A glossary of acronyms, slang,
and terminology
First Edition
Real Estate
& REITs
JARGON
The
BOOK
of
®
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The Book of Jargon
®
– Real Estate & REITs is one in a series of practice
area-specic glossaries published by Latham & Watkins. The denitions
provide an introduction to each term and may raise complex legal issues on
which specic legal advice is required. The terms are also subject to change
as applicable laws and customary practice evolve. As a general matter,
this glossary was drafted from a US practice perspective. The information
contained herein is not legal advice and should not be construed as such.
2
10% Asset Test: one of the several Asset Tests that a REIT must
satisfy at the close of each quarter of the Taxable Year to qualify as a
REIT. Under this test, the REIT may not hold securities having more
than 10% of the total voting power or the total value of the outstanding
securities of any one Issuer (other than securities of a TRS, a qualied
REIT subsidiary (QRS), and, in some cases, partnerships as well as
securities that qualify for the 75% Asset Test).
100-Shareholder Requirement: one of two ownership tests that a
REIT must satisfy to qualify as a REIT. Under this test, the REIT must
have at least 100 shareholders during at least 335 days of a 12-month
Taxable Year (or a proportionately smaller number of days for a shorter
year). This requirement is not applicable in the rst REIT Taxable Year.
15% Personal Property Test: a test used to determine if Rent
attributable to personal Property qualies as Rents From Real Property
for purposes of the Income Tests. Under the 15% Personal Property
Test, Rent attributable to personal Property leased in connection with
a Lease of real Property qualies as Rents From Real Property if
the Rent attributable to personal Property for the Taxable Year does
not exceed 15% of the total Rent for the Taxable Year attributable to
both the real and personal Property leased in connection with such
Lease. For this purpose, the Rent attributable to personal Property is
generally determined by reference to the relative Fair Market Values
of the personal property and all of the leased Property (including the
personal Property). A similar test applies for purposes of determining
whether personal Property leased in connection with real Property or an
obligation secured by a Mortgage on both real Property and personal
Property qualies as a Real Estate Asset for purposes of the 75%
Asset Test, and whether Interest income from an obligation secured by
a Mortgage on both real Property and personal Property qualies as
Qualifying Income under the 75% Income Test.
25% Asset Test: one of several Asset Tests that a REIT must satisfy at
the close of each quarter of the Taxable Year to qualify as a REIT. Under
the 25% Asset Test (i) securities may not represent more than 25% of
the value of the REIT’s total assets (other than securities that qualify
for the 75% Asset Test), and (ii) Nonqualied Publicly Oered REIT
Debt Instruments may not represent more than 25% of the value of the
REIT’s total assets. See also TRS Asset Test.
3(c)(1) Exception to ICA: a section of the Investment Company Act
that provides an exemption from registration as an investment company
for Issuers that are (i) benecially owned by not more than 100 investors
(excluding knowledgeable employees), and (ii) not making a public
oering of their securities.
3
3(c)(5)(C) Exception to ICA: a section of the Investment Company Act
that provides an exemption from registration as an investment company
for certain real estate funds if the funds are suciently focused on
qualifying real estate transactions (e.g., acquiring Mortgages and other
Liens on interests in real estate).
3(c)(7) Exception to ICA: a section of the Investment Company Act
that provides an exemption from registration as an investment company
for Issuers that (i) only qualied purchasers and/or knowledgeable
employees own, and (ii) are not making a public oering of
their securities.
3-05s: Financial Statements required by Rule 3-05 of Regulation S-X,
which requires that Financial Statements of certain “signicant” acquired
businesses be included in registration statements led with the SEC.
3-14s: Financial Statements required by Rule 3-14 of Regulation S-X,
which requires that Financial Statements of certain “signicant” acquired
real estate operations be included in registration statements led with
the SEC.
363 Sale: named after a section of the Bankruptcy Code, an auction-
like procedure for a bankrupt entity to sell assets, subject to the judge’s
approval. Often there is a stalking horse bidder that has already
arranged to purchase the assets. If the stalking horse bidder is outbid
(which does happen), the stalking horse bidder gets a breakup fee for
its trouble.
4% Excise Tax: an excise tax that a REIT is required to pay for each
calendar year to the extent it fails to distribute during such year at least
the sum of (i) 85% of its Ordinary Income for such year, (ii) 95% of its
Capital Gain net income for such year, and (iii) any undistributed taxable
income from prior periods.
409A: the Internal Revenue Code section that provides guidance on the
tax treatment of Equity-based instruments granted as compensation.
Running afoul of Section 409A can result in punitive taxes on
compensation that a Sponsor, principal, or employee receives.
5% Asset Test: one of the several Asset Tests that a REIT must
satisfy at the close of each quarter of the Taxable Year to qualify as
a REIT. Under this test, not more than 5% of the value of the REIT’s
total assets may be represented by securities of any one Issuer (other
than securities of a TRS, a qualied REIT subsidiary (QRS), and, in
some cases, partnerships as well as securities that qualify for the
75% Asset Test).
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5/50 Test (Closely Held Test): one of two ownership tests that a
REIT must satisfy to qualify as a REIT. Under this test, ve or fewer
“individuals” cannot actually own or Benecially Own more than 50%
in value of the REIT’s outstanding stock at any time during the last
half of the Taxable Year. For purposes of the 5/50 Test, an “individual”
includes a supplemental unemployment compensation benet plan, a
private foundation, or a portion of a trust permanently set aside or used
exclusively for charitable purposes, but generally excludes a qualied
pension plan or prot sharing trust. This test is not applicable in the rst
REIT Taxable Year. See also Ownership Limit.
75% Asset Test: the primary requirement of the Asset Test that a REIT
must satisfy at the close of each quarter of the Taxable Year to qualify
as a REIT. Under the 75% Asset Test (i) at least 75% of the REIT’s total
assets consist of real estate, cash and cash items (including certain
receivables), and government securities. See also TRS Asset Test.
75% Income Test: one of two gross Income Tests that a REIT must
satisfy for the Taxable Year to qualify as a REIT. Under this test, at
least 75% of the REIT’s gross income (excluding gross income from
Prohibited Transactions, certain hedging transactions, and certain
foreign currency gains) must be derived from investments relating to
real Property or Mortgages on real Property, including Rents From Real
Property, dividends from other REITs, and, in certain circumstances,
Interest on Obligations adequately secured by Mortgages on real
Property, or certain types of temporary investments.
90% Distribution Test: a distribution test that a REIT must satisfy
for the Taxable Year to qualify as a REIT. Under the 90% Distribution
Test, the REIT’s Dividends Paid Deduction (computed without regard to
Capital Gain Dividends) for the Taxable Year must equal or exceed the
sum of (i) 90% of the REIT’s taxable income (computed without regard
to the Dividends Paid Deduction and by excluding any Net Capital
Gain), plus (ii) 90% of the REIT’s after-tax net income from Foreclosure
Property, minus (iii) the excess of the sum of certain items of non-cash
income over 5% of the REIT’s taxable income (computed without regard
to the Dividends Paid Deduction and by excluding any Net Capital
Gain).
95% Income Test: one of two gross Income Tests that a REIT must
satisfy for the Taxable Year to qualify as a REIT. Under the 95%
Income Test, at least 95% of the REIT’s gross income (excluding gross
income from Prohibited Transactions, certain hedging transactions, and
certain foreign currency gains) must be derived from the real Property
investments described in the denition of 75% Income Test or dividends,
Interest, and gain from the sale or disposition of stock or securities.
5
Abandonment: the voluntary relinquishment of all right, title, claim,
and Possession, without the intention of reclaiming it. If there is some
action — for example, an express statement (inaction is not sucient)
— that makes clear the owner no longer wants to own the Property, the
Property becomes free and open to anyone who comes along to claim it.
Abatement: usually encountered in a Lease context, with respect
to Rent. A Rent Abatement involves the removal or reduction of the
tenant’s Rent obligation as a Lease concession at the outset of the Term
of the Lease or to make up for some interruption of or interference with
the tenant’s ability to use its Premises during the Term of the Lease.
Absolute Assignment: the Transfer of all benets, liabilities, or rights
by one party to another that leaves the assignor with no interest in the
assigned right. Often used as Collateral in Mortgage loans for lenders in
case the Borrower Defaults.
Abstract: a document showing the Encumbrances and Liens
associated with a certain Property. The Abstract includes the names of
all the Property owners and documents that aect the Property, such as
Mortgages, Deeds, Covenants, restrictions, Property taxes, and the like.
Accelerated Cost Recovery System (ACRS): an accelerated system
of Depreciation introduced for US federal income tax purposes in 1981.
ACRS is based on IRS predetermined recovery periods set forth in the
Internal Revenue Code rather than the useful life standard.
Accelerated Depreciation: any one of several methods by which a
company may depreciate an asset in a manner that results in a greater
amount of Depreciation being taken during the earlier years of an
asset’s life. The two most popular methods of Accelerated Depreciation
for nancial reporting purposes are the declining balance method
and the sum-of-the-years digits method. The two currently allowable
Accelerated Depreciation methods for US federal income tax purposes
are ACRS and MACRS.
Acceleration: the end of the line under a Loan Agreement or Credit
Agreement. The denitions of Default and Event of Default describe how
we get there. Following an Event of Default, the lender (or the agent
for the lenders) has the right to “accelerate” the due date of the debt;
in other words, the lender has the right to declare its loans immediately
due and payable. Bankruptcy and insolvency Events of Default
automatically lead to Acceleration without any required notice or further
action on the part of the lender (or agent). Also the premise of the Fast
and Furious movie franchise.
Access/Accessibility: the ease with which a tenant or other user can
enter a Property. Accessibility may also refer to design features that
6
facilitate the ease with which disabled people can enter and maneuver
in the building.
Accounts Receivable: the money that customers (individuals or
entities) owe to another entity in exchange for goods or services
(including, without limitation, charges for the use or occupancy of any
guest, conference, or banquet rooms or other facilities; any restaurant,
bar, or banquet services; or any other goods or services that have
been delivered or used but not yet paid for). In the hotel industry, these
typically include the City Ledger and the Guest Ledger.
Accretion (Alluvion): applies to both land and investment value. In
relation to land, the increase in land by the washing up of seas or rivers
to deposit sand and soil and form rm ground. In relation to investment,
the accumulation of value until Maturity with respect to Bonds sold at a
discount to face value that mature at Par.
Acquisition Fee: any and all fees, charges, and Commissions paid in
connection with the purchase of real or personal Property. Examples
include Commission paid to real estate brokers, Closing Costs, initiation
or bank fees, and other Commissions or Closing Costs. Acquisition Fees
may be paid directly by the purchaser or may be borrowed as part of a
loan or Mortgage nancing the acquisition.
Acquisition Loan: a loan attained for a specic purpose. Typically
used to acquire a real Property asset.
Additional Insured (Additional Named Insured): lenders worry that
a plainti may sue them if their Borrower harms the plainti, because the
banks have deep pockets. Consequently, lenders instruct the Borrower
to add the lenders, or at least the Collateral agent and administrative
agent, on the Borrower’s liability policies as Additional Insureds. The
Additional Insureds have the right to be defended by the insurer, and to
have any valid and covered claims paid, up to the policy limit. Lender
coverage is eected through an Endorsement issued by the Insurance
Broker, who makes sure the insurer’s records show all the Additional
Insureds. The cost is nominal.
Additional Rent: the amount of money to be paid by the tenant to the
landlord in accordance with the Lease provisions in addition to the Base
Rent. These costs can include the tenant’s proportional share of HVAC
charges, Common Area Maintenance fees, utilities, insurance, and
janitorial services.
Adjusted Capital Account Decit: with respect to any Partner or
Member, the decit balance, if any, in such Partner’s or Member’s
Capital Account as of the end of the relevant Fiscal Year, after crediting
any amounts that such Partner or Member is obligated to restore or
7
is deemed to be obligated to restore pursuant to certain tax laws and
debiting the items described in Treasury Regulations Section 1.704-
1(b)(2)(ii)(d)(4), (5) and (6). Generally, for a Partner or Member without
general liability or debt Guaranty Obligations, the decit balance
that would remain in a Partner’s or Member’s Capital Account after
certain mandatory income and gain allocations is the Adjusted Capital
Account Decit.
Adjusted Funds From Operations (AFFO): a nancial Performance
Test used in the analysis of REITs, generally equal to Funds From
Operations with adjustments made for recurring Capital Expenditures
adjustment to GAAP straight-lining of Rent, leasing costs, and other
material factors.
Adjusted Gross Income (AGI): for US federal income tax purposes,
dened in Internal Revenue Code Section 62 as gross income reduced
by certain specically listed expenses.
Administrative Agent Fee (Agency Fee): the annual fee paid to the
administrative agent for administering a credit facility.
Adverse Possession: a method of acquiring legal title to real Property
by actual, open and notorious, hostile (without permission), and
continuous Possession of the real Property, to the exclusion of its true
owner, for a period of time set by state statute.
Adavit of Title: a document signed by the seller to verify that the
Property to be sold is owned by the seller and is free from potential legal
issues. For example, a seller may sign an Adavit of Title guaranteeing
that there are no Liens against the Property and no unrecorded
Easements, and that the Property is not being sold to another party.
Aliate: dened slightly dierently in dierent types of agreements,
but generally refers to a corporation, partnership, or other person
controlling, controlled by, or under common control with another entity.
The ocial securities law denition is found in SEC Rule 144.
Armative Covenant: requires a Borrower or seller “to armatively
do something.” These are contractual provisions in a Credit Agreement
or sale contract that itemize certain actions the Borrower or seller
must take to be in compliance with the applicable document. Think of
these as the “thou shalt” Covenants. Armative Covenants are usually
more Boilerplate in nature, covering such actions as a promise by
the Borrower to pay Interest and fees, maintain insurance, pay taxes,
provide quarterly operating reports, and so forth and a seller to continue
to operate its Property in the ordinary course of business between
signing and Closing. In contrast, see Negative Covenant.
8
Armative Easement: the right to use another’s Property for a
particular purpose. For example, if a path from A’s Property crosses over
a portion of B’s Property, A has an Armative Easement from B.
After Acquired Property: the personal or real Property of a Borrower/
debtor that is acquired after a security instrument (Security Agreement,
Mortgage, Deed of Trust, etc.) has been entered into by such party.
Pursuant to §9-204 of the UCC, if so provided in a Security Agreement,
the Lien of a Security Agreement generally extends to the debtor’s after-
acquired personal Property. A similar provision in a real Property security
instrument may be valid with respect to the mortgagee/Beneciary,
but the instrument, if recorded prior to the time the Mortgagor/Grantor
acquires record title to the after-acquired real Property, may not provide
constructive notice to third parties as the security instrument will be
outside of the Chain of Title because the instrument does not fully reect
all of the real Property encumbered thereby. Typically, the secured real
Property lender will record a modication or spreader with respect to
the original Mortgage subjecting the after-acquired real Property to the
Lien of the Mortgage and solving any Chain of Title issues. As a note, if
the debtor/Mortgagor/Grantor becomes a debtor in Bankruptcy, Property
acquired after commencement of the Bankruptcy action generally will
not be subject to the Lien of a prior security instrument.
Aged Receivables: the detail of how long Accounts Receivable owed
to the business have been outstanding and unpaid. Such amounts are
typically described as: current (less than 30 days), more than 30 days,
more than 60 days, and more than 90 days.
Agreed Value: the stipulated value of a company-owned asset that
has been agreed upon by the owners of the company or otherwise
determined by a Designated Individual in accordance with a prescribed
process. Agreed Value is usually intended to represent the asset’s then-
current Fair Market Value.
Air Rights: the legal right to develop the space above a piece of
Property, building, or other structure. Air Rights can be transferred
separately from the building Lot, so they have signicant value for
vertical development in urban areas such as New York City.
Alienation: the act of transferring Property or title to Property to
another person.
All or Substantially All: no one knows the exact meaning of this
phrase. It is used in various Covenants and other contractual provisions,
but the precise meaning is the subject of much debate (and litigation). It
does not necessarily mean what it sounds like in layman’s terms but is
generally interpreted to mean the sale of nearly all of a company.
9
Allocated Loan Amount: in a Mortgage loan transaction secured by
more than one Real Estate Asset, the portion of the Principal amount of
the loan allocated to each asset, often based on the relative Appraised
Value of each asset. This Allocated Loan Amount can be used to
determine the Release Price for each asset (i.e., the price the Borrower
pays to obtain the release of the asset from the Lien of the Mortgage),
materiality thresholds for each asset (e.g., a casualty causing damage in
excess of X% of the Allocated Loan Amount of the asset), and the Cap
on the amount secured by such asset if it is in a Mortgage recording tax
state (e.g., “the greater of 125% of the Allocated Loan Amount and the
Appraised Value of the Property”).
Allonge: an Endorsement to a Note, on a piece of paper separate from
the Note, used to Transfer ownership of the Note from the then-current
holder to the designated successor. Under the laws of some states, an
Allonge must be “permanently axed” to the Note to be eective.
American Land Title Association (ALTA): a national trade
association of the title industry that produces survey standards, forms
of title insurance policies and Endorsements, and other real estate
guidelines that have become industry standard. Typically used as an
adjective and almost never spelled out, as in ALTA survey.
ALTA Statement: an adavit containing representations regarding the
status of the Property title and signed by both the buyer and the seller
in order to obtain the buyer’s title insurance policy. The document meets
standards specied by the ALTA and is typically reviewed and signed by
both parties at the Closing.
Alteration: a change or modication made to real Property, whether
decorative (such as painting interior walls or changing carpeting) or
more substantial (such as the rearranging of the interior layout of one’s
Premises, or the demolition or expansion of existing structures and
Improvements, or the addition of new structures and Improvements).
Sometimes a necessary improvement to new clothing.
Amendment: an agreement entered into between parties that
changes the Terms of a prior agreement entered into between the
same parties (or their predecessors in interest), whether by adding new
provisions, deleting existing provisions, or modifying or supplementing
existing provisions.
American Institute of Architects (AIA): a professional organization
for licensed architects in the US.
Americans With Disabilities Act (ADA): a US federal act that
prohibits discrimination of disabled persons in employment, state
and local government, public accommodations, commercial facilities,
10
transportation, and telecommunications. For example, use of a
properties facility must be ADA-compliant.
Amortization: the required periodic repayment in installments of
portions of a loan prior to its nal Maturity. In accounting speak,
Amortization is the same concept as Depreciation, except that intangible
assets are Amortized and tangible assets are Depreciated.
Amortization Schedule: the schedule of regularly timed repayments
of Principal prior to the Maturity of a loan. The Amortization Schedule is
usually set forth in the Loan Agreement or Credit Agreement.
Anchor: the leading tenant in a shopping center whose name
recognition often attracts other Tenants to the center.
Annual Budget: Approved: the Capital Budget and Operating Budget
for a Property, prepared by the Property owner, showing the amounts
required to operate and maintain the Property for a 12-month period
(usually a calendar year, but sometimes the owner’s Fiscal Year), in a
format either prescribed or approved by the Property owner’s lender,
submitted by the Property owner to the lender on an annual basis. An
“approved” Annual Budget is an Annual Budget that the lender has the
right, under the loan documents, to approve and has, in fact, approved.
