroys all leases and the new owner enters into a new lease with the tenants. But, under the Act, the post-foreclosure owner might or might not owe security deposit refunds to tenants.
Right to use vacation interval A mechanism for enjoying a housing unit for a pre-determined time period each year, but without any ownership rights. In contrast with a “deeded timeshare ownership,” one is not limited to a particular unit. The right to use is considered personal property, not real property. There are several options under a “right to use” agreement, including:
Second tier cities There is no consensus regarding what distinguishes a first tier city, a second tier city, and a third tier city. To some extent, the definition depends on the perspective of the definer. For meeting planners, a second tier city might be defined with reference to convention facilities, number of available hotel rooms, ease of mass transportation, walking distance among hotels in a defined area, and proximity to recreational facilities. For a large corporation seeking a new corporate headquarters, a second tier city might be any one with a population greater than 300,000 and less than 1 million. Others might view anything less than 2.5 million population as second tier. In all instances, one should not rely upon someone’s characterization of a need for locations in a second tier market, or a desire to avoid second tier markets. Instead, one should determine the goals sought to be me, and find communities that meet those goals.
Silent second Typically refers to a mortgage that is placed on property in order to secure the owner’s compliance with certain government or charitable programs that provided assistance in purchasing the property. After the homeowner has met all obligations under the program, the mortgage becomes null and void, but if the homeowner does not meet their obligations, then the mortgage provides a lien for recovery of some or all of the assistance. As an example, under the US Department of Housing and Urban Development (HUD) program called Good Neighbor Next Door, qualified home buyers may receive a discount of 50% off the listed purchase price for HUD-owned homes. HUD places a silent second mortgage on the property. If the owner does not occupy the property as their principal residence for 36 months, then HUD must be repaid the 50% discount, and the silent second mortgage provides the lien for that obligation.
Small balance loans A description sometimes used for loans in the range of $3 million to $15 million. Because of requirements of the secondary mortgage market, and costs associated with preparing loans for securitization, the loan economics are considerably different for those with principal balances less than $15 million. For that reason, many lenders will not entertain proposals for small balance loans, unless there is some expectation that the property purchaser or developer will grow into something larger over time.
SNDA: Often seen in commercial loan commitment documents, in the “requirements” section. SNDA is the abbreviation for “Subordination, Non-Disturbance and Attornment.”
Soft second See silent second.
Special form Also called an HO-3, it is an insurance policy that combines the benefits of the Comprehensive form (coverage for all risks except those specifically excluded) on the insured’s dwelling and private structures, and Broad from coverage (coverage for only 18 specifically described perils) for the insured’s personal property.
Springing liability The liability that an investor has under a non-recourse carve-out guarantee (defined above), it is a liability that does not currently exist. It might or might not qualify as a contingent liability, and require disclosure under other loan applications or company or personal financial statements. When in doubt, one should consult with accounting professionals to determine this, or discuss the situation with potential lenders to learn their particular requirements regarding disclosure.
Subordination, Non-Disturbance and Attornment Agreement: An agreement among borrower/landlord, lender, and borrower’s tenants regarding what will happen to the tenants if the lender has to foreclose on the property. Major tenants often require separate SNDA agreements, besides the lease, that preserve their rights. In all other instances, the lender’s required SNDA terms are usually written into the borrower’s form lease, and never really examined by tenants. The issues usually addressed in the agreements, or in the lease language, are as follows: 1. If the lender forecloses, do all leases automatically terminate, or do leases continue if the tenant is willing to do certain things, such as pay market rental rates and other such matters. 2. Clear statements that the lender will not be responsible for the refund of any security deposits, for fulfilling any promises made by the former borrower/landlord, or for any negligence or wrongful acts by the former borrower/landlord. 3. A statement that tenants will be given credit for the current month’s rent after a foreclosure, but any pre-paid rent for future periods will not be effective, and the tenants will have to pay each month’s rent to the new landlord after foreclosure, or face eviction.
Sustainable development A development theory and methodology that focuses on three inter-related areas: social, economic and environmental factors and the ability of the project and the community to balance all three so that no single factor will unduly burden the others or the community. The goal is to create something that will not sacrifice the needs of future generations in order to meet the goals of current users. Contrast with green development, which focuses on the environmental factor and may sometimes sacrifice social and economic sustainability, placing great burdens on those factors in order to meet the environmental goals.