Annualized Net Eective Rent: a metric used by REITs to measure
leasing economics. Annualized Net Eective Rent is typically calculated
by straight-lining contractual Rents to Amortize Free Rent periods and
Abatements, without regard for tenant Improvements and Leasing
Commissions. Annualized Net Eective Rent diers from annualized
cash Rent, which does not straight-line to amortize Free Rent periods
and Abatements and which does account for tenant Improvements and
Leasing Commissions.
Anti-Deciency Statute: a state statute that prohibits lenders from
suing Borrowers for deciencies (the dierence between the amount
owed on a Mortgage and the price realized at a Foreclosure sale) with
respect to Mortgages secured by a Borrower’s primary residence.
Anti-Dilution: a provision intended to protect existing investors in the
occasional event the company issues Equity at a lower Valuation than
in previous oerings. Such a provision typically allows existing investors
the rst right to purchase a pro rata share of the new oering in order
to prevent the investor’s ownership interest in the company from being
reduced by the new oering.
Applicable Margin: the additional percentage added to a particular
Interest Rate index to determine the Interest Rate payable on Variable /
Floating Rate debt. Generally, the Loan Agreement or Credit Agreement
11
will set the Interest Rate at either the Base Rate plus a specied
percentage, or LIBOR plus a specied percentage. The specied
percentage is usually referred to as the Applicable Margin.
Appraisal: a determination of the value of a real Property asset
performed, ideally, by a disinterested professional, usually in the context
of the sale or nancing of the asset. The scope of and methodology
applied in performing an Appraisal may be prescribed by US federal or
state statutes and regulations (such as the Financial Institutions Reform,
Recovery, and Enforcement Act, or FIRREA), by professional standards
(such as the Uniform Standards of Professional Appraisal Practice,
or USPAP), and/or by the person requiring the Appraisal. Often the
requester will also require that the appraiser performing the Appraisal
be a member of the Appraisal Institute; the appraiser should also be
certied or licensed by the state where the real Property is located.
Appraisal Institute (AI): an organization that promotes professional
practice and ethics in the real estate eld through industry standards,
services, and education.
Appraised Valuation (Valuation): the value of an asset determined
at a particular point in time that is typically performed by a professional
appraiser.
Appreciation: an increase in value relative to purchase price.
Appurtenance: a right, privilege, or Property that is considered part
of the principal Property and is conveyed with it for purposes such as
passage of title, conveyance, or inheritance. An example is Easements
that Run With the Land.
Arbitration (Alternative Dispute Resolution): a means of dispute
resolution often perceived as less cumbersome and more expeditious
than litigation. The rules of evidence are considerably more lax; there
is no risk of a “wild jury verdict” (as there is no jury per se, though the
Arbitrators are sort of professional jurors), and since the process is
private, the parties do not have to wait on the public court system.
Arbitrator: a person chosen to conduct an Arbitration pursuant to a
prescribed set of rules for the purpose of resolving a dispute between
two or more parties.
Article 8 Opt-In: the election of the holder(s) of the interests in a
partnership or limited liability company to have those interests be a
security governed by Article 8 of the UCC. The election is achieved by
including an express statement in the partnership agreement or LLC
operating agreement that the Partnership Interests or Membership
Interests are a security governed by Article 8. A lender secured by the
12
pledge of the Equity in a partnership or LLC will often insist on an Article
8 Opt-In because of the advantages of holding a security (rather than
a general intangible) as security; the lender also will usually insist that
such interests be certicated.
Article 9: the law that governs the validity and Perfection of Security
Interests in most personal Property. This is the article of the UCC that
governs secured transactions of all types. In California, Article 9 is called
“Division 9” — they just have to be special.
Articles Supplementary: a necessary Filing when a Maryland
corporation classies any new class or series of unissued capital
stock (e.g., when it creates and issues a new series of Preferred
Stock). An Articles Supplementary updates (and becomes part of) the
corporation’s Charter and is similar to a Certicate of Designation for a
Delaware corporation.
Asbestos Containing Materials (ACM): pursuant to EPA regulations,
any material containing over 1% asbestos.
As-Extracted Collateral: a type of personal Property dened in Article
9. As-Extracted Collateral consists of (i) oil, gas, or minerals that are
subject to a Security Interest before they have been extracted, or (ii)
accounts from the sale of oil, gas, or minerals that the debtor has
an interest in before their extraction. For troubled credits, may also
include teeth.
As-Is (Where-Is): a description of how a Property is being conveyed,
which is in its actual, current state, warts and all, with all faults, with
no Warranties or guaranties of any type (implied or otherwise), and
no obligation of the seller or landlord to remedy any aw. The buyer
or tenant must take the Property, if at all, in its existing condition,
without modication.
Assessed Value: the value a government agency assigns to a
particular Property or asset for purposes of levying a particular tax, such
as real Property tax.
Assessment: the actual Valuation assigned to a Property to
determine tax payments. This value is calculated by tax assessors
and may represent full cash value or a percentage of the actual
cash value, depending on the Assessment practices followed in the
particular jurisdiction.
Asset Allocation: an investment strategy that seeks to balance risk
and reward by adjusting the percentage of various Asset Classes in a
Portfolio according to risk tolerance, goals, and investment time frame.
13
Asset Class: a category of Real Estate Assets that a REIT may own,
such as residential housing, commercial oce space, or industrial site
properties. Many REITs focus on one particular Asset Class.
Asset Test/Taxable REIT Subsidiary (TRS) Asset Test: a set of
compliance requirements that a REIT must satisfy at the end of each
quarter of the Taxable Year to qualify as a REIT. See also 10% Asset
Test, 25% Asset Test, and 75% Asset Test.
Assignment of Contracts: a Collateral loan document pursuant to
which a loan party (the Borrower or one of its Guarantors) assigns the
contracts to which it is a party to the lender as Collateral for a loan.
The contracts will typically be the agreements that relate to or bind the
Mortgaged Property that is Collateral for the loan.
Assignment of Rents and Leases: a Collateral loan document
pursuant to which a loan party (the Borrower or one of its Guarantors)
assigns the Leases encumbering real Property owned by the loan party
and the Rents and proceeds derived from such real Property to the
lender as Collateral for a loan. Generally, the real Property will also have
been mortgaged for the benet of the lender.
Association: a corporate entity a developer forms under state statute
for the purpose of marketing, managing, and selling homes, apartments,
or Lots in a residential subdivision or Condominium development. The
developer Transfers ownership of the Association to the home or condo
owners after selling a predetermined number of units or Lots. Types of
Associations include a Condo Association and Homeowner Association
(HOA).
Assumable Loan (Assumable Mortgage): a Mortgage loan that the
original Borrower may (though usually subject to conditions and/or an
Assumption fee) Transfer to another party in conjunction with the sale
of the Mortgaged Property. Most commercial Mortgage loans are not
assumable.
Assumption: a decision by a debtor in a Bankruptcy action to
remain obligated to perform under an Executory Contract or Lease
and to receive the benets under such Executory Contract or Lease.
The Assumption must be of the entire agreement and not of merely
select portions.
At the Market Program (ATM Program): an Equity oering sold
into an existing market over a period of time at various prices. ATM
Programs can reduce costs associated with oerings, such as road
show expenses and agent Commissions. Because they allow an Issuer
to adjust the size and timing of the individual issuances, ATM Programs
14
generally do not decrease stock price to the same degree a traditional
oering would.
Attornment: the express or implied consent to a Transfer of a right,
such as when a tenant agrees to remain a tenant of the Property under
a new landlord after the Transfer of Property ownership.
Audit: an examination of a company’s Financial Statements and/or
accounting procedures in order to evaluate their accuracy, validity, or
appropriateness. In addition, an Audit is an examination of a tax return
by the IRS or other tax authority in order to determine whether the
taxpayer has paid the correct amount of tax or otherwise complied with
applicable tax laws.
Audit Committee: a committee that a company or its Board of
Directors forms that is responsible for the oversight of the company’s
nancial reporting and disclosure.
Automatic Stay: a rule under Bankruptcy law stating that once a
Bankruptcy case has commenced, creditors and other parties generally
are not permitted to collect on claims against the debtor or otherwise
obtain or exercise Control or Possession over Property of the debtor’s
Bankruptcy estate outside of the Bankruptcy proceedings. Creditors
may seek relief from the Automatic Stay by Filing a motion with the
Bankruptcy court. There are a number of exceptions to the Automatic
Stay, such as governmental entities exercising their police power and
the termination or Liquidation of certain nancial contracts.
Average Daily Rate (ADR): a statistical measure that is often used
in the lodging industry. ADR represents the average rental income per
rented room in a given time period. It is calculated by dividing total room
revenue by the number of rooms sold.
Avulsion: a change in the border between properties due to a sudden
change in the natural course of a stream or river, when the border
between properties is dened by the channel of a waterway.
Award: the decision to give a judgment of money to a party with respect
to a lawsuit, Arbitration, or administrative claim. In the context of a
Condemnation, the Award is the amount paid to a Property owner for the
taking of the subject Property.
B Piece: in CMBS deals, the most subordinate bond classes or
tranches, usually the B-rated and BB/Ba-rated bond classes along with
the unrated class. Can be a subordinate piece of a Mortgage Note
known as the “B Note.”
15
Backup Contract: a contract signed by both the seller and potential
buyer that formalizes the Backup Oer. If the primary contract falls
through, the Backup Oer becomes the primary oer and both parties
are obligated by the Backup Contract to proceed with the deal.
Backup Oer: any oer submitted after the seller accepts and signs a
dierent purchase oer (the primary contract).
Balloon: the principal payment due on a loan (other than a fully
Amortizing loan) on the Maturity date.
Bankruptcy: a US federal court process under the Bankruptcy
Code whereby a company restructures its debt under the auspices
of the Bankruptcy court. There are advantages (such as the ability to
Cramdown a plan on dissenting creditors) and disadvantages (such as
high costs and public disclosure requirements) to restructuring debts in
Bankruptcy, as opposed to out of court.
Bankruptcy Code: Title 11 of the United States Code, the law
governing Bankruptcy in the US.
Base Building: the part of a multi-tenant building that directly serves
and aects all tenants. The Base Building normally includes the
building’s primary structure, the roof and façade, public Access areas,
re Egress (lobbies, corridors, elevators, and public stairs), and primary
mechanical and supply systems (electricity, heating and air conditioning,
phone, water supply, drainage, gas, etc.) up to the point of contact with
tenant Premises.
Base Building Systems: the primary mechanical and supply systems
of a building (electricity, HVAC, plumbing, gas, re safety, etc.).
Base Management Fee (Special Management Fee): the basic fee
paid to hotel managers. The fee is usually set as a percentage of total
revenues or a minimum monthly amount, whichever is greater.
Base Rate: a Floating Rate of Interest that varies daily, usually equal
to the higher of (i) the Prime Rate and (ii) the Federal Funds eective
rate plus 0.5%. Lending rates are set at a Margin over the Base Rate,
depending on the risk involved. See Applicable Margin and LIBOR.
Base Rent: the minimum, xed Rent due under the Terms of a Lease,
which often increases over the Term of the Lease.
Base Year: the actual taxes and Operating Expenses for a specied
Base Year, most often the year in which a Lease commences.
Basis Points (BPS): 1/100th of a percentage point (e.g., 50 Basis
Points equals 0.50%). BPS is generally pronounced “bips.”
16
Basket: an exception contained in a Negative Covenant (usually
expressed as a dollar amount). For example, a Negative Covenant may
be “borrower shall not issue additional debt,” while a Basket would be
“except for unsecured debt in an amount not to exceed US$10 million.”
Benecial Ownership: in the context of REIT, the Benecial
Ownership of stock under the rules of Section 544 of the Internal
Revenue Code, as modied by Section 856(h)(1)(B) of the Internal
Revenue Code. Generally, these rules provide for attribution of stock
ownership among certain family members and to holders of options
to acquire stock, and certain upward attribution of ownership of stock
held by partnerships, corporations, trusts, or estates to their owners or
beneciaries.
Beneciary: a person who is entitled to enforce a promise or obligation
made for that person’s benet. For example, the Beneciary under
a Letter of Credit is the person who is entitled to Draw on the Letter
of Credit; and the Beneciary under a Guaranty is the person who is
entitled to make a claim under the Guaranty. A Deed of Trust is made by
a Grantor or trustor, who owns real Property, to a trustee for the benet
of the Beneciary, who gets to direct the trustee with respect to the
Property and the exercise of remedies in the event of a Default on the
secured Obligations.
Bid Rigging: when contractors engaging in Competitive Bidding for a
project manipulate the bids or bid process so as to ensure which bid will
be accepted, eectively increasing prices. Bid Rigging is a violation of
US antitrust law.
Bifurcation of Lease: a landlord may divide a Lease as a matter of
law to evict a certain tenant while allowing other tenants’ Lease and
occupancy rights to remain intact.
Big Box: a retail store that occupies a large square or rectangular
building and sells a variety of products at high volume.
Bill of Sale: a document signed by both parties evidencing the Transfer
of title to personal (not real) Property from the seller to the buyer. The
Bill of Sale contains essential terms such as the purchase price, names
and addresses of both parties, and a description of the Property.
Blanket Easement: an Easement that is not conned to a limited area
of a Property but covers the entire Property for the use contemplated by
the Easement.
Blanket Lien: a Lien that covers over everything. A Blanket Lien gives
a creditor the right to seize, in the event of nonpayment, nearly all types
of assets and Collateral owned by a debtor in order to satisfy the debt
at issue.
17
Blanket Mortgage: a Mortgage that covers multiple properties as
security for a debt or other obligation.
Blind Pool REIT: a REIT that does not own any properties or identify
what specic properties will be acquired when raising capital from
investors. After funds have been raised, the manager(s) of the Blind
Pool REIT determines what properties the REIT will acquire.
Blocker Entity: typically a C Corporation or other entity taxable as a
corporation for US federal income tax purposes that is used by a fund
in structuring certain investments to achieve certain tax treatment or
results. Blocker Entities are frequently utilized to: (i) avoid the incurrence
of UBTI by certain tax-exempt investors, (ii) protect the tax-exempt
status of certain tax-exempt investors, (iii) avoid the incurrence of
Eectively Connected Income (or other, similar tax consequences) by
certain non-US investors, and/or (iv) assist certain non-US investors
that, but for their investment in the fund, may not be obligated to le a
US tax return or otherwise be subject to taxation in the US.
Blue Sky Laws: US state laws that regulate (i) the oer and sale
of securities within each state, (ii) the registration and reporting
requirements for broker-dealers doing business in each state, and (iii)
investment advisers seeking to oer investment advisory services in
each state.
Board of Directors: the governing body of a company that is elected
or appointed by the owners of the company and which is responsible for
the overall management of the company.
Boilerplate: the parts of a contract, usually found near the end, that
vary little among contracts of the same type.
Bona Fide Purchaser (BFP): an innocent party that has purchased
Property for a stated value, unaware of any fact that would cast doubt
on the seller’s right to make the sale.
Bondable Lease: a Lease in which the lessee pays all the expenses,
including Mortgage Interest and Amortization, carries all of the real
estate risks (including casualty and Condemnation), never has the right
to terminate the Lease before its expiration date, and never has the right
to abate Rent, leaving the lessor with a steady Rent amount free of all
claims, just like a bond. See also Hell or High Water Lease.
Bonds: a Surety Bond guarantees a contractor’s payment and
performance, deposited by the contractor for a deal with a Guaranty
Construction job, to assure the owner that the contractor will complete
the job.
18
Bonds: Completion: a Surety Bond that a given project will be
completed, even if the project runs out of money or into other issues
with completion.
Bonds: Payment: a Deposit or guarantee that the successful bidder
of a Construction Contract gives to assure that upon completion of the
contract, all amounts the successful bidder owes will be paid.
Bonds: Performance: a Surety Bond issued by one party to safeguard
against a failure of the other party to meet their contract Obligations.
Bonds: Surety: a transaction between three parties, in which the
“surety” promises to pay the “obligee” if the Principal or obligor fails to
fulll the Terms of the contract. The transaction ensures that the obligee
does not suer losses from a Principal’s failure.
Book Value: the value at which Property is carried on the Balance
Sheet of a company. The Book Value usually consists of the Property’s
historical cost adjusted for Depreciation.
Bookings: reservations for guest, conference, and banquet rooms or
other facilities at a hotel.
Books and Records: typically a reference to all documents, records,
and books of the account pertaining to an entity’s business aairs,
including the entity’s organizational certicates and documents,
ownership lists, Financial Statements, minutes of meetings and
proceedings, and written records of other actions taken by or on behalf
of the entity.
Borrower: a company that borrows under a Loan Agreement or Credit
Agreement.
Brand Name: the name associated with a hotel or lodging system of
hotels.
Brand Standards: the procedures, policies, instructions, standards,
requirements, specications, and programs required by the owner of a
Brand Name with respect to the (i) marketing, operation, management,
provision of various services, and maintenance of properties to be
operated under or identied with the Brand Name, and (ii) physical
appearance and components of properties to be operated under or
identied with a Brand Name.
Brand Trademarks: the trademarks, service marks, trade dress,
trade names, corporate names, logos and slogans (and all translations,
adaptations, derivations, and combinations of the foregoing), and
Internet domain names associated with a Brand Name.
19
Branded Residential: a usually upscale residential Condominium
product associated with a Brand Name hotel, where the Condominium
owners are oered the opportunity to receive a litany of luxury hotel
services.
Breakage Costs: the losses, costs, and expenses incurred by a lender
as a result of a Borrower’s (i) failure to borrow, convert or continue
a LIBOR loan after giving notice requesting the same, (ii) failure to
make a prepayment of LIBOR loans after giving notice thereof, or (iii)
Prepayment of LIBOR loans on a day that is not the last day of the
applicable interest period (i.e., the costs of “breaking” a LIBOR loan).
Breakpoint: in Leases with Percentage Rent, the threshold dollar
amount of annual Gross Revenues over which Percentage Rent is to
be paid. The Breakpoint can be a dollar gure negotiated between the
landlord and tenant, or it can be a “natural Breakpoint,” which is derived
by dividing the minimum or Base Rent payable under the Lease by the
Percentage Rent rate. For example, if the minimum or Base Rent were
US$20,000 per month, and the Percentage Rent rate were 6%, the
natural Breakpoint would be US$333,333.33 (US$20,000 / 0.06).
Bridge Loan: a short-term loan that is used to nance a transaction
(typically an acquisition) temporarily and cover costs until more
permanent nancing is arranged.
Bring Down Certicate: a document certifying that the
Representations and Warranties set out in an agreement (often the
Purchase Agreement or Loan Agreement) are true and correct. At
Closing, Bring Down Certicates are often exchanged.
Bucket: when Indemnication is provided for, Bucket generally refers
to a specied minimum dollar amount one party’s losses must exceed
before the other party has an obligation to pay damages to the rst party
for the losses. See also Basket.
Budget: Annual: the projected expenditures and income of a 12-month
period.
Budget: Capital: the budget utilized by a lender, purchaser, or owner
to track projected expenditures for Capital Improvements necessary at
a Property.
Budget: Construction: the projected cost of the Construction phase of
a project.
Budget: Operating: the projected expenditures and income for
necessary day-to-day activities.
20
Budget: Proposed: a budget for costs and expenses of Construction
of a project proposed by the owner/developer, often subject to the
Construction lender’s approval.
Buer: in Zoning, the portion of a lot that is not covered by buildings,
pavement, parking, Access, and service areas. Established as
landscaped open space for the purposes of screening and separating
properties. Typically consists of trees, shrubs, and other natural
vegetation.
Builder’s Risk Insurance: an insurance policy that covers perils that
can occur during the Construction phase of a project.
Building Code: a set of regulations and standards promulgated by
local government relating to the structural safety of buildings, and
containing legal requirements for the Construction and maintenance of
the same.
Building Systems: typically the core systems of a building, including
the plumbing, electrical systems, and HVAC systems.
Build-Out: approximately where and how much space will be available
for a potential development.
Build-to-Suit: an agreement whereby the owner of real estate agrees
to construct and fund the Construction of a building or Premises to meet
the specic requirements of a tenant. In exchange, the tenant agrees
to Rent the building or Premises from the owner on mutually agreed
Terms.
Bulk-Sales Adavit: when real estate is transferred for income
purposes and is not considered to be in the ordinary course of the
seller’s business, the seller must complete an adavit detailing its
secured and unsecured creditors. This adavit is designed to protect
the purchaser and is governed by the bulk sale laws of each jurisdiction.
The sale of a single- or two-family home by an individual, trust, or estate
is exempt.
Bureau of Indian Aairs (BIA): the US federal government agency,
within the Department of the Interior, responsible for the administration
and management of American Indian reservations.
Buy-Sell: a provision whereby the owners of a company agree upon
the manner in which one or more owners may purchase the interests
of another owner of the company. These provisions are typically used
when a dispute arises between the owners that cannot be resolved
or when an owner is in Default of its Obligations under the governing
document of the company.
21
C Corporation: an entity taxable as a corporation under Subchapter C
of the Internal Revenue Code. Income of a C Corporation is generally
subject to two levels of tax: rst at the corporate level, and again at the
shareholder level when the income is distributed.
Cage Cash: cash held on the Premises (usually in a safe or vault).
The gaming reserve requirements determine the minimum amount of
cash held.
California Association of Realtors (CAR): an organization that
promotes professional practice and ethics in the real estate eld through
industry standards, services, and education.
California Land Title Association (CLTA): a nonprot corporation
representing title companies in California. CLTA develops title
forms, monitors and summarizes relevant legislation, and promotes
professionalism within the title industry.
Call Right: a feature of some bonds that allows their Issuer to redeem
(or “call”) them before they mature and must be repaid.
Cap (Ceiling): a maximum dollar limitation on claims or reimbursement
Obligations. Often used for Indemnication claims or a party’s obligation
to reimburse legal fees or Closing Costs.
Capital Account: an account maintained for each Partner or Member
of an entity treated as a partnership for US federal income tax purposes.
A Partner’s or Member’s Capital Account generally equals the sum of
such person’s Capital Contributions and allocable share of income and
gain, minus such person’s Distributions received and allocable share of
deductions and losses.
Capital Appreciation: an increase in the market value of an asset
relative to its purchase price. Capital Appreciation and Yield together
comprise the total return on an investment in a particular asset.
Capital Call: action taken by a fund to exercise its right to receive from
investors all or part of their Capital Commitment.
Capital Contribution: an owner’s contribution of capital, in the form of
money or Property, to a company.
Capital Expenditure (Capex): a business expenditure that is
Capitalized to the Balance Sheet under the rules of GAAP, and then
Amortized or Depreciated as an Income Statement expense over a
period of more than one year rather than being immediately “expensed”
to the Income Statement in full in the current period. A Capital
Expenditure is distinguished from a current expense because it has a
22
long-term impact that will benet the business in future years as well
as the current year. Buying vegetables for dinner is probably a current
expense. Buying a vegetable farm is probably a Capital Expenditure.
See also Capitalize.
Capital Gain / Capital Loss: gain or loss realized on the sale or other
disposition of a capital asset. Generally, Capital Gain and Capital Loss
are calculated by taking the sale price less asset basis and transaction
costs.
Capital Gain Dividend: a dividend, or portion thereof, that is
designated by the REIT in a written notice mailed to its shareholders
as a “capital gain dividend” and is paid out of the REIT’s Net Capital
Gain for the Taxable Year. A Capital Gain Dividend is taxable to REIT
shareholders as Long-Term Capital Gain.
Capital Improvements (Capital Repairs): forms of Capital
Expenditures, which are costs typically incurred to add value to a xed
asset. A key factor to determining whether an Improvement or repair
constitutes a Capital expense is whether the cost can be fully deducted
for accounting and tax purposes in the year in which the cost was
incurred; costs that must be Capitalized or Amortized over more than
one year are considered Capital expenses.
Capital Lease: a Lease that meets at least one of four criteria outlined
in paragraph seven of FASB No. 13 and, therefore, must be treated
essentially as a loan for book accounting purposes. The criteria are: (i)
title passes automatically to the lessee at the end of the Lease Term,
(ii) Lease contains a bargain Purchase Option, (iii) Lease Term is
greater than 75% of estimated useful life of the leased asset, and (iv)
present value of Lease payments is greater than 90% of the leased
asset’s Fair Market Value. The lessee treats a Capital Lease as both the
borrowing of funds and the acquisition of an asset to be Depreciated;
the Lease is recorded on the lessee’s Balance Sheet as an asset and
a corresponding liability (Lease payable). Periodic lessee expenses
consist of Interest on the debt and Depreciation of the asset.
Capital Structure: the overall structure of a company’s debt and
Equity. For example, a company’s Capital Structure could include Senior
Mortgage debt, Preferred Equity, and common Equity investments.
Capitalization Rate (Cap Rate): the ratio between the Net Operating
Income produced by an asset and its capital or current market value.
Capitalize: in accounting terminology, a cost a company recognizes
as a long-term investment rather than immediately recognizing it as an
expense. The company then Amortizes or Depreciates the expense
23
over time on its Income Statement, until eventually all of the expense
is recognized. Spreading the expense over time like this increases
earnings in the short term, because the entire cost is not deducted in
the rst period. Also used in the context of loans that accrue Interest
in whole or in part (rather than being paid on a current basis), where
Capitalize refers to adding any accrued and unpaid Interest to the
Principal amount of the Notes on any Interest Payment Date in lieu of
paying that Interest in cash.
Carried Interest: the percentage of a fund’s or other company’s
investment prot that is paid, directly or indirectly, to the fund manager,
General Partner, or a particular Member of a company, which is in
excess of such party’s ownership percentage in the entity. This is
eectively the performance fee for receiving such payment.
Carryforward: an income tax deduction or credit (typically used when
referring to a net operating loss) that cannot be taken entirely in a given
period but may be taken in a later period.
Carveout: an exception to a Covenant or other Term of a Loan
Agreement or Credit Agreement. Also, an exception to the nonrecourse
character of a real Property secured loan.
Cash Available for Distribution (CAD): a REIT’s cash available to be
distributed as dividends, generally calculated by subtracting recurring
Capital Expenditures from FFO.
Cash Equivalent: highly rated, short-term, liquid investments that are
readily convertible to cash and have short maturities.
Cash Flow: the volume of revenues and expenses owing in or out of
an entity. Cash Flow is sometimes used synonymously with Liquidity or
Current Income.
Cash Flow Participation: the right to share in the Cash Flow
generated by an income producing Property in excess of Property
expenses and, often, a certain return to the Equity investors. Often a
source of additional return to a lender, beyond Interest and fees.
Cash Management Account: an account set up under a Cash
Management Agreement or the cash management provisions of a Loan
Agreement into which all Cash Flow from a Mortgaged Property are to
be deposited. Usually an account set up in the name of the lender or
under the exclusive control of the lender.
Cash Management Agreement: an agreement between a Mortgage
Borrower and its lender that prescribes how the lender is to collect and
disburse all Cash Flow from the Mortgaged Property.
24
Cash on Cash: a measure of an investment’s rate of return based on
cash invested, excluding Leverage. A Cash on Cash return is generally
equal to the annual income generated by the investment divided by the
amount of cash invested.
Cash Out Financing: a loan that allows the Property owner to liquidate
some or all of its Equity in the Property, usually due to the Appreciation
of the Property since its acquisition by the owner.
Cash Sweep: taking all Excess Cash Flow and applying it to the
Mandatory Prepayment of debt. Cash Sweeps usually apply when
something bad has happened or is projected to happen, so as to reduce
the lenders’ exposure as quickly as possible. Sometimes Cash Sweeps
happen by design, if a loan is intended to be relatively short-term or highly
Amortizing (such as a liquidating trust structure). See also Cash Trap.
Cash Trap: when times are bad, but perhaps not bad enough to call for
a Cash Sweep, lenders may use a Cash Trap. Excess Cash Flow is held
in an account while the parties wait and see whether things improve.
Typically, the lender then applies this money through a Waterfall to pay
debt service and other real Property expenses, and then any remaining
funds will sit in the Cash Trap until release upon the Borrower meeting
certain tests.
Casualty Insurance: a general category of insurance providing
coverage against accidents, Property damage, or other liabilities.
Casualty Insurance diers from Property Insurance in that Property
Insurance insures damage to the physical Property itself, while Casualty
Insurance covers the business.
Cause (Cause Event): the commission of a specied act or the
occurrence of a particular event that gives one party the right to exercise
certain rights or remedies against another party under a contractual
agreement.
Caveat Emptor: the Latin equivalent of “buyer beware.” Although US
state and federal law has modied this common law doctrine, Caveat
Emptor cautions purchasers to proceed at their own risk and holds them
responsible for determining Good Title.
Centralized Marketing Program: the marketing, sales, and
reservation services that a hotel manager or franchise company typically
provide to owners of the hotels within the manager’s or franchise
company’s system.
Centralized Services: the services, programs, and benets that a
hotel manager or franchise company typically provide to owners of the
25
hotels within the manager’s or franchise company’s system (such as a
Loyalty Program).
Certicate of Good Standing: ordered in connection with a Closing
to make sure that the company and its subsidiaries are good corporate
citizens. Certicate of Good Standing is a document issued in the US
by the Secretary of State of the relevant jurisdiction certifying that an
entity is in good standing (i.e., all fees, taxes, and penalties owed to
the state have been paid, annual reports have been led, no articles
of Dissolution have been led, etc.). A Bring Down Certicate of good
standing is a short-form Certicate of Good Standing that is obtained
more quickly and generally ordered for delivery on the morning of the
Closing to make sure nothing has happened since the date of the long-
form Certicate of Good Standing.
Certicate of Insurance (COI): a document issued by an insurance
company certifying to a Property owner and often to its lender and its
landlord, if applicable, that insurance coverage exists and outlining the
basic provisions thereof. Also known as Evidence of Insurance.
Certicate of Occupancy (CO or CofO): a document verifying that
the building complies with applicable Code and Zoning restrictions,
issued by the local building or Zoning authority.
Chain of Title: the historical sequence of owners of a Property,
beginning with the original owner and ending with the current owner.
This list tracks Transfers of title to a Property.
Change Order: an agreement during Construction between a project
owner and contractor that the contractor do something dierent
than was originally contemplated by the Construction Contract.
The contractor typically initiates the Change Order process when a
circumstance or Assumption has changed, and the owner agreed to
take the risk surrounding that change. For instance, a contractor might
agree to guarantee completion by March 15, provided there are no more
than ve days of inclement weather preventing crews from working.
Once the inclement weather days exceed ve, the contractor will seek
a day-for-day extension of the guaranteed completion date through the
Change Order process.
Charge O (Write Down): a write-o of debt by a lender.
Charter: a name for the fundamental document prescribed under US
state corporate laws to create a valid corporation that qualies for limited
liability and all other state-conferred aspects of incorporation. Generally
called the articles of incorporation (in Maryland, California, and other
states) or the certicate of incorporation (Delaware).
26
Chattel: an item of personal Property that is movable (as distinguished
from real Property).
Chattel Mortgage: a Mortgage on goods purchased, whereby the
seller Transfers title to the buyer but retains a Lien securing the unpaid
balance due to the seller, which is paid in future installments. Security
Agreements, which Article 9 of the UCC governs, have generally
replaced Chattel Mortgages.
Churn Rate: used by REITs to refer to the rate at which Leases are
not renewed or are terminated during a certain period. Churn Rates
are often calculated by comparing the annualized Rent of expired/
terminated Leases during a certain period to the total Portfolio’s
annualized Rent at the beginning of such period.
City Ledger: Accounts Receivable attributable to non-registered
guests, guests that are no longer at the hotel or event, or meeting room
usage. Credit card receivables typically make up the largest portion of
the City Ledger.
Claims Made Policy: an insurance policy in which coverage is
triggered by the date the insured rst became aware of the possibility of
a claim and notied the insurer of such possibility. Typically, the policy
period for a Claims Made Policy will extend to a stated retroactive date
years before the policy was purchased, and the policy will provide
coverage for claims made during the Term of the policy stemming from
actions or events that occur sometime between that retroactive date and
the date the claim is made. Compare with Occurrence Policy.
Class of Building: oce space classications representing a
subjective quality rating that is used to dierentiate between buildings
and indicate the competitive ability of each building to attract similar
types of tenants. Class A oce buildings compete for premier oce
users, Class B oce buildings compete for users willing to pay average
Rent, and Class C oce buildings are aimed at tenants who pay below-
average Rent for the area. Trophy properties are usually one-of-a-
kind landmark buildings such as Rockefeller Center in New York. The
Building Owners and Managers Association (BOMA) is in charge of
overseeing classication standards.
Class of Stock (Class of Interest): a type of stock or interest in a
company that issues more than one type of stock or interest. Each
type of classied stock or interest has distinct rights attached to it. Two
common classied stocks are Preferred Stock, which carries the right
to guaranteed dividends, and common stock, which carries the right to
vote and collect common dividends.
27
Clawback: the obligation to return a fund Distribution previously
received from the fund. This can refer to the obligation of a fund
manager or General Partner to return excess Carried Interest
Distributions, which can occur when markets or investment outcomes
are strong in the early years of the life of a fund and weak in later years.
Clawback can also refer to the obligation of fund investors to return
Distributions previously received if the fund requires those amounts
to meet its expenses or liabilities. Commonly referred to as a Limited
Partner giveback.
Clean Title: a title that is free from Liens and all doubt regarding
ownership of the Property, such that a reasonable buyer would accept
that title to the Property. Clean Title is legally valid or eective. Also
known as Clear Title, Defensible Title, Good Title, Indefeasible Title,
Insurance Title, and Marketable Title.
Clogging the Equity of Redemption: the right of a Mortgagor to
redeem its Property once the debt secured by a Mortgage is paid
o or otherwise Discharged, and to hold and enjoy the Property as
such Mortgagor was entitled to hold and enjoy it before the Mortgage.
Contractual impediments that interfere with the Mortgagor’s ability to
satisfy its Obligations and reclaim its Property are referred to as clogs
and are void.
Closing (Purchase and Sale): the consummation of a sale transaction
between a purchaser and seller of real Property. At the Closing, all
agreements between the parties are nalized, executed and delivered.
Consideration is exchanged and title to the Property is conveyed.
Closing Checklist: a document that lists every last piece of paper that
needs to be executed and/or delivered as a Closing Condition before
the Closing of any transaction (loan, acquisition, etc.). A junior attorney’s
best friend and worst nightmare.
Closing Condition: a type of Conditions Precedent, namely those
applicable at the time of Closing of a transaction.
Closing Costs: miscellaneous fees that both buyer and seller or
lender and Borrower incur during the course of a transaction. These
costs are often paid at Closing, when the contract or loan documents
are executed and the sale or loan is consummated. Examples of
Closing Costs include fees from the involved attorneys, surveyors, and
appraisers, as well as title insurance premiums and other diligence
providers.
Closing Date: the date on which the Closing occurs.
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Closing Documents: documents signed during the nal step in the
execution of a transaction. These documents usually include the Deed,
loan documents, title adavits, and multiple disclosures.
Closing Instruction: written instructions pursuant to which an attorney
or Escrow agent assembles the documents signed by the parties,
then holds them in Escrow as part of a deal Closing process. Once
these instructions have been followed, the Escrow is released and the
documents become eective.
Closing Memo: a memorandum prepared prior to the Closing and
agreed by the parties to the transaction, which sets forth the order in
which the transaction steps occur and the amounts and wire instructions
for the payments to be made at the Closing.
Closing Statement: a document that discloses all the Sources and
Uses of funds and proceeds from the transaction, including all fees,
costs, credits, and expenses.
Club Deal: a smaller loan pre-marketed to a group of relationship banks
— the arranger is a rst among equals, and each lender gets a full (or
almost full) cut of the fees.
Code: a reference to a set of rules or ocial statutes such as the
Internal Revenue Code or Bankruptcy Code.
Coinsurance: title insurance coverage provided by two or more title
companies whereby each company is responsible for its allocated
portion of risk and shares in its portion of the title insurance premium
and the insured has direct access to each insurer in the event of a
claim. Common practice is for one company to issue the policy and for
the other company(ies) to review the lead insurer’s policy and issue a
Coinsurance Endorsement (also known as a “Me Too” Endorsement) to
the lead insurer’s title policy.
Co-Lender Agreement (Syndication Agreement): an agreement
among lenders setting out the relative rights and Obligations of the
various lenders making the loan to the Borrower, including Priority of
payment, allocation of losses, and Priority of interest in the Collateral, if
any, supporting the loan, the rights to service and administer the loan,
and the exercise remedies following the occurrence of an Event of
Default. The agreement will also address the rights of each lender to sell
o its loan exposure after a transaction has closed.
Collar: a form of Hedge that limits the upside and protects the downside
on the particular item being Hedged. For instance, an Interest Rate
Collar on a Floating Rate Loan would establish an upper and lower limit
on the Floating Rate.
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Collateral: the assets of a Borrower and any Guarantors or other
Grantors or Pledgors that secure the Borrower’s (and sometimes
Guarantors’) Obligations under the applicable loan or credit documents
in a Secured Financing.
Collection Account: an account created for an income-producing
Property into which all revenues of the Property are deposited. The
account will either be in the name of the lender or agent for the lenders
or be expressly held for the benet of the lender or agent, as secured
party, and the Borrower will grant the Lender or agent a Security Interest
in the Collection Account.