Teacher Next Door Former program of the US Department of Housing and Urban Development, is has been replaced by the Good Neighbor Next Door program. See that entry, above, for details.
Tenant’s policy Also called an HO-4, it is an insurance policy that covers losses to a tenant’s personal property located on rented premises, and that reimburses for any loss of use of the property, up to 20% of the value of the personal property covered. The standard tenant’s policy does not include any liability coverage, so tenants are well advised to separately obtain such coverage.
Timeshares A temporal (time) slice of rights to own or use property. See deeded time share ownership and right to use vacation intervals
Uniform Computer Information Transactions Act (UCITA) Laws proposed by the National Conference of Commissioners on Uniform State Laws, for adoption by individual states as authorized by their legislatures, if so desired. The UCITA is a sort of contract code for computer information transactions. If adopted, it would supercede some portions of the federal Electronic Signatures in Global and National Commerce Act
Uniform Electronic Transactions Act (UETA) An attempt to bring commerce into the twenty-first century by recognizing the importance of electronic documents and by providing rules for granting legal effect to them and protecting against abuses. Many states passed local versions of the UETA; some apply to real estate and some do not. The federal version is called the Electronic Signatures in Global and National Commerce Act (E-Sign). It governs in the absence of state laws, or when state laws are inconsistent with E-Sign. The critical issue in real estate is whether an exchange of e-mails or e-mailed documents may satisfy the Statute of Frauds requirement that almost all contracts related to real estate must be in writing. This issue is still unsettled and controversial in some states.
Urban heat island A metropolitan area that is warmer than the surrounding countryside, typically by 2° to 10° Fahrenheit. Causes include something called the canyon effect (multiple surfaces of buildings heat up very efficiently and hold that heat longer), the lack of any convection effect (buildings block air flow, preventing the movement of warmer air out, and cooler air in), and because of the physical characteristics of concrete, pavement and glass, which hold and transfer heat differently than natural materials. Many local governments seek to minimize new construction’s contribution to the urban heat island by making various requirements such as rooftop green areas, the use of permeable surfacing that promotes cooling, and other such techniques. For more information, visit the web site of the Environmental Protection Agency, at http://www.epa.gov/heatislands/
USA Patriot Act Short name for the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, it was signed into law on October 26, 2001 as a response to the 9/11 terror attacks. It dramatically expanded the authority of law enforcement to fight terrorism. For an excellent discussion of the Act’s impact on the real estate industry, please read the article written by Kevin L. Shepherd, attorney at law, found in volume 39 of the Real Property Probate and Trust Journal at page 403 (2004) and on the American Bar Association website at http://www.abanet.org/rppt/meetings_cle/spring2004/rp/Patrioact/shepherd2.pdf
Walking money The loan proceeds in excess of that necessary to purchase or refinance a property; the money the borrower is able to put in its pocket. Walking money is most often encountered when (a) a developer borrowers more than the acquisition, development and holding costs for a project; (b) a lender holding foreclosed real estate agrees to finance the purchase for a buyer, and to provide walking money; and (c) when one refinances property in order to pull out some equity.
Yield maintenance The concept that a lender or a secondary market pooler expects a certain income stream from its loans, because of the anticipated term of the loan and the interest rate charged. For commercial loans, if the property owner wished to refinance, or to sell the property, it had to pay a fee to the owner of the mortgage for yield maintenance—to maintain the “yield,” or revenue stream, to the lender. The lender (or current mortgage owner) took the proceeds from paying off the mortgage, plus the yield maintenance fee, and used those funds to buy US Treasury Securities that exactly duplicated the benefits of the mortgage, as far as income stream was concerned. Today, yield maintenance is less common, and the preferred mechanism is defeasance, defined above.
Zombie loans and zombie financial institutions Ought to be dead, but just insist on acting like they are alive. Zombie financial institutions have liabilities greater than their assets (they are insolvent) but are propped up by government programs rather than being closed. Zombie Loans are those in which the collateral is not worth as much as the money due on the promissory note, but the borrower is still making their payments on time. In my mind, Zombie Loans have a chance of surviving if everyone will just stay calm and wait for the economy to come back. Probably the same thing with Zombie Banks, assuming they don't have other problems at the same time.
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