Comfort Letter: a letter from an Issuer’s auditors addressed to
the underwriters (in public oerings) or the initial purchasers (in
144A oerings) that provides “comfort” that the numbers included
in the prospectus (in public oerings) or in the Private Placement
memorandum (in 144A oerings) are accurate. The prescribed form a
Comfort Letter should take is spelled out in SAS 72. The underwriters
or initial purchasers (and sometimes the Board of Directors) seek such
a letter in order to help establish a Due Diligence defense. The Comfort
Letter allows the underwriters or initial purchasers to demonstrate
reliance on experts for the Audited nancials and an element of a
“reasonable investigation” for the Unaudited Financials and other
Unaudited Financial information. The Comfort Letter is delivered at
pricing. It is the natural enemy of both accounting rms and junior- and
mid-level law rm associates.
Commencement Date: the date on which actions pertaining to a
contract begin. Although a Lease is dated when negotiated and signed,
the Commencement Date may be a later date upon which the Terms of
the Lease are implemented.
Commercial Mortgage-Backed Security (CMBS): a security backed
by the Cash Flow produced by commercial or residential Mortgage
loans. The creation of these securities occurs through a Securitization
process whereby the applicable Mortgages are sold into a Securitization
trust and the securities are issued by the trust thereafter.
Commission: a fee paid to a real estate broker in exchange for
services rendered in connection with the sale, Lease, or exchange of
Property. The payment is negotiated independently between the parties
on a case-by-case basis and may be a percentage of the transaction
value.
Commitment (Capital): in a loan context, a lender’s obligation to fund
a loan, up to the maximum amount specied, to a Borrower provided
that the terms and conditions of the Loan Commitment are satised. In
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a joint venture context, the obligation of a joint venture Member to fund
Capital Contributions to the venture, in or up to the maximum amount
specied, provided that the terms and conditions for such Capital
Contribution are satised.
Commitment Fee: a fee paid to the arranger of a loan for the
Commitment provided in the Commitment Letter. The term also refers
to a fee that is paid on the undrawn portion of a committed Revolver as
compensation to the Revolver lenders for keeping money available for
borrowing.
Commitment Letter: a letter by which nancial institutions commit
to provide loans. The Commitment Letter consists of the actual text of
the letter, along with annexes and exhibits that lay out the Terms of the
facilities and the Conditions Precedent to funding.
Commitment (Title Insurance): a document that informs the
buyer or lender of the state of title of a Property as of the date of
the Commitment. It includes three schedules: an informational page
showing the party in which title to the Property vests and the Legal
Description of the Property (often labeled Schedule A); the requirements
page setting forth what the title insurance company needs to insure the
buyer’s title to the Property or the lender’s Mortgage of the Property
(often labeled Schedule B-I); and the exceptions page describing Liens,
Easements, real estate taxes, and other matters aecting title to the
Property (often labeled Schedule B-II).
Common Area: the area of Property available for shared use by all
owners or tenants, often found in the lobbies of oce buildings and in
the clubhouses or similar amenities of apartments, gated communities,
and Condominiums.
Common Area Maintenance (CAM): the fees paid by tenants that
cover a pro rata share of the upkeep of specic Common Areas and
amenities such as parking lots, trash removal, and street cleaning. CAM
is highly negotiated in retail Leases. Landlords seek a broad denition
to cover their costs of ownership and operation of the Common Areas,
whereas tenants seek to narrow the denition to cover operation and
maintenance costs of such areas only.
Community Reinvestment Act (CRA): an act passed by the US
Congress in 1977 to encourage Depository institutions such as
local banks and thrifts to help meet the credit needs of surrounding
communities (particularly low- and moderate-income neighborhoods)
by measuring each such institution’s record in fullling its community
obligations and then using that measurement in connection with future
regulatory approvals needed by the applicable institution.
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Comp: data used to calculate how much a Property is worth by
comparing various aspects from recently sold properties in the same
geographic neighborhood, such as physical characteristics, nancing
conditions, and conditions of sale. Also known as Comparables. Market
conditions and locational comparability are also important factors.
Compact: the negotiated agreement between an American Indian
tribe and a state government that resolves questions of overlapping
jurisdictional responsibilities.
Competitive Bidding: bids from competing organizations that are
openly invited, in order to stimulate competition and receive the lowest
price for a given contract.
Competitive Set: a group of hotels mutually selected by the owner of a
hotel and its manager to serve as a reference benchmark for the hotel’s
performance. A good description of a pair of rst-year law students.
Completion Guaranty: Guaranty provided by a credit-worthy entity or
person (e.g., the Sponsor of the project) guaranteeing completion of the
project and payment of any overages incurred in connection therewith.
Comprehensive Environmental Response Compensation and
Liability Act (CERCLA): a US federal law, passed in 1980 and
commonly known as Superfund, that imposes strict liability (i.e.,
liability that does not depend on fault) for cleaning up environmentally
contaminated land.
Computer Assisted Drawing (CAD): the use of a computer to aid in
the formation or Alteration of a building design. Like making computer
animated cartoons, but for buildings.
Concept Drawings: the initial illustration of a design for a Construction
project, without the specic engineering logistics.
Condemnation: when a taxpayer owns Property or real estate in a
place that has been designated for public use or Construction. Public
authorities exercise Condemnation through the power of eminent
domain.
Conditional Sale: a sale whereby the buyer takes Possession
of the Property but the seller retains a right of repossession until
payment of the full purchase price or satisfaction of one or more
stipulated conditions. Once the conditions are satised, the contract
becomes binding.
Conditional Use Permit: a Property owner’s permit that allows
the owner to use the Property in accordance with current Zoning
regulations, according to the conditions required by the Zoning authority.
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Conditions Precedent: things that must happen, including delivery of
documents, Representations and Warranties being true, and sucient
funds being on-hand to close a transaction or be entitled to Draw under
a Revolver loan facility or Construction Loan facility. The accent is on
the second syllable: “prǝ-see-dent.”
Condo Hotel (Condotel) Block: a project that is used as both a
Condominium and a hotel. Typically, individual guest rooms are sold as
Condominium units to third-party owners who are then given the right
to oer such units to be rented out as part of the hotel’s guest room
inventory. When a unit owner occupies the unit, the owner is typically
given the right to receive all of the hotel’s ancillary services. The right
to submit the unit back into the hotel’s inventory is what primarily
dierentiates a Condo Hotel from a Branded Residential project.
Condominium: an individually owned housing unit that is part of a
larger complex.
Condominium Conversion: the conversion of rental units to a
Condominium regime.
Conduit Loan: a loan originated with the intent of selling the loan into
a pool (such as a REMIC) that will become the security for a mortgage-
backed security.
Conrmation Order: an order entered by the Bankruptcy court to
evidence its approval and conrmation of a Plan of Reorganization.
Connected Load: the total electric load of a system when all of the
equipment connected to that system is energized.
Consent Dividend: a REIT and its shareholders may, under certain
circumstances, agree to treat an amount as deemed paid as a dividend
on common stock for purposes of the Dividends Paid Deduction. The
amount of a Consent Dividend is treated as distributed in cash by the
REIT to the shareholder on the last day of the REIT’s Taxable Year and
as contributed to the REIT’s capital by the shareholder on such day.
Consideration: something of value given in exchange for something
else. Consideration is often bargained for and induces each party to
enter into a contract, and is what distinguishes a contractual obligation
from a gift. Money is a common form of Consideration, but other things
of value, such as a promise to pay or a piece of Property, are also
acceptable.
Construction: when a Property owner constructs a building or space
for a specic tenant, with the tenant typically controlling the design and
specications.
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Construction Contract: an agreement to build, construct, or repair a
building or structure.
Construction Document (CD): a plan, drawing, or specication for a
Construction project.
Construction Drawings: documents prepared by an architect that
show a graphic representation of the building or project as planned.
Construction Loan: a type of loan, the proceeds of which are used
primarily for Construction Improvements on real Property, which is
typically advanced in parts as work progresses and is used to pay the
General Contractor, Subcontractors, and material suppliers, as well as
the Soft Costs of Construction. This type of loan is typically made with
the expectation that a permanent loan will be used to renance it upon
completion of construction, or the loan is structured to be convertible
into a permanent loan at such time.
Construction Manager: the person responsible for oversight of a
project’s construction and coordination from start to nish.
Construction: Build-Design: when a single entity handles both the
design and Construction of a specic project.
Construction: Fast Track: when some portions of a project begin
Construction before the entire design is nished.
Construction: Take-Out Buyer: the purchaser of a new Construction
project upon completion of Construction. The proceeds of such sale are
applied to pay o the Construction nancing, and any excess is retained
by the initial developer as Prot.
Constructive Eviction: when a landlord does not ask the tenant to
leave but instead does something or fails to do something that they have
a legal duty to provide, rendering the Property uninhabitable. Tenants
who can show that the landlord’s actions caused the uninhabitable
condition and that the tenant vacated the Premises in a reasonable time
may terminate the Lease and seek damages.
Constructive Ownership: the ownership of REIT stock under the
rules of Section 318 of the Internal Revenue Code, as modied by
Section 856(d)(5) of the Internal Revenue Code. The Constructive
Ownership rules also apply when determining whether a REIT actually
or constructively owns an interest in a tenant. Generally, these rules
provide for Constructive Ownership of stock among certain family
members and to holders of options to acquire stock, and certain upward
and downward attribution of ownership of stock between partnerships,
corporations, trusts or estates and their owners, subsidiaries, or
beneciaries.
34
Consumer Price Index (CPI): a measure of the average change
over time in the prices paid by urban consumers for a market basket
of consumer goods and services. Indexes are available for the US
and various geographic areas. Average price data for select utility,
automotive fuel, and food items are also available. In real estate, the
CPI is often used in the determination of annual Rent increases, either
to dene the amount of the Rent increase each year or to provide a cap
or Floor for such increases.
Contiguous: pieces of Property that are adjoined or adjacent to one
another and share a common boundary.
Contingency: extra money in a Construction budget which at the time
of Closing is not earmarked for any particular use but may be used
for unexpected costs going forward. Contingency might be anywhere
between 5% and 15%. Developers do not want Contingency to be too
high, since it consists of debt (expensive and rare) and Equity (even
more expensive and rare).
Contingent Obligation: an obligation that may, but is not certain to,
materialize depending on what circumstances arise.
Contingent Rent: the Rent, or portion of the Rent, under a Lease that
is not xed or determinable at the inception of the Lease, but varies as
a result of changes or events occurring after the inception of the Lease.
Contingent Rent encompasses things like Common Area Maintenance
costs, Property taxes payable by the tenant and Percentage Rent and
Rent escalations based on an Index rather than a xed percentage
escalation.
Contraction Right: a Lease provision allowing the tenant to return a
portion of the Demised Premises to the landlord if desired. A Contraction
Right may also include the ability for the tenant to terminate the Lease
early in its entirety.
Control: in a contractual context, a range of denitions, factoring
in shareholdings, management roles, shareholder agreements,
directorships, and the degree to which others have any of these
things. Also a means of achieving Perfection Under Article 9 for certain
types of Collateral. For certain Collateral, such as Deposit accounts,
Control is the only method of Perfection. For other Collateral, such as
securities accounts, certicated Securities, and uncerticated Securities,
Perfection can be achieved by Filing a Financing Statement, although
Perfection by Control has higher Priority in instances where Perfection
can be achieved both ways.
Controlling Holder: in the context of a co-lender or Participation
agreement, the holder of a portion of the debt that has the right to direct
35
and consent to how the lenders will act in certain situations (e.g., in
exercise of remedies). The Controlling Holder can lose its control if an
Appraisal event occurs and it is determined that such holder is “out of
the money” to such a point as to make their position valueless (and
therefore their position as a controlling party inappropriate).
Cooling O Period: a period of time after the purchase during which
the buyer has the right to terminate the contract for a small penalty fee.
At the end of the Cooling O Period, the contract is legally binding.
Under the US Federal Trade Commission’s Cooling-O Rule, real estate
transactions are exempt and, therefore, contracts are binding once
exchanged.
Cooperating Broker: a broker who assists another broker, often
by locating the buyer for the Property. The brokers usually split the
Commission.
Cost of Capital: the combined cost of debt and cost of Equity used
to determine required return on capital necessary to make a project
worthwhile.
Cost Overruns: the amount spent in excess of budgeted costs to
complete the Construction or Alteration of a project.
Cost Recovery: the recoupment or deduction for nancial accounting
or tax purposes of the cost of a capital asset over time through
Depreciation, Amortization, or depletion.
Cost-Plus Contract: an agreement by which the contractor is paid for
all costs, plus a Prot.
Co-Tenants: persons who hold Property jointly or in common with each
other.
Counterparty: the “other guy,” or the other party that participates in
a contractual transaction. For example, buyer and seller or lender and
Borrower.
Course of Dealing: a clearly recognizable pattern of previous
conduct between the parties to a transaction. The Course of Dealing
is admissible evidence to interpret ambiguities in contracts and is
examined by a court in determining the intent of the parties when they
entered into a contract. The presumption is that the parties entered
into the contract in accordance with the manner in which business was
transacted prior to the signing of the contract. The Course of Dealing
cannot be used to alter or contradict the contract’s express provisions.
The Course of Dealing is intended to safeguard the expectations of the
parties and improve the certainty of their transactions, based upon their
prior dealings with each other.
36
Covenant: legalese for an agreement to do something (Armative
Covenants such as give notice to a seller/lender of a material event), to
not do something (Negative Covenants such as not encumbering one’s
Property), or to maintain something (maintenance Covenants such as
maintaining a Debt Service Coverage Ratio of a specied amount).
Covenant of Quiet Enjoyment: a promise that the tenant or Grantee
will be able to use and enjoy real Property without disturbance. This
Covenant includes the right to exclude others from the Property, to
peace and quiet, to clean Premises, and to basic services.
Covenants, Conditions and Restrictions (CC&R): limitations
and rules placed on a group of homes or condos by a developer or
Association; for example, restrictions on the color a home can be
painted.
Cramdown: the conrmation of a Chapter 11 Plan of Reorganization
over the rejection of one or more classes of impaired creditors, provided
that the Plan of Reorganization satises the basic requirements set
forth in Bankruptcy Code Section 1129(b). The conrmed Plan of
Reorganization will bind all creditors and Equity security holders, even
those who vote against it.
Credit Agreement (Loan Agreement): a legal document in which
one or more lenders agrees to lend money to a Borrower. The Credit
Agreement not only sets forth the mechanics for the making of loans,
but also contains Representations and Warranties of the loan parties,
Armative Covenants, Financial Covenants, Negative Covenants, the
remedies of the lenders after the occurrence of an Event of Default and
expense reimbursement, as well as indemnity and other Boilerplate
provisions.
Credit Bid: a bid by a secured creditor in a Foreclosure or Bankruptcy
sale whereby the secured creditor bids up to the amount of the
outstanding balance of its loan (in a Foreclosure context) or osets the
allowed amount of its secured claim against the price at which it would
purchase the assets (in a Bankruptcy context).
Credit Enhancement: improving the credit quality of a company by
employing resources, nancial instruments, or the credit of another
entity to support such credit quality. Common methods of Credit
Enhancement include guarantees, Letters of Credit, Surety Bonds,
Reserve Accounts, and cash Collateral accounts.
Credit Rating: designations used by Rating Agencies to give relative
indications of credit quality.
37
Credit Tenant Lease: a single-tenant, Triple Net Lease, on a mid- to
long-term basis, to an Investment Grade tenant. A landlord with such
a Lease may be able to arrange more favorable nancing Terms from
lenders who will lend against the rental stream from such Lease,
underwriting the loan based on the credit of the tenant rather than using
Mortgage loan underwriting standards in evaluating the value of the
Property and credit of the landlord.
Creditor’s Rights: an area of law dealing with the collection of debts
and judgments owed by a party (the debtor) to another party (the
creditor).
Cross-Collateralized: an asset that serves as Collateral for more than
one loan. If the debtor is unable to make timely either loan’s schedule
payments, the aected lender(s) can eventually force the Liquidation of
the asset and use the proceeds for repayment.
Cross Default: a loan provision under which Default on one debt
obligation triggers Default on another debt obligation.
Curb Appeal: the general attractiveness of a house or other type
of Property from the exterior. Curb Appeal plays a signicant role in
Property Valuations, as it indicates the initial appeal of a Property to
prospective buyers. Examples of factors that play a role in Curb Appeal
are: landscaping, exterior decorations, state of repair, and paint. Also a
popular show on HGTV.
Cure: to x or make right. Bringing into compliance with a Covenant or
otherwise eliminate a Default.
Cure Period (Grace Period): the period provided in a Loan
Agreement, Credit Agreement, or other loan document for a Borrower or
other loan party to Cure a Default so it does not ripen into an Event of
Default.
CUSIP Number: a gure consisting of a combination of nine
characters, both letters and numbers, that uniquely identies a nancial
security. The CUSIP system is overseen by the Committee on Uniform
Securities Identication Procedures.
Custodian: a nancial institution that has the legal responsibility for a
customer’s documents, Notes, and/or securities.
Customary Services: for purposes of the Income Tests, Rents From
Real Property include charges for services customarily furnished or
rendered in connection with the rental of real Property, whether or
not those charges are separately stated. Basic Customary Services
provided to tenants in connection with the occupancy of space in
38
general (e.g., light, heat, other utilities, and Common Area Maintenance)
may be provided by the REIT directly or by any other person. Other
Customary Services provided at properties of a similar class in the
same geographic market in which the Property is located generally must
be provided through an Independent Contractor from whom the REIT
derives no income or a TRS.
Damages: monetary compensation that is awarded by a court in a civil
action to a party that has been injured through the wrongful conduct
of another party, intended to be remedial in nature, i.e., to restore the
injured party to the position the party was in prior to the harm.
Exemplary/punitive Damages may be awarded to a plainti in addition
to compensatory Damages when a defendant’s conduct is particularly
willful, wanton, malicious, vindictive, or oppressive. The intent of
exemplary/punitive Damages is to punish the wrongdoer and to act as a
deterrent to others who might engage in similar conduct.
Consequential Damages or losses arise not from the immediate act of
the party, but as a consequence of such act. Consequential Damages
can be direct or indirect.
Datedown Endorsement: an Endorsement to a title insurance
policy that brings the date of the policy forward to the date of the
Endorsement. This Endorsement describes any Encumbrances or
other matters aecting title to the Property that have been recorded
against the Property since the date of the initial title policy, and ensures
that there are no additional Encumbrances since the date of the initial
title policy that take Priority over one’s Mortgage or Deed of Trust.
This Endorsement is customarily obtained in connection with a loan
modication transaction.
Dealer Property: Property held as inventory or primarily for sale to
customers in the ordinary course of business. Whether a Property is
Dealer Property is determined based on the facts and circumstances,
taking into account factors such as the number, frequency, and
continuity of sales, the nature and extent of promotional selling activities,
the length of the holding period, and the purposes for which the Property
was acquired, held, and disposed of. See also Prohibited Transaction.
Debt Maintenance: Partners in a partnership (such as an Operating
Partnership) are allocated a share of the partnership’s debt. If
a Partner’s share of partnership debt is reduced, or if a Partner
contributes to a partnership Property subject to liabilities, and its share
of such liabilities after the contribution is reduced, such reductions are
treated as a Distribution of cash by the partnership to the contributor.
Such Distributions will result in the recognition of gain to the extent that
39
they exceed the Partner’s tax basis in the Partnership Interest or trigger
a Disguised Sale. The contributor of Property to a partnership may
therefore want to ensure that it will be allocated sucient partnership
debt to prevent recognition of gain. A Tax Protection Agreement will
frequently provide for restrictions on the partnership’s ability to repay or
renance the debt to which the contributor’s properties are subject. It
may also provide the contributor with the right to guarantee a specied
amount of the partnership’s debt for a specied time period (e.g., the
same period as that chosen for Sale Protection), which is intended
to cause such debt to be allocated to the contributor for purposes of
the above rules. The partnership may be required to indemnify the
contributor in the event the contributor recognizes income as a result of
the partnership’s breach of these obligations.
Debt Service Coverage Ratio: the ratio of debt service to Net
Operating Income, i.e., the amount of cash available to pay Principal
and Interest on the loan. Often an ongoing Financial Covenant or cash
trap trigger in a Loan Agreement.
Debt Service Reserve (DSR): cash Collateral held by lenders or the
agent to pay debt service in case there is a hiccup in revenue.
Debt Stack (Capital Stack): the entirety of capital necessary for the
completion or funding of a project. Such capital may include Equity,
Preferred Equity, mezzanine debt, and Mortgage debt. The debt with the
highest level of risk is at the top of the so-called “capital stack” and has
the highest level of return. Typically, the stack is arranged as follows:
(i) Sponsor Equity, (ii) Preferred Equity, (iii) mezzanine debt, and (iv)
Mortgage debt.
Debt to Equity Ratio: a nancial leverage ratio calculated by dividing
a company’s total liabilities by its owners’ Equity. The ratio indicates
what proportion of Equity and debt the company is using to nance the
assets of a company. A high Debt to Equity Ratio generally means that a
company has been aggressive in nancing its growth with debt.
Debtor in Possession: a debtor that has remained in Possession of
its Bankruptcy estate (as opposed to having, for instance, a Chapter 11
trustee appointed to run the Bankruptcy estate). In Chapter 11, a
Debtor in Possession has most, if not all, of the powers that a trustee
of the debtor’s estate would have if the trustee were in Possession of
the estate.
Debtor in Possession Financing (DIP Financing): nancing
arranged for a company for the period during which it is in the
Chapter 11 reorganization process. Notably, claims for Principal,
Interest, and fees under a DIP Financing typically take Priority over all
40
existing debt, even pre-Bankruptcy secured debt. As long as certain
conditions are met, the Bankruptcy Code allows Liens securing the DIP
Financing to “prime” Liens securing the pre-Bankruptcy Filing debt, in
order to encourage lenders to lend money to companies in Bankruptcy.
Deed: a legal document containing a bargain or contract used to
Transfer ownership of real Property which describes the real Property
and is signed by the transferor. Some Deeds include Warranties.
Deed in Lieu of Foreclosure: an agreement by an owner of a Property
subject to a defaulted loan to “hand the keys” to the lender instead
of making the lender go through the hassle of Foreclosure. This is
a fairly common approach in downside cases, indicating that not all
Acceleration scenarios are contentious between Borrower and lenders.
Sometimes the owner is given a nominal payment to cough up the Deed
in Lieu of Foreclosure, perhaps payment of its legal fees. Also known as
Deed in Lieu or Assignment in Lieu.
Deed: General Warranty: a type of Deed containing both present
and future Covenants whereby the seller makes several guarantees,
including that seller owns the Property in question and has a right to sell
it, and that the real Property is free from any Liens or Encumbrances.
The General Warranty extends back to the origin of the real Property,
not just the period of ownership of the seller.
Default: Loan Agreements and Credit Agreements generally have three
stages of trouble: the Default, the Event of Default, and Acceleration. At
stage one, the Default, the Borrower has violated some provision of the
loan documents. Left uncured for a specied period of time, together (in
some cases) with notice from a disgruntled lender or agent, a Default
will ripen into an Event of Default, which will entitle the lender or agent
to exercise remedies. Also known as the beginning of trouble.
Default Interest/Rate: the extra Interest accruing on amounts under
a Loan Agreement or Credit Agreement following an Event of Default.
Often Default Interest accrues on all outstanding amounts at the
regularly applicable Rate plus 200–500 Basis Points, but sometimes it
only accrues on overdue amounts.
Defeasance: a provision that voids a bond or loan when the Borrower
purchases and pledges as collateral to the secured party cash or bonds
sucient enough to service the Borrower’s debt. Usually encountered
in a CMBS context, Defeasance of a Securitized commercial Mortgage
is a process in commercial real estate nance by which a Borrower
substitutes other income-producing collateral for the Property subject to
the Securitized Mortgage to facilitate the removal of such Mortgage on
the Property without paying-o the existing Note. Generally, a Basket of
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US Treasury Obligations is the only collateral acceptable for this type of
substitution. See also Defeasance Collateral.
Defeasance Collateral: substitute Collateral comprised of government
securities within the meaning of the Investment Company Act that can
be used to replace real Property Collateral securing a Mortgage loan
without jeopardizing the loan’s status as a qualied Mortgage under
the tax rules governing REMICs. Typically, these are US Treasury
Obligations. The Portfolio of securities used to Defease the real Property
Collateral needs to be structured to match the debt service schedule of
the loan through the loan’s Maturity date.
Deferred Maintenance: normal upkeep activities that have been
postponed and often result in asset deterioration. In loan transactions,
the Borrower is sometimes required to Escrow a portion of the proceeds
of the loan in a Deferred Maintenance reserve fund to cover costs for
such upkeep activities.
Deciency: the dierence between how much a secured party is owed
and how much it realizes upon disposing of its Collateral in Foreclosure.
Deciency Dividend: a dividend paid by a REIT in a later Taxable Year
that the REIT may include in its Dividends Paid Deduction in an earlier
Taxable Year following a determination (such as a nal court decision,
a Closing agreement, an agreement between the IRS and the REIT, or
a statement led by the REIT) that results in an increase in the REIT’s
taxable income or a decrease in the REIT’s Dividends Paid Deduction
for such earlier year. Deciency Dividends may be taken into account
both in determining whether a REIT has satised the 90% Distribution
Test and in computing the REIT’s tax on undistributed income for the
applicable Taxable Year, and may be used to prevent an inadvertent
failure to satisfy the 90% Distribution Test. However, a Deciency
Dividend may not be used to prevent a 4% Excise Tax.
Deciency Judgment: a judgment following a Judicial Foreclosure
for the unpaid balance of the Mortgage debt, when the proceeds of the
Foreclosure sale of the Mortgaged Property are insucient to satisfy the
outstanding Mortgage debt.
Delay Damages: the actual costs incurred as a result of Construction
that has been discontinued for a period of time longer than the time
frame anticipated on the date the contract was signed. If the delay
is excusable, then the company may receive an extension of time to
complete the Construction. Also, not all delays are compensable.
Demand Load: the total electric power that a facility requires to supply
its continuous and non-continuous operations. Knowledge of the
42
Demand Load is important prior to certain types of Construction in order
to ensure that the new structure or addition will be supported by enough
power.
Demising Wall: a boundary, also known as a partition or party wall,
that separates the real Property of one party from the real Property of
another party.
Deposit: the funds provided at the signing a Letter of Intent or contract
to convey that the buyer is committed to the transaction. If the deal goes
ahead after the diligence period or other contract conditions to Go Hard
are complete, the Deposit becomes non-refundable and applied to the
purchase price. If the buyer terminates the contract during the diligence
period or the seller defaults after the Go Hard date, the Deposit is
returned to the would-be buyer. Also known as Earnest Money or Good
Faith Deposit.
Depositary (Depository Bank): a bank that agrees to hold a
Borrower’s accounts in a nancing and to administer them in
accordance with instructions that leave no discretion to the Depositary.
Depreciation: an accounting method of allocating the acquisition
cost of a tangible asset or Property over the expected useful life of
such asset or Property by attributing portions of such cost to the
periods during which the asset is being “used up” to earn revenues.
Depreciation is not a method of Valuation but rather cost allocation. The
Depreciation of an asset for accounting purposes is not necessarily
a reection of the asset’s current market value. In accounting speak,
a tangible asset Depreciates over time whereas an intangible asset
Amortizes.
Design Development: the phase of Construction in which the design of
a project goes from schematic drawings to drawings that specify design
elements and lay out mechanical, architectural, structural, and other
details.
Designated Individual: a person designated by a partnership or limited
liability company to act on behalf of the Partnership Representative
and the partnership or limited liability company if the Partnership
Representative is an entity.
Development Density: the maximum aggregate amount of land per
land parcel that is permitted to be developed. REITs often use the term
Development Density when discussing the characteristics and value of
their Real Estate Assets.
Development Management Fee: a fee paid to a party that is
responsible for overseeing and managing the Construction and
development of a project.
43
Development Yields: the Net Operating Income that the development
of an asset expects to generate upon the Stabilization of such asset,
expressed as a percentage of the cost of developing such asset,
including the cost of a Lease-Up.
Dilution: a reduction in the ownership percentage held by an owner
of a company, which typically results from the issuance of additional
equity interests in the company to other owners or the conversion of
convertible securities held by others.
Diminution: the typical measure of Damages applied by courts in
determining Damages to Award in cases of Waste (material and
permanent injury to Premises or Property). Diminution of Value
compares the value of the Premises or Property after the Waste to the
value of the Premises or Property prior to the Waste (as contrasted
with “cost of repair,” which determines Damages awarded based upon
the reasonable cost of repairing the damage done to the Premises
or Property). Also known as Diminution of Value and Diminution of
Premises.
DIP Financing: see Debtor in Possession Financing.
Direct Metering: when a utility company installs a meter to measure
energy consumption, and the tenant pays the utility company directly.
Disbursement Agreement: an agreement between the developer and
the lender that establishes the Terms to govern the Construction and the
maximum disbursement amount to cover the Construction costs. It also
identies the parties authorized to sign requests for the disbursement of
borrowed funds.
Discharge: the release of a Borrower’s obligation to pay the lender
when the lender receives payment in full of the debt. Also used to
describe a release of a Mortgage secured by the debt being paid.
Discount Rate: when used in connection with a bank’s cost of money,
the Interest Rate charged to a member bank to borrow money from the
US Federal Reserve. Also, the Interest Rate used to determine present
value.
Discounted Cash Flow: a method for determining the value of an
asset based upon discounting the estimated future Cash Flows of the
asset to the asset’s net present values.
Disguised Sale: under certain circumstances, a contribution of
Property to a partnership in exchange for a Partnership Interest,
preceded or followed by an actual or deemed (see Debt Maintenance)
Distribution of cash or other Property by the partnership to the
44
contributing Partner, may be treated, in part, as a sale of the Property
to the partnership for tax purposes. This term may also refer more
generally to a Transfer of Property to an entity that is in the form of a
tax-free or tax-deferred contribution to the entity but is in substance a
taxable sale to the entity.
Disposition Fee: fees levied at the time of the disposition of an asset.
Dispute Resolution Provision: a provision designed to serve as an
agreed-upon way for parties to resolve certain disputes. In the context
of a joint venture or fund agreement, the mechanism may involve a Buy-
Sell provision, Forced Sale Right, or Arbitration provision as the means
to resolve an impasse.
Disregarded Entity (DRE): an entity wholly owned, directly or indirectly
through other Disregarded Entities, by a taxpayer, whose separate
existence from such taxpayer is disregarded for income tax purposes.
Dissolution: the termination and winding up of an agreement, contract,
or business entity.
Distribution: the distribution of cash, Property, or securities by a
company to an owner of the company.
Diversication: a technique that seeks to reduce risk and enhance
returns by blending the types and classes of assets held within a
Portfolio.
Dividend Coverage: the extent to which a company’s net income is
sucient to support the company’s dividend payments.
Dividend Payout Ratio: a measure of the amount of a REIT’s earnings
returned to shareholders that is attributable to recurring Cash Flows,
generally expressed as the yearly dividend per share divided by FFO or
AFFO.
Dividend Reinvestment Plan (DRIP): a company-sponsored plan that
permits shareholders to have all or a portion of the dividends they would
otherwise receive (sometimes along with additional amounts paid by
such shareholders) automatically used to purchase additional company
stock, sometimes on advantageous terms.
Dividends Paid Deduction (DPD): a deduction, equal to the sum of
the dividends paid during the Taxable Year and the Consent Dividends
for the Taxable Year, that a REIT is entitled to take to reduce its taxable
income, generally allowing the REIT to avoid entity-level tax with respect
to such deducted amount. Except in the case of a Publicly Oered REIT,
any Preferential Dividend is not considered a dividend for purposes of
computing the Dividends Paid Deduction.
45
Doctrine of Merger: a proposition of real Property law that states
that all prior negotiations and agreements (including the purchase
agreement) merge into the Deed when the Deed is conveyed. Pursuant
to this doctrine, any Covenants or guarantees made in the contract
that are not reected in the Deed are extinguished when the Deed is
conveyed to the purchaser of the real Property.
Domestically Controlled REIT: a REIT in which at all times during a
ve-year testing period non-US persons held directly or indirectly less
than 50% in value of its stock. Domestically Controlled REIT status is
relevant for non-US investors because the stock of such a REIT is not
treated as a USRPI under the FIRPTA rules.
Dominant Tenement: the real Property that benets from an Easement
or right to use a portion of another real Property that is usually adjacent.
DownREIT: a Subsidiary partnership used to acquire and hold Real
Estate Assets by a REIT that is not an UPREIT. The DownREIT
partnership is intended to replicate the benets to contributors of
appreciated Property that might be obtained from an UPREIT. Generally,
owners of appreciated Property will contribute such Property to the
DownREIT in exchange for Partnership Interests bearing some degree
of economic similarity or exchangeability for the stock of the REIT
General Partner. Because the returns to the contributor come from
the assets in the DownREIT partnership (rather than all the assets
of the REIT in an UPREIT structure), the contributor to a DownREIT
partnership often enjoys a preferential distribution right equal to the
REIT dividend.
Drag Along Right: a provision allowing an owner of a company
(usually a majority owner) to require that other owners of such company
(usually minority owners) participate in a sale of their ownership
interests to a third party. The idea is that an owner may not be able
to recognize the full value of its holdings unless it can sell the entire
company to a third party by dragging along the other owners. Drag
Along Rights would generally provide that the minority owner receive the
same Terms as the majority owner. In contrast, see Tag Along Right.
Dragnet Clause: a clause in a Mortgage pursuant to which any
Property acquired by the applicable Borrower after the date of such
Mortgage is automatically made subject to the Lien of the Mortgage
and/or any additional debt incurred by the same Borrower to the lender
following the date of the Mortgage will be automatically secured by the
existing Mortgage.
Draw: a funding under a Construction Loan, typically subject to
satisfaction of certain conditions for such funding, such as completion of
a portion of work and delivery of Lien Waivers.
46
Dry Closing (Pre-Closing): a transaction (commonly a lending or sale
transaction) in which all of the required Closing documents are executed
and delivered but no money is funded, pending satisfaction of one or
more conditions subsequent, at which point the Closing occurs (the
loans are made or the sale price is paid).
Dry Powder: cash reserves kept on hand to cover future Obligations or
to purchase assets if conditions are favorable.
Dual Agency: when the Listing agent and the buyer’s agent are both
licensed by the same broker, or when the same agent represents both
buyer and seller. In this arrangement, a dual agent can never get the
highest price for the seller and the lowest price for the buyer. Dual
Agency must be agreed to in writing between the parties, and is not
legal in every state.
Due Diligence: a process of conducting an intensive investigation of
a Property or corporate entity to understand fully, among other things,
all of the assets and obligations of an entity, title issues, environmental
issues, Zoning issues, Building Code issues, pending and potential
lawsuits, Leases, Warranties and contracts, and engineering or Property
condition issues.
Due Diligence Period (Inspection Period): the time period following
acceptance of an oer during which the buyer may investigate the
Property to ensure that they are satised before nalizing the purchase.
Due on Sale Clause: a clause in a Mortgage contract that requires
the Mortgagor/Borrower to repay the Mortgage in full if the Mortgaged
Property is transferred or sold.
Duty to Mitigate: a non-breaching party’s duty to make reasonable
eorts to limit losses resulting from the other party’s breach. Not doing
so may preclude the party from collecting Damages that might have
been avoided.
Early Access: when a landlord allows a tenant to move into or begin
performing work on a Property before the Lease is fully negotiated and
executed or before the commencement date occurs.
Earn Out: a provision in a Mortgage ensuring that the Borrower will
be able to obtain additional funds if certain conditions of the business
are met. This allows for the Borrower to reap the benets of projected
earnings, since the lender is not willing to loan additional funds for those
future earnings.
Earnings Before Interest, Taxes and Amortization (EBITA): a
common measure of company nancial performance. Other measures
47
include: EBITDA; Earnings Before Interest, Taxes, Depreciation,
Amortization and Management Fees (EBITDAM); and Earnings Before
Interest, Taxes, Depreciation, Amortization and Restructuring or Rent
Costs (EBITDAR).
Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA): a common measure of company nancial performance.
Easement: the legal right to use another’s real Property for a specied
purpose such as for Ingress or Egress across a neighbor’s real Property,
for a right to construct a pipeline under the land, or for a grant to a utility
provider to construct or maintain utility lines above or below ground.
Easement by Necessity: an Easement over a real Property that is
required for the enjoyment of another real Property. This often results
when both parcels of land were previously owned by the same party, but
can also occur when a landlocked parcel of land requires an Easement
over an adjacent Property in order to reach a public road.
Easement in Gross: an Easement that benets a particular individual,
not the real Property.
EBITDA: Adjusted: EBITDA adjusted to eliminate the impact of certain
unusual or non-cash items that a Borrower (or its Sponsor) believes are
not indicative of the future performance of its business. Also EBITDA on
steroids.
Economic Interest: interest in an entity that entitles the owner of such
interest only to Distributions and related allocations of income and
loss but not to any management, voting, information, or other rights in
the entity.
Egress: to exit, go out from, or leave from.
Eligible Independent Contractor (EIK): an Independent Contractor
that, at the time such contractor enters into a Management Agreement
or other similar service contract with a TRS to operate a Qualied
Lodging Facility or a Qualied Healthcare Property leased to the TRS
by a REIT in a RIDEA Structure, is actively engaged in (or is related to a
person actively engaged in) the trade or business of operating Qualied
Lodging Facilities or Qualied Healthcare Properties (as applicable) for
any person who is not related to the REIT or the TRS.
Emergency Capital Requirements: the right of a manager or owner of
a company to contribute capital or spend capital on an emergency basis
without the approval of other owners, often to the extent necessary to
prevent injury to persons or Property.
48
Emerging Issues Tax Force (EITF): a standing committee of the
FASB intended to identify and work on recommendations and responses
to emerging nancial accounting issues.
Encroachment: an intrusion where a Property owner infringes a
neighbor’s Property rights by building a structure in whole or in part on a
neighbor’s Property or by letting something encroach onto a neighbor’s
Property.
Encumbrance: a claim against a Property by another party that
does not prohibit passing title but often impedes transferability by
diminishing title value. Common Encumbrances on real Property include
outstanding Mortgages or unpaid Property taxes. Other types of less
problematic Encumbrances include Easements such as utility and
Access Easements.
Endorsement: a supplement to an insurance policy agreed to by
the Issuer of the insurance to address specic risks or concerns.
Endorsements are available for title insurance, liability, casualty,
Worker’s Compensation, Business Interruption, and other types of
insurance policy. With respect to title insurance, there is a great variety
in the nature, scope, cost, and negotiability of Endorsement coverages,
and from jurisdiction to jurisdiction. Examples of title Endorsements
include usury, same-as-survey, contiguity, and Access.
Engagement Letter: a letter agreement pursuant to which consultants
are retained for a particular purpose, such as preparation of Appraisals,
Property condition reports, environmental reports, and the like.
Engineering Report: a description of the physical condition of the
Property and its Building Systems, as well as an amount to calculate
reserves for possible replacement. An Engineering Report is drafted by
an architect or engineer.
Enterprise Value: a measure of a company or REIT’s total value that
demonstrates the takeover price of the enterprise. Enterprise Value
is typically calculated as the company’s market capitalization plus
Indebtedness, minority interests, and Preferred Equity, minus cash and
Cash Equivalents.
Environmental Indemnity: an agreement between the lender and
Borrower that provides that the Borrower (and typically the Guarantor)
will be liable for any environmental hazards, conditions, or problems that
occur on the Property.
Equitable Subordination: the power of a Bankruptcy court (which is a
court of Equity, after all) to subordinate a claim of a party that engaged
in fraudulent or otherwise unsportsmanlike conduct, in order to provide
49
a remedy for innocent creditors and shareholders that suered an injury
as a result of the bad conduct. Equitable Subordination is a remedial,
not penal, measure. A claim is subordinated only to the extent necessary
to oset the harm caused by the culpable creditor. Claims by insiders
are subject to more rigorous scrutiny for Equitable Subordination than
are claims by non-insiders.
Equity: money from an owner invested in a project or nancing. It is an
abbreviation of Equity of Redemption, an ancient doctrine that prohibited
a secured lender from eecting a strict Foreclosure on Collateral (i.e.,
keeping it) when the Borrower had made a substantial reduction of
the debt, since this would leave the lender with both the Collateral
and the debt repayment to-date. The Borrower was provided the just
outcome (equity) of being allowed to sell the Property to pay o the debt
(Redemption), and keep the dierence (now called the Equity). Equity
also refers to the owner of an asset, as in “that Credit Agreement allows
distributions to Equity if Debt Service Coverage Ratios are above 1.4x.”
Equity Kicker: when a lender agrees to take a share of ownership in
the business or Property for which the loan is advanced. In return, the
lender charges a lower Interest Rate.
Equity Market Capitalization: the total market value of all Equity
interests in a particular company or market segment.
Equity of Redemption: an opportunity for the Mortgagor/Borrower to
save their Property from Foreclosure proceedings by paying the lender
in full, plus Interest, even after Foreclosure proceedings have begun.
Equity Recharacterization: the recharacterization of debt as Equity
in a Bankruptcy based on a number of factors considered by the
Bankruptcy court. Such “Equity” interest is then subordinate to the
claims of other creditors.
Equity REIT: a REIT that invests in and holds primarily real Property
and derives its revenue primarily from rental payments from tenants. In
contrast, see Mortgage REIT and Hybrid REIT.
Escalation Provision: a clause in a contract allowing for an increase in
price in the event of certain conditions such as ination or an increase in
production costs.
Escrow Instructions: written instructions provided to an Escrow agent
identifying the parties to a deal and specifying the conditions required to
complete a transaction and/or to release Escrowed funds. The Escrow
agent may only act within the scope of the instructions, so they are often
extremely detailed.
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Escrow Style Closing: a Closing where all the parties involved deposit
their signed documents and funds into an account and with a neutral
third party such as a title company or law rm until the ultimate release
of signatures and funds at Closing. In contrast, see New York Style
Closing.
Estoppel: when somebody does or fails to do a thing, such that a court
will view that person as not fairly entitled to make a claim later. For
example, if a neighbor helps a boy hang a rope swing on the neighbor’s
tree and the boy falls o and breaks his arm, the neighbor can’t argue
that the boy was trespassing — the neighbor is “estopped” from making
that argument. Lenders and purchasers typically require delivery of
Estoppel Certicates from at least major tenants of the Property being
mortgaged or acquired, wherein the tenant acknowledges the Rent
amount, that the Rent is current, that the tenant is not otherwise in
Default, and other negotiated provisions. Estoppel Certicates are
also typically required to be delivered from ground lessors of a ground-
leased properties.
Estoppel Certicate: a series of statements about the Lease and
the landlord-tenant relationship that the tenant certies to the current
landlord or to a potential purchaser or lender as accurate and true. The
tenant is thus legally barred from ever asserting a contrary claim. Often
a Closing condition in connection with the sale of a Property or the
nancing of a Property.
Event of Default: a contractual provision that sets out specic events
that would result in a Default beyond any applicable notice or Cure
Periods (if any), allowing the lender to accelerate repayment in full of the
loan and all nancial Obligations owed to lender before it was due.
Evergreen: a contractual provision that allows for the automatic
renewal of a contract (e.g., Letter of Credit) unless notice for termination
is given usually by the Beneciary thereof. Like evergreen trees in the
winter, the contract will keep going.
Eviction: the lawful expulsion of an occupant from real Property.
Excess Cash Flow: the amount left at the bottom of a Waterfall, or
after paying Operating Costs and debt service, and funding all Reserve
Accounts. Excess Cash Flow is either dividended to the Sponsor or
subjected to a Excess Cash Flow Sweep or Cash Trap.
Excess Cash Flow Sweep: a contractual provision that stipulates
a percentage (which could be 100%) of Excess Cash Flow that the
Borrower will repay a lender (or that the lender may be able to hold as
cash collateral) during a specied period. The percentage is calculated
as an amount of Excess Cash Flow.
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Exchange Accommodation Titleholder (EAT): an intermediary
that assists taxpayers to obtain Like-Kind Exchange treatment in
certain transactions that would not qualify for such treatment without
the participation of such intermediary. Ordinarily, Like-Kind Exchange
treatment does not apply if the Replacement Property is acquired
before the Relinquished Property is transferred. If the owner of the
Replacement Property must sell that Property before the Relinquished
Property can be transferred, Like-Kind Exchange treatment may apply
if certain requirements are met, including having an EAT acquire and
hold the Replacement Property until the Relinquished Property can
be transferred by the taxpayer, at which time the EAT would Transfer
the Replacement Property to the taxpayer. The taxpayer will generally
own and control the operation of the Replacement Property while it is
owned by the EAT (e.g., through a Lease). An EAT must meet certain
requirements, including that such person is subject to US federal income
tax and holds qualied indicia of ownership of the Property.
Exclusive (Exclusivity): when one broker is granted the Exclusive
right to sell or Lease a Property, that broker is entitled to compensation
if the Property sells or is leased within a specied amount of time
(regardless of whether such broker nds the buyer or not).
Exculpation: the concept of contractually relieving a party of liability to
another party.
Executory Contract: a contract that has not been fully performed, or a
contract under which continuing Obligations exist for one or both parties
to the contract.
Exit Rights: the ability of an investor to sell its interest in a company or
to cause or force the sale or Liquidation of all or part of the company’s
assets. It is the bucket of rights given to an investor to allow such
investor to liquidate its holdings in a company and “exit” even if the other
investors do not want to sell.
Expansion Right: a Lease provision allowing a tenant to lease
additional space in the building where its current Demised Premises are
located or in another Property owned by the same landlord, if desired.
Expansion Space: the additional area that is the subject of an
Expansion Right.
Extend and Pretend: an Amendment or extension of a loan that is not
performing by the lender to avoid having to enforce remedies at such
time (e.g., Foreclosing on a Property the lender does not really want to
own). Also known as Amend and Extend and Kicking the Can.
52
Extended Coverage Title Policy: a policy that minimizes the
exceptions from coverage found in a standard title policy and oers
armative coverage including insuring against loss occasioned by
defects that are ascertainable, but undiscovered or unreported, by
an examination of the public records and from defects that are not
ascertainable from the public records (e.g., parties in Possession,
unled Mechanic’s Liens, and matters that would be disclosed by an
accurate survey). The basic Extended Coverage removes the standard
pre-printed exceptions in a title policy or limits them to take exception
only for matters that occur after the date of the title policy.
Extension Right: a contractual right, typically in a Lease or Loan
Agreement, to continue the Term of the same contract for a specied
period beyond the original contractual period, which Extension Right
is typically conditioned upon satisfaction of certain specied conditions
such as no Events of Default, payment of extension fees, and other
items.
Externally Managed: a REIT managed by a third party rather than
an internal team, generally because an outside manager can leverage
experience and analytics from overseeing other, related enterprises.
External management is typically less costly than developing an internal
infrastructure team but can involve conicts of interests and corporate
governance challenges.
Fair Market Value (FMV): the price for which Property can be sold (or,
as applicable, the Rent for which it can be leased) in an “arms-length”
transaction, or between informed, unrelated, and willing parties, each of
which is acting rationally and in its own best interest.
Falling Out of Escrow: when one or more Terms of the Property sale
cannot be met, the deal may fall apart.
Federal Funds: overnight borrowings made by commercial banks to
maintain required reserves at the US Federal Reserve.
Federal Home Loan Mortgage Corporation (Freddie Mac): a US
government-sponsored enterprise that purchases mortgage loans to be
pooled and then Securitized as mortgage-backed securities. Freddie
Mac guarantees payment of the underlying mortgage loans securing
the mortgage-backed securities, thereby eliminating credit risk and
stimulating the secondary market for mortgages.
Federal National Mortgage Association (Fannie Mae): a US
government-sponsored enterprise that expands homeownership through
the creation of a secondary Mortgage market. Fannie Mae purchases
and guarantees Mortgages that it then Securitizes as mortgage-backed
securities and sells to investors.
53
Fee (Fee Simple Title): a type of real Property interest in which the
Property holder has outright ownership of the land. Fee Simple Title is
the largest and most comprehensive real Property interest under the
law. The Fee Simple Title Property owner has Exclusive ownership until
they die without heirs.
Fiduciary Duty: the highest standard of care that can be imposed on a
party at law or in Equity and which typically requires one party to act in
the best interests of another party.
Filing: the act of depositing an original instrument (or an authentic
ocial copy), such as a Deed or Mortgage, in a public registry to protect
a person’s interest in the Property against subsequent purchasers or
mortgagees. A Filing generally must be made with the Register of Deeds
or the Recording Oce in the county where the real Property is located.
Also known as Record / Recordation.
Financeable: either provides for Subordination of the landlord’s Fee
interest or contains provisions to protect the Leasehold Mortgagee from
certain risks associated with loss of the Leasehold Interest as a result
of the termination of the Ground Lease such as notice and Cure rights,
granting of a new Lease in the event of termination, and similar rights.
Financial Accounting Standards Board (FASB): a private-
sector organization formed by the US accounting profession to study
accounting procedures and formulate accounting standards to be
employed in the preparation of Financial Statements.
Financial Covenant: a Covenant contained in a Credit Agreement
requiring the Borrower to meet certain tests, such as EBITDA relative
to Indebtedness. Breach of the Financial Covenant leads to an
Event of Default. However, Project Finance Credit Agreements and
mortgage loans typically do not contain Financial Covenants since
declaring an Event of Default based on Financial Covenant breach
would not motivate the Borrower to repay the limited recourse debt.
Project Finance Credit Agreements and mortgage loans include other
protections, such as Cash Sweeps and Reserve Accounts.
Financial Industry Regulatory Authority (FINRA): a private-sector
organization formed to self-regulate the US securities industry. FINRA is
the successor to the National Association of Securities Dealers (NASD).
Financial Statements: statements reecting the nancial condition
of a company or Property, including Income Statements, Balance
Sheets, and Cash Flow / revenue summaries, typically prepared by an
accountant or a nancial Ocer.
54
Financial Statements: Audited: Financial Statements prepared by
an auditor adhering to GAAP. Lenders typically require that annual
Financial Statements be audited, often by a Big Four accounting rm.
Financial Statements: Balance Sheet: an account of a company’s
assets, liabilities, and ownership equity. Balance Sheets are typically
included in Financial Statements.
Financial Statements: Cash-Flow Statement: a reection of a
business’s Liquidity. The Cash-Flow Statement shows cash and Cash
Equivalents, as aected by changes in income and Balance Sheet
accounts. Cash-Flow Statements are typically included in Financial
Statements.
Financial Statements: Certied: an Audited Financial Statement that
has been approved by an accountant.
Financial Statements: Unaudited: Financial Statements not prepared
according to GAAP, even if prepared by an auditor. Lenders typically
will accept Unaudited Financial Statements for quarterly or monthly
reporting.
Financing (Leverage Policy): a policy adopted by the board or
management of a REIT setting forth the amount of Leverage the REIT
may employ.
Financing Contingency: when a deal hinges on whether or not the
buyer is able to obtain nancing to fund all or a portion of the purchase
price.
Financing Fee: the fee payable from a Borrower (usually at the time
of Closing) to a lender in Consideration of the lender making a loan to
the Borrower. It is usually expressed as a percentage of the total loan
proceeds made available to the Borrower.
Financing Statement (UCC-1, UCC-3): the rst thing to know is that
these are not the Financial Statements. The purpose of Financing
Statements is to Perfect a Security Interest in many classes of personal
Property, including Fixtures. A Financing Statement is used in a Secured
Financing and is a simple document that contains the name and
address of each of the debtors and the secured party (i.e., the lender)
and contains a brief description of the Collateral (and in the case of a
Financing Statement being led as a Fixture Filing, a Legal Description
of the real Property). The Financing Statement serves as public notice of
the Security Interest. To be eective, the Financing Statement must be
completed properly (particular attention must be paid to the exact legal
name of the debtor) and be led in the proper ling oce. It is always
advisable to le a Financing Statement as soon as possible, but in any
55
event, within 10 days of the Closing date, in order to avoid Preference
concerns if the debtor were to le for Bankruptcy.
Finder’s Fee: the Commission paid to an intermediary in a business
transaction. Often, a Finder’s Fee is paid by a landlord or seller to a
broker for nding a buyer or tenant for a Property.
Fire Sale: a sale at a heavily discounted price, often well below the
intrinsic value of the Property or asset.
FIRPTA Distribution: a distribution by a REIT to a non-US individual,
non-US corporation, or another REIT that is attributable to gain from
the sale by the distributing REIT of a USRPI, which is treated as gain
recognized by such non-US individual, non-US corporation, or other
REIT from the sale of a USRPI. Such distribution is subject to US
federal income tax and withholding under the FIRPTA rules, unless
such distribution is with respect to any Class of Stock of a REIT that
is regularly traded on an established US securities market and the
applicable shareholder held 10% or less of such Class of Stock during a
specied testing period.
Fiscal Year: a year as dened by a company. A company’s Fiscal Year
is typically a 52- or 53-week period that the company uses to calculate
its annual Financial Statements. Although a scal year often lines up
with a calendar year, it is not necessary for it to run from January 1
through December 31.
Fitch: shorthand for Fitch Ratings, a Subsidiary of Fimelac, S.A. Fitch is
a Rating Agency.
Fixed Charge Coverage: a means of evaluating a REIT’s ability to pay
xed charges (primarily Interest expense and dividends on Preferred
Stock) using its available Cash Flows, typically measured using EBITDA
or Adjusted EBITDA.
Fixed Rate: an Interest Rate that is locked in upon issuance of the debt
and does not change over the course of the life of the debt.
Fixed Rate Loan: a loan that accrues Interest at a Fixed Rate.
Fixture: a statutory exemption from SEC registration requirements that
permits oers and sales of Securities that are deemed to be conducted
outside of the United States.
Fixture Filing: a type of Financing Statement that is Filed in county real
estate records to notify third parties of a secured party’s Lien in Fixtures.
The Fixture Filing can be in the form of a Financing Statement: UCC-1
or it can be included as part of the Mortgage or Deed of Trust. In almost
56
all jurisdictions, there is no advantage to having a Fixture Filing separate
from the Mortgage. However, some local counsel require a separate
Filing prior to such counsel issuing an opinion.
Fixtures, Furniture and Equipment (FF&E): xtures, furniture, and
equipment that are not permanently connected to the structure of a
building or utilities.
Flip: a transaction in which a buyer purchases real Property with the
intent to sell quickly and realize on the Appreciation in value.
Floating Rate: an Interest Rate that periodically adjusts based on a
market Index rate, such as the Base Rate or LIBOR.
Floating Rate Loan: a loan that accrues Interest at a Floating Rate.
Flood Certicate: a report prepared by a surveyor or engineer that
determines whether a real Property is in a Flood Zone.
Flood Zone: an area subject to oods. The US Federal Emergency
Management Agency (FEMA) maintains a list of dierent Zones to
designate areas with a higher propensity for ooding. The particular
Flood Zone a real Property is located in will often inuence the Mortgage
and insurance rates.
Floor: the dollar threshold in Damages suered by a party that must be
reached before Indemnication can be claimed. See also Interest Rate
Floor.
Floor-Load: the weight that a structure’s oor may be expected to bear
safely if uniformly distributed, usually calculated in pounds per square
foot of area. Leases will often regulate the Floor-Load of a particular
piece of equipment or machinery to be installed.
Floor-to-Area Ratio (FAR): the ratio of total building square footage
to the square footage of the Lot on which the building is located.
Frequently used in Zoning and as a measure of Developmental Density.
Flow Through Entity: a business entity whose income “ows through”
to its owners. The income is treated as direct income of the owners,
and therefore only the owners — and not the entity — pay income tax
(avoiding double taxation that may be associated with, for example, a C
Corporation). Common examples include partnerships, S corporations,
and Disregarded Entities. Also known as a Pass Through Entity or
Fiscally Transparent Entity.
Food and Beverage (F&B): a portion of operating revenue as well as a
component of hotel operations, whether managed internally, leased out,
or operated by a third party under a Management Agreement.
57
Forbearance: an agreement the Borrower arranges with its lenders
pursuant to which the lenders agree to refrain from accelerating the
debt for a limited period of time while the Borrower endeavors to
get its act together. In a typical situation, lenders might agree not to
exercise remedies while giving the Borrower time, beyond any available
Cure Period, to improve performance, nd a new nancing source,
or otherwise agree upon an appropriate Amendment to the facility to
reect the new (and usually unpleasant) circumstances. The lenders will
typically seek to tighten Terms, such as demanding additional Collateral,
increased pricing, and stricter nancial reporting in exchange for their
Forbearance.
Force Majeure (Act of God): literally, an overpowering force. A typical
Force Majeure event would include a hurricane, war, earthquake,
terrorism, or another occurrence beyond the control of the party claiming
Force Majeure, but usually would not include things that result in an
inability to pay money. A Force Majeure event excuses a party from
performance under a contract. The party claiming Force Majeure has to
have done everything reasonably possible before and after the event to
avoid the eects.
Forced Sale Right: the right of one or more investors to force a
company to sell an asset without the approval of the other investors in
the company.
Forcible Entry: the act or an instance of taking Possession of real
Property by force, unlawfully and against the will of those in lawful
Possession.
Foreclosure: in a real Property context, the act by a mortgagee of
following certain legally prescribed procedures to realize upon the real
Property that is security for debt owed to the mortgagee, usually by
advertising the Property is for sale and selling it in an auction process
for cash. US Foreclosure laws are state-specic and a mortgagee must
abide by the laws of the jurisdiction where the real Property is located
(e.g., some states allow for Non-Judicial Foreclosure, while other
states only allow for Judicial Foreclosure). A Foreclosure by a Senior
mortgagee wipes out any junior Liens as well as the owner’s interests. A
Foreclosure by a junior mortgagee also wipes out the owner’s interests
(and those of any even more junior mortgagee), but leaves intact any
Senior Liens. (Some of these outcomes can be altered through an
Intercreditor Agreement.) It is rare for anybody other than the mortgagee
to bid at a Foreclosure, simply because you are bidding on the value
of the Property in excess of the debt (aka the Equity). If there were
any such value, most often the owner would not have let the Property
go into Foreclosure in the rst place. Also, typically bidders must bid
cash or Cash Equivalents, except that the Foreclosing mortgagee may
Credit Bid.
58
Foreign Investment in Real Property Tax Act (FIRPTA): provisions
in the Internal Revenue Code that generally impose US federal income
tax and withholding and related tax return ling requirements with
respect to the disposition of USRPIs by non-US persons.
Fractional Interest (Fractional Ownership): the division of Property
into portions or shares. In the case of real Property, the title or Deed
can be legally divided into shares or Fractional Ownership, which is
contrasted with time-sharing, in which the owner has use rights but does
not own part of the title.
Franchise Agreement: an agreement that outlines a hotel franchisor’s
terms and conditions for the franchisee to use the Brand Name owned
by the franchisor and the services associated with the use of the Brand
Name. The agreement also states the Obligations of the franchisor
and franchisee regarding the operation of the hotel, the training and
operational support the franchisor will provide (and at what cost),
any radius restriction prohibiting the franchisor from granting another
franchise within the specied area, the Term of the franchise, the
franchise fees, rights to Transfer the agreement, and so on.
Franchise Disclosure Document (FDD): a document mandated by
the US Federal Trade Commission that discloses certain proscribed
information regarding a franchisor to ensure that franchises are making
honest and full disclosures about their franchise operations. The FDD’s
purpose is to give the prospective franchise buyer all the information
about the franchise before an agreement is signed. The FDD was
formerly known as the Uniform Franchise Oering Circular.
Franchisor Comfort Letter: an agreement from the franchisor of a
hotel to the lender of such hotel that may provide, among other things,
that in the event the hotel owner defaults under its loan arrangements
and the lender exercises its enforcement remedies under its loan
documents, the franchisor will not terminate the Franchise Agreement
provided the lender meets certain conditions. A Franchisor Comfort
Letter may also address whether the lender would have the right to
terminate the Franchise Agreement as part of such enforcement, and
whether a termination fee would be payable. Some Franchisor Comfort
Letters may also require the franchisor to give the lender notice and
an opportunity to Cure a franchisee default prior to terminating the
Franchise Agreement or exercising its remedies.
Fraudulent Conveyance (Fraudulent Transfer): a Transfer made
by a party that subsequently becomes the debtor in a Bankruptcy
proceeding (i) that was made with actual intent to hinder, delay, or
defraud that party’s creditors, or (ii) in which the party making the
Transfer received less than reasonably equivalent value in exchange
59
and was or became insolvent. A Fraudulent Transfer can be subject to
Clawback from the transferee under certain Fraudulent Transfer laws.
Free Rent: a landlord concession granted under a Lease whereby
the tenant is not required to pay Rent during a certain period of time
during the Term of the Lease. Sometimes this time period occurs at the
beginning of the Lease Term during an operations ramp-up period, and
sometimes it is sprinkled throughout the Term.
Funded Commitment: a portion of cash that an investor has paid to
the fund in connection with such investor’s Commitment to contribute
cash to the fund.
Funded Redemption: a REIT’s public oering, the proceeds of
which are used to fund the Redemption (or repurchase) of outstanding
common units in its Operating Partnership from third-party Limited
Partners.
Funds Flow Memorandum: a Closing document that shows in detail
where the money is going. In more complex transactions, the Funds
Flow Memorandum is often executed or initialed by the Borrower,
particularly when the lender or title company is directed to apply the
funds in some manner on the Borrower’s behalf.
Funds From Operations (FFO): a measure of nancial performance
used by REITs and adopted by Nareit. FFO is net income or earnings
increased by Depreciation and Amortization, sometimes on a per-share
basis. FFO is generally understood to be a measure of a company’s
Cash Flow.
Further Assurances: a standard addition to most contracts providing
that each party will cooperate and perform the actions necessary to
accomplish the intent of the contract.
Gap Coverage (Title Coverage): coverage in title insurance whereby
the title company insures the risk associated with the recording of any
Encumbrance against the real Property security after the Closing of a
transaction but prior to the date the lender’s Mortgage or Deed of Trust
is recorded in the public records.
Gap Undertaking: insurance coverage against previously recorded
adverse matters that aect title between the date of Commitment and
the date the documents are recorded.
Garden Style: a type of multi-family Property in which a cluster of
buildings, typically not more than two or three stories high, share
landscaping and paths such as Common Areas, yet retain separate
addresses.
60
Garn-St. Germain Depository Institutions Act: US congressionally
enacted deregulation of savings and loans associations that abolished
the Interest Rate ceiling for banks, and authorized them to make
commercial loans.
General Contractor (GC): the person in charge of a Construction
project pursuant to the general contract. The GC is responsible for
oversight of day-to-day activities and supplying all materials, labor,
and equipment necessary for the project. Typically, the GC hires
Subcontractors to perform specic aspects of the project under the GC’s
oversight.
General Partner: the individual or rm that organizes and manages a
Limited Partnership, such as a hedge fund. The General Partner has
unlimited residual legal responsibility for the liabilities of a partnership.
Generally Accepted Accounting Principles (GAAP): a set
of authoritative standards for recording and reporting accounting
information, and the standard by which US companies report their
Financial Statements.
Go Hard: a buyer’s determination not to exercise a Due Diligence out,
and the expiration of a buyer’s deadline to do so. After this point, the
buyer will probably lose its Deposit if it cannot close, but may litigate and
ultimately settle by splitting the Deposit with the seller.
Grandfathering: the use of a Property that violates current Zoning laws
but is permitted as such use predates the enactment of such laws.
Grantee: an individual or entity that receives an interest in Property
from a Grantor.
Granting Clause: words in the conveyance instrument (such as a
Deed) that Transfer the interest from the Grantor to the Grantee.
Grantor: an individual or entity that conveys or grants an interest in
Property.
Grantor-Grantee Index: an alphabetical list of the last name of parties
transferring real Property kept in each county’s oce of ocial records.
The Grantor Index lists sellers, while the Grantee Index lists buyers.
Gross Asset Value (Gross Real Estate Investment): the aggregate
market value, without regard to Indebtedness or Preferred Equity, of the
real estate owned or managed by a REIT.
Gross IRR: a calculation of the amount returned by an investment
divided by the amount invested (before deducting any fund-level
expenses).
61
Gross Lease: a Lease by which the tenant pays a at rental
amount and the landlord pays all the expenses usually associated
with ownership, such as real estate taxes, insurance, utilities, and
maintenance.
Gross Lease With Base Year: another name for a Modied Gross
Lease. A tenant under a Gross Lease pays only the stated Rent under
the Lease, and the landlord pays all Operating Expenses of the building
(utilities, maintenance, insurance, and real estate taxes). Under a Gross
Lease With Base Year, the tenant pays only the stated Rent for the rst
year of (or rst full calendar year occurring during) the Lease Term.
For each subsequent Lease or calendar year, as applicable, the tenant
will pay, in addition to the stated Rent, the amount (or, in a multi-tenant
building, that tenant’s percentage share of the amount) by which the
building Operating Expenses for the then-current Lease / calendar year
exceeds the building Operating Expenses during the rst, or Base,
Lease/calendar year of the Lease.
Gross Operating Prot (GOP): describes the line “Income After
Undistributed Operating Expenses” under the Uniform System of
Accounts for the lodging industry. The acronym GOP is not to be
confused with the Grand Old Party.
Gross Revenue: the money generated by all of a company’s
operations, before deduction for expenses.
Gross Sales: the sum of all sales, unadjusted for customer discounts,
returns, Operating Expenses, or tax payments.
Gross-Up (Gross-Up Provision): a clause in a contract providing
that all payments be made in the full amount, free of any deductions.
Payments made usually contain additional funds to oset any taxes so
that the receiving party still receives the net amount promised.
Ground Lease (Land Lease): a Lease of land pursuant to which a
tenant may develop the land or erect buildings, and the tenant pays all
relevant taxes incurred. At the end of the Lease Term, the land and all
Improvements revert to the landlord.
Guarantor: a credit-worthy entity or person (typically the Sponsor) who
provides a Guaranty to the lender of payment and/or performance of
certain liabilities (e.g., completion of a project). See also Non-Recourse
Carve-Out Guaranty.
Guaranty: a promise to pay the debt of another or to perform a duty or
obligation if the person who is primarily liable fails to do so. A Guaranty
must be in writing to be enforceable.
62
Guest Data: hotel guest or customer proles, contact information (e.g.,
addresses, phone numbers, facsimile numbers, and email addresses),
histories, preferences, and any other guest or customer information
collected by a hotel or Brand Name.
Guest Ledger: Accounts Receivable attributable to guests currently
registered at a hotel.
Guide 5: a disclosure guide published by the SEC related to the
preparation of registration statements covering interests in real estate
Limited Partnerships and REITs. Guide 5 most commonly applies to
registration statements related to securities oerings by Non-Traded
REITs.
Haircut: a discount o Par Value in selling a loan. Also a good way to
prepare for a job interview.
Hard Cost: the direct cost of Construction, such as materials,
equipment, and labor. In contrast, see Soft Cost.
Hard Lockbox: a Lockbox established at the Closing of a loan, under
which all of the revenues from a Borrower’s Property are required to be
paid directly into the Lockbox, the disbursements from which require
lender approval (which may be pre-approved in the form of a Waterfall in
the Loan Agreement or a Cash Management Agreement).
Hard Money: funds that are loans secured by more than the Collateral
that was the purpose for which the loan was obtained such as a
residence, stocks, bonds, and the like, which are non-refundable. In
nance, a Hard Money loan is an asset-based nancing that the value of
the Property secures. Hard Money is often an ongoing source of funding
by an organization or the government, which provides a steady and
predictable ow of funds.
Harvest Period: the time period, usually at the end of a fund’s Term, in
which the fund liquidates its remaining investments and distributes any
returns to investors.
Hazardous Materials (Hazardous Substances): a broad category
of substances that have the potential for causing injury or damage to
human health, animals, or the environment, often including items that are
deemed to be toxic, radioactive, ammable, or explosive, or are generally
treated as a “pollutant” or “contaminant” under environmental law.
Heating, Ventilation and Air Conditioning (HVAC): systems for
indoor environmental comfort that provide ventilation, heating, cooling,
humidity control, and pressure control in a structure. HVAC is an
important component of the design and Construction of large buildings,
where healthy conditions require regulated temperature and humidity.
63
Hedge: an investment or strategy that takes an osetting position in
order to attempt to reduce the impact of economic exposure in an area.
This could take the form of, among other approaches, selling forward,
selling short, buying or selling puts or calls, or entering into a Swap.
For example, if you have milestone payments payable in euros and you
have budgeted to pay them in US dollars, you might enter into a foreign
exchange Hedge that pays you if the value of the US dollar deteriorates
versus euros. (If the US dollar appreciates, you give up the gain.)
Hedge Provider: a Counterparty willing to execute a Swap or other
type of Hedge, thereby assuming the price risk associated with the
subject of the Hedge.
Held for Sale: an accounting classication for assets that are actively in
the process of being sold. If an asset is Held for Sale and the asset’s fair
value (less the cost to sell) is less than its carrying value, then the sale
may result in an impairment charge.
Hell or High Water Lease: a provision in a Triple Net Lease or
Bondable Lease that provides that the tenant must pay all amounts
owing under the Lease and related documents, regardless of any
defenses the tenant may have available to it, including defenses as
against the landlord. Hell or High Water Lease clauses are critical in
Leveraged Leases, other structured Leases, and Lease Securitizations,
since the lenders, holders, or purchasers in such structures will want a
guaranteed Cash Flow regardless of the claims that a tenant might have
against a landlord. The tenant retains its right to pursue claims against
the landlord or other appropriate parties.
High-Rise: generally, a building more than 75 feet high.
Hold Harmless Clause: a contractual provision stating that one or
both parties agree not to hold the other party liable for any injuries or
Damages associated with certain actions. A Hold Harmless Clause is
often coupled with an indemnity from the party that is not being held
harmless.
Holder in Due Course: an amount of Cryptocurrency charged to
process a transaction and paid to a Miner.
Holding Company: a company that sits on top of (or “holds” the
ownership interests of) a Subsidiary that is directly below it. This
concept sometimes connotes a company that does nothing else (i.e.,
has no operations) other than owning one or more subsidiaries.
Holdover: a Lease provision stating that if a tenant continues to occupy
the Demised Premises after the Lease Term has expired, the tenant is
responsible for a specic amount of Additional Rent, typically anywhere
64
from 150% to 200% of the current Base Rent. In addition, such tenant
becomes a month-to-month Holdover tenant, whose Tenancy is typically
terminable with 30 days’ notice by either party.
Hurdle: the minimum return threshold typically used in a joint venture
or fund agreement for a particular investment or project that must be
satised before payment of returns is made to other parties to the
agreement. For example, a certain percentage IRR.
Hurdle Rate: the stated rate of return on a project or investment that is
required by an investor. See also Carried Interest and Preferred Return.
Hybrid REIT: a REIT that invests in and holds a diverse mix of real
Property and real estate mortgages or mortgage-backed securities
and derives its revenue from both rental payments from tenants and
Interest payments on those real estate mortgages or mortgage-backed
securities. Hybrid REITs are in contrast to an Equity REIT or Mortgage
REIT, which owns primarily real Property or mortgage related assets,
respectively.
Impact Fee: a fee imposed on developers by municipalities for the
new infrastructure that must be built or increased due to new Property
development.
Impermissible Services (Bad Services): services provided by a REIT
to the tenants of a Property or for managing or operating the Property,
other than Customary Services.
Impermissible Tenant Services Income (ITSI): income that is directly
or indirectly received or accrued by a REIT with respect to any Property
for Impermissible Services provided by the REIT, other than through a
TRS or, in some cases, an Independent Contractor. If such amount with
respect to a Property for a Taxable Year exceeds 1% of all amounts
received or accrued by the REIT with respect to such Property during
the Taxable Year, then all such amounts are treated as Impermissible
Tenant Services Income. This income does not count as Rents From
Real Property (or other Qualifying Income) under the Income Tests.
Implied Equity Market Cap: the total equity value of a REIT that has
both corporate securities (REIT shares) and convertible Partnership
Interests (such as UPREIT or DownREIT Partnership Interests)
outstanding.
Impound Accounts: the sum of money held by a lender (usually a
bank) for payment of insurance, real estate taxes, and other related
expenses of a Property or Properties encumbered by a particular loan.
See also Reserve Accounts.
65
Improvement: permanent structures or work performed on real
Property that adds value to the Property.
In-House Asset Management: the management of assets held by an
employee-conducted fund or by a related internal management arm of
the fund, rather than by an outside management rm. If a fund hires an
Aliate to provide asset management services, it can still be considered
Externally Managed.
In the Money: used in the context of valuing a contract at a specied
moment, when the contract — by its nature — has a value that might
uctuate. At that moment, being In the Money means that if you oered
somebody in the business of entering into contracts of that nature
the opportunity to substitute themselves into your position under the
contract, they would pay you for the privilege. When your Counterparty
is in Default under the contract, it would seem like it’s a good thing for
you to be In the Money, but it’s not. This is because if the contract is
terminated due to the Default, you have to collect its termination value,
the amount by which you are In the Money. Also a song sung by Ginger
Rogers in Gold Diggers.
Incentive Fee: a fee payable to a hotel operator or Property manager if
the operations of the hotel or Property meet a certain level of Prot.
Income Statement: a Financial Statement on which a company reports
its results of operations over a period of time (usually monthly, quarterly,
or annually). Also commonly referred to as a prot and loss statement or
P&L statement.
Income Tests: the two gross Income Tests (i.e., the 75% Income Test
and the 95% Income Test) that a REIT must satisfy for the Taxable Year
to qualify as a REIT.
Increased Costs Provision: a common provision in a commercial
credit agreement that allows the lender to charge to the Borrower the
amounts necessary to compensate for increased costs or reductions in
the lender’s return on capital due to changes in law or regulations.
Incumbency Certicate: a certicate that establishes the
incumbency — or state of being in oce — of various persons holding
positions in the company. The company secretary or other ocer
signs the Incumbency Certicate, certifying as to the genuineness
of the signatures of authorized Ocers of the company. Contract
counterparties then look at the board resolutions, which authorize
certain Ocers to take actions on behalf of the company (such as sign
a Loan Agreement). The loop is closed if the person who signs has the
title stated in the Incumbency Certicate and the person of that title is
authorized by the resolutions to bind the company.
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Indebtedness: the amount that one party loans to another and is
required to be repaid at a later date, usually with Interest.
Indemnication (Generally): when one party guarantees to
compensate another party for any loss that may be suered.
Indenture: a contract between an Issuer and a trustee (who acts as a
sort of bondholder representative) pursuant to which bonds are issued.
In a Leveraged Lease, the Indenture is the agreement between an
Indenture trustee and the lessor pursuant to which the lessor grants
to the Indenture trustee on behalf of the lenders the assignment of the
Lease and the Lien on the leased asset. The document will also set
forth the other intercreditor arrangements between the lessor and the
Indenture trustee.
Independent Contractor (IK): any person (i) who does not own
(actually or constructively) more than 35% of a REIT’s stock and (ii) if
such person is a corporation, not more than 35% of the total combined
voting power of whose stock, or if such person is not a corporation,
not more than 35% of the interest in whose assets or net Prots is
owned (actually or constructively) by one or more persons owning 35%
or more of the REIT’s stock. An IK from whom the REIT derives no
income generally may provide services that are customarily rendered
by landlords to tenants in similar buildings in the geographic area
where the applicable building is located, without causing the amounts
derived with respect to such services to be treated as ITSI. The REIT
rules generally require that a REIT and an IK of the REIT have an
arm’s-length relationship, with the IK being adequately compensated for
services performed for the REIT.
Independent Director: one of the elements of Separateness used to
create a Single-Purpose Entity. For real estate loans in excess of US$20
million, most institutional lenders will require at least one Independent
Director be appointed either at the Borrower or Managing Member level
(and if such loan is being Securitized, an Independent Director will be
required by the Rating Agencies). The Independent Director is a party
with no aliation to the company for which it is being appointed or the
parent entity (and is typically an employee of a corporate services rm).
The main function of the Independent Director is to prevent the company
from Filing Bankruptcy in bad faith; the Independent Director’s consent
is required in order to cause the company to le. The Independent
Director typically does not have voting rights other than with respect to
Bankruptcy matters.
Index: in the context of Interest Rates, a reference rate such as
LIBOR or Base Rate. May also refer to an index of prices, such as the
Consumer Price Index or the Henry Hub Spot Price for Natural Gas.
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Index Mutual Fund: a mutual fund designed to match a particular stock
market index, such as the S&P 500, the Russell 2000, etc.
Information Rights: the rights of an investor to receive nancial and
reporting information from the company.
Ingress: access to a location or the ability to enter a specic location.
Initial Capital Contribution: the initial amount of capital an investor
contributes to a company.
Installment Sales Contract: a contract by which the buyer receives
equitable title and takes Possession of the Property immediately, but the
seller retains legal title until the buyer has made a series of installment
payments.
Insurable Interest: a legal interest in protecting one’s real Property
from injury, destruction, loss, or pecuniary damage. Having an Insurable
Interest is required in order to take out a title insurance policy on a
Property.
Insurance: All-Risk: an insurance policy that covers all risks
(excluding building risk) except for those specifically stated in the
contract.
Insurance: Business Interruption: an insurance policy that protects
against the loss of Prots and continuing xed expenses due to an
event that interrupts operations.
Insurance: General Liability: an insurance policy that protects the
business against third-party claims when the business’s negligent acts
(or omissions) result in Property or bodily damage.
Insurance: Property: an insurance company agreement to indemnify
the Property owner, who is the insured party, against Property damage
or destruction.
Insured Protection Letter (Closing Protection Letter): a written
indemnity agreement that is often requested by lenders from the
underwriter of the Lender’s Policy to identify the circumstances under
which the underwriter will indemnify the lender and accept liability for the
acts or omissions of the underwriter’s Closing agent.
Intercreditor Agreement: an agreement that sets forth the rules of
engagement between two or more groups of lenders with respect to
shared Collateral or other intercreditor relationship matters. Think of
this as a prenuptial agreement between two classes of creditors. Apart
from addressing the obvious point that the rst Lien lenders get paid out
rst from Collateral proceeds and the second Lien lenders get paid out
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second in rst Lien / second Lien deals, Intercreditor Agreements also
lay out important provisions regarding the right of each lender group to
take action with respect to the Collateral generally.
Interest: the amount that a Borrower/Issuer pays for borrowing money
under the credit facility / Notes, calculated at the Interest Rate.
Interest Accrual Period: the period of time (typically one month) used
to calculate Interest due on Indebtedness to be paid on the applicable
Interest Payment Date. The Interest Accrual Period is usually keyed o
a specied date of each month.
Interest Only (I/O) Strip: in the CMBS context, the Interest portion of
mortgage, Treasury, or bond payments, which may be sold separately
from the Principal portion of the same payments, and therefore can be
“stripped” to create synthetic zero-coupon bonds.
Interest-Only Loan: a loan for which the Borrower pays only the
Interest on the Principal Balance, leaving the Principal Balance the
same throughout the Term.
Interest Payment Date: the date that regularly scheduled payments of
Interest (and Principal, if the loan Amortizes) are due under the loan.
Interest Rate: the rate charged for the use of money (i.e., a loan),
typically expressed as an annual percentage of the Principal amount
borrowed. Interest Rates may be oating or xed. Also known as
approved percentage rate or APR.
Interest Rate Cap: a derivative product that eectively “caps” a
Floating Rate Loan at a specied Interest Rate (the strike rate) by
requiring the Counterparty (i.e., the Issuer of the Interest Rate Cap) to
pay the dierential between the strike rate and the Floating Rate under
the loan if such Floating Rate exceeds the strike rate for a given Interest
Accrual Period.
Interest Rate Floor: the minimum Interest Rate level, in the context
of a Floating Rate Loan, for the Index to which the total Interest Rate is
tied, notwithstanding the actual rate of such Index.
Internal Rate of Return (IRR): the average annual rate of return
earned on an investment through the life of such investment calculated
by discounting the net present value of income ows to zero.
Internal Revenue Code: a set of US federal tax laws enacted by
Congress in Title 26 of the United States Code (26 U.S.C.).
Internalization: a process by which an Externally Managed REIT
internalizes its management functions by acquiring its own management
69
personnel. Often structured as the REIT’s acquisition of the entity that
formerly acted as its external manager.
International Finance Reporting Standards (IFRS): a set of
international accounting standards promulgated by the Board of the
International Accounting Standards Committee delineating how nancial
transactions should be reected on a company’s Financial Statements.
IFRS is intended to replace individual national accounting standards
(such as GAAP) and help ensure that Financial Statements are
understandable and comparable across national boundaries.
International Swaps and Derivatives Association (ISDA): a
global organization that represents participating parties in the private
negotiated derivatives market (such as Hedges, Interest Rate Caps,
and Swaps). ISDA seeks to make over-the-counter derivatives markets
safe and ecient. ISDA works primarily to reduce Counterparty credit
risk, increase transparency, and improve operational infrastructure in the
industry.
Investment Advisers Act (IAA): a US federal law — 15 U.S.C. §§
80b-1–80b-21 — enacted to regulate the actions of investment advisers.
Investment Company Act (ICA): a US federal law —15 U.S.C.
§§ 80a-1–80a-64 — designed to regulate the actions of investment
companies as dened in the act.
Investment Criteria: agreed-upon types of investments that a
company will pursue. Investment Criteria may include Property type,
return targets, purchase price, geographical location, and other similar
items.
Investment Grade: a rating of Baa3 or better by Moody’s, BBB- or
better by S&P, or BBB- or better by Fitch.
Investment Period: the period during which a fund actively invests its
capital in new investments.
Investment Policy: a policy explaining a REIT’s investment objectives,
such as its focus geographies, Asset Classes, management priorities,
and growth strategies.
Involuntary Bankruptcy: Bankruptcy proceedings initiated by a
creditor, forcing the debtor into Bankruptcy.
Ipso Facto Clause: a contract clause that provides for an Event
of Default and termination of an agreement due to a company’s
Bankruptcy, insolvency, or nancial condition. Although many contracts
include Ipso Facto Clauses, such clauses are unenforceable under the
Bankruptcy Code.
70
ISDA Master: a master agreement in the form ISDA publishes. Parties
to Swaps and other Hedges use this form agreement, which ISDA
designed to be a balanced and easily administered agreement. The
second-generation ISDA Master was published in 1992, and a third
generation was published in 2002. However, the 1992 form is more
commonly used. The ISDA Schedule is part of an ISDA Master — there
is no such thing as an ISDA Master without an ISDA Schedule.
ISDA Schedule: the part of an ISDA Master that includes the specic
choices/elections made by the counterparties, as well as notice
information and any exceptions and addenda the parties wish to make
to the preprinted form.
Issuer: the person issuing or selling debt or Equity securities (e.g., in a
144A oering).
Issuing Bank: the nancial institution that issues a Letter of Credit.
Joint Tenants: two or more people who are granted real Property to
hold in Fee Simple, fee tail, for life, for years, or at will. The estate they
hold is called a joint Tenancy and can provide for rights of survivorship
(whereby upon the death of a Joint Tenant, the remaining Joint
Tenant(s) automatically acquire(s) the deceased Joint Tenant’s interest
in the Property). Each Joint Tenant has an equal, undivided interest in
the whole Property. Each Joint Tenant may enter onto, take Possession
of the whole, occupy, and use every portion of the common Property at
all times and in all circumstances.
Judgment Proof: defendants or potential defendants who are
nancially insolvent and therefore dicult or impossible to collect from.
Judicial Foreclosure: a judgment by a court in favor of Foreclosure
on a Mortgage or Deed of Trust, which orders the sale of the Mortgaged
Property pursuant to statutory Foreclosure proceedings in order to
satisfy the secured debt. By pursuing a Judicial Foreclosure (rather than
using the Non-Judicial Foreclosure provision of the Mortgage or Deed
of Trust), a lender is able to obtain a Deciency Judgment against the
Mortgagor for amounts still owed after the Foreclosure sale. In some
jurisdictions, only Judicial Foreclosure is available under applicable law.
Junior Debt: a level of debt that is lower in the Capital Structure than
other debt. For example, if a company has both mezzanine debt and
mortgage debt, the mezzanine debt is junior. The same applies to rst
mezzanine debt and second mezzanine debt, or rst Lien mortgage
debt and second Lien mortgage debt (the second mezzanine debt and
second Lien mortgage debt are junior).
71
Just Compensation: a payment made to the owner of real Property in
connection with the government’s exercise of eminent domain and the
taking of all or a portion of such Property.
Key Man Provision: a provision that requires one or more identied
individuals to commit a substantial part of their time to the eorts of the
company. These individuals — not necessarily men — are typically seen
as crucial to the success of the company.
Key Money: a payment made to a building owner, manager, or landlord
by a potential tenant or Property Manager in an attempt to secure a
desired Tenancy or Property Management Agreement. Key Money is
typically used to improve the real Property at issue.
Keys: the number of rooms in a hotel.
Kick the Can Down the Road: a phrase used when a party to a
transaction does the minimum possible to preserve (or reinstate) the
status quo of a transaction until a decision-making point at a later date.
Know Your Customer (KYC): an investigation that certain nancial
institutions are required to conduct to ascertain certain information
regarding their customers, usually with the goal of identifying or
preventing money laundering or another nancial crime.
Land Grant: a piece of land the government grants for a specic, often
public purpose, such as for roads.
Land Use: an area of law dealing with the development of land and
regulations pertaining thereto, including Zoning and subdivision laws.
Landlord’s Lien (Lessor’s Lien): generally, a statutory Lien on a
tenant’s personal Property at the Demised Premises in favor of a
landlord who receives preferred-creditor status on that Property. Such
a Lien usually secures the payment of overdue Rent or compensation
for damage to the Demised Premises. A Landlord’s Lien can also be
created contractually under the Terms of the Lease if the tenant grants
a Security Interest in its personal Property to the landlord to secure the
tenant’s Lease Obligations.
Landlord’s Lien Waiver: a legal document signed by a landlord
relinquishing any Landlord’s Lien. Often, the landlord subordinates its Lien
rights to a lender of the tenant in lieu of an outright waiver of such rights.
Landlord’s Work: the landlord’s Obligations with respect to work
and Improvements in the leased Premises carried out for the tenant
according to a specied agreement. Landlord’s Work is often specied
in the Work Letter that is attached to the Lease.
72
Last Twelve Months: a measurement period for Financial Covenants
or Financial Statements.
Late Charge: an additional fee assessed on a debt when a payment is
not received by the due date. Examples include Late Charges that can
be imposed on overdue rental payments under a Lease or overdue loan
payments under a credit facility. The fee can be a stated at fee or a
percentage of the overdue amount.
Latent Defect: a aw or imperfection in a Property that is hidden or
dormant.
Leakage: a gap or aw in a lender’s cash management system
imposed under its loan documents that allow some portion of the
Borrower’s Cash Flow to be used other than as the loan documents
intended or permitted. This term is also seen in a hotel REIT context,
where the leasing arrangement with a TRS allows less than the
maximum possible income to be passed up through the TRS Lease
structure.
Lease: an agreement whereby one party (a landlord) grants the right to
possess, occupy, and use all or a portion of a real Property to another
party (a tenant) for a xed period of time in exchange for Consideration
the tenant pays to the landlord, and the landlord retains the residual
estate.
Lease Incentives: a bonus or discount oered to a tenant in
Consideration for the tenant’s entry into a Lease. These incentives can
come in the form of Rent Concessions or expense reimbursements,
among others.
Lease Intangibles: assets (or liabilities) attributed to above-market (or
below-market) Leases from the perspective of the acquirer of the Lease.
Leasehold Estate: the right created by a Lease in real Property.
Leasehold Financing: a secured loan by which the Borrower leases
rather than owns all or a signicant portion of the Property on which
the revenue-generating means of repaying the loan is located. The
lender takes the leasehold as security for the loan, as well as any
Improvements and personal Property, obtains one or more SNDAs (if
the landlord has a fee Mortgage lender or if the leasehold is subordinate
by its Terms) and Estoppel Certicates (from the landlord under the
Lease), and records a Leasehold Mortgage against the leasehold
Property.
Leasehold Interest: the right to use, occupy, or hold Property for a
xed period of time, but not the right to Transfer or sell the Property.
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Leasehold Mortgage: a security instrument encumbering a Leasehold
Estate in real Property. Also known as a Leasehold Deed of Trust or
Leasehold Deed to Secure Debt.
Leasehold Mortgagee: a lender holding a Leasehold Mortgage.
Leasehold Mortgagee Protections: a series of Terms and provisions
that provide protection to a lender holding a Leasehold Mortgage in
the event that a Borrower (tenant) Defaults under the Lease and such
Default would allow the landlord to terminate the Leasehold Mortgage.
The rights of a lender to have notice of and the ability to Cure tenant
Defaults, and the rights to obtain a new Lease in the event of a tenant
Bankruptcy and subsequent tenant attempt at rejection of the Lease are
typically included in the Leasehold Mortgagee Protections.
Leasehold Policy: a policy that insures either the tenant holding a
Leasehold Estate or a lender making a Mortgage-secured loan on the
Leasehold Estate with respect to the title of the Property. If a tenant is
prevented from using a Property because of an insured title matter, the
tenant will be covered under this title insurance policy.
Lease-Up: the process by which tenants are found and acquired in
order to increase the occupancy of the Property, with the goal of getting
the Property Stabilized.
Leasing Commission: amounts paid to real estate brokers in
connection with nding tenants and entering into Leases.
Leeching: the process by which water-soluble contaminants such as
pesticides, chemicals, or hazardous or toxic substances are carried
through soil and can contaminate groundwater. Typical sources of
Leeching are farm waste, underground storage tanks, landlls, and
industrial sites.
Legal Description: a required component of a Deed that details the
specic piece of Property being transferred in sucient detail to identify
and locate the Property and its boundaries. Three basic types of Legal
Descriptions are used in the US: (i) the Metes and Bounds system, (ii)
the US Public Land Survey System (PLSS), and (iii) the Lot and Block
system. Also known as a Land Description.
Lender Liability: a Borrower’s claim that a lender should be liable for
any adverse consequences if the lender overstepped its position and
became overly involved in the operation and management of a Property.
This is particularly problematic in the context of budget veto rights and
other operational controls aorded to the lender in the loan documents.
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Lender’s Policy: a type of title insurance issued to Mortgage lenders
that insures the lender for the defense of the validity, Priority, and
enforceability of its Mortgage. A Lender’s Policy also insures the lender
from title defects to the extent not excepted or excluded from the policy
coverage. ALTA forms are commonly used.
Letter of Credit (L/C or LOC): a letter from a bank essentially
guaranteeing certain payment Obligations of the Letter of Credit
applicable to the Letter of Credit Beneciary, up to the amount of
the Letter of Credit. In the event that the applicant is unable to make
payment, the Beneciary can demand payment from the bank. In
that case, the bank is required to pay the demand to the Beneciary
and then seek reimbursement from the applicant. A Letter of Credit is
typically irrevocable.
Letter of Intent (LOI): a written summary of terms detailing the
preliminary understanding of parties that plan to enter into a contract. A
Letter of Intent typically is not meant to be binding, but rather is intended
to set out certain essential terms to initiate the process of entering into
a binding agreement. The parties must be careful to include appropriate
language regarding the non-binding nature of the agreement and the
binding nature of certain parts of the agreement (i.e., Exclusivity and
condentiality).
Leverage: the use of borrowed funds or debt combined with Equity to
increase amounts available to purchase assets and thereby increase
potential returns to equity investors.
Leveraged Buyout (LBO): a transaction in which debt is used to
buy a target company, typically involving existing management in the
transaction and future management of the emerging company. The
transaction allows Sponsors and LBO rms to nance large acquisitions
while contributing only a small portion of the purchase price in the form
of Equity capital.
Leveraged Lease: a Lease transaction in which the lessor has
borrowed a portion of the acquisition cost of the leased asset on a non-
recourse basis and the lender obtains an assignment of the Lease and
a Mortgage or Security Interest in the leased asset as Collateral for the
debt. The Rent under the Lease is always sucient to pay in full the
debt service under the related loan.
License: a grant of permission, on a revocable or irrevocable basis, to
a third party to use Property for a specied purpose. A License right is
a lesser right than a Lease or an Easement as the licensee does not
acquire an interest in real Property as a result of having the License but
rather a contractual right.
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License Agreement: an agreement granting a party permission
to engage in some act that would otherwise be unlawful. A License
Agreement generally permits the licensee to enter the licensor’s land to
do some act.
Lien: an Encumbrance upon the Property of a party granted to secure
payment of a debt or performance or some other obligation owed to
another party or created by law in favor of a creditor.
Lien Law: a law that allows laborers, Subcontractors, and suppliers to
place a claim against a Property if they have not been paid. In some
jurisdictions, claims can be made even if the owner paid the General
Contractor.
Lien Theory: the legal concept that a Mortgage is a form of a Lien on
real Property that does not grant the mortgagee any ownership rights
until the Mortgage is Foreclosed upon. Most states have adopted the
Lien Theory instead of the Title Theory.
Lien Waiver: a document from a party holding a Mechanic’s Lien
against a Property stating that payment has been received and waiving
future Lien rights to the same Property. There are four general types
of Lien Waivers: (i) unconditional waiver and release upon progress
payment, (ii) conditional waiver and release upon progress payment,
(iii) unconditional waiver and release upon nal payment, and (iv)
conditional waiver and release upon nal payment.
Like-Kind Exchange (Section 1031 Exchange): a transaction in
which a taxpayer exchanges (or is treated as exchanging) Relinquished
Property for Replacement Property in a tax-deferred transaction
under Section 1031 of the Internal Revenue Code. To qualify for
Like-Kind Exchange treatment, such transaction must satisfy various
requirements, including that both the Replacement Property and the
Relinquished Property must be held for productive use in a trade or
business or for investment. Under current law, only real property can be
exchanged in a Like-Kind Exchange.
Limited Partner: a Partner in a Limited Partnership whose liability is
limited to the extent of the Partner’s share of ownership in the Limited
Partnership. Limited Partners generally have little, if any, management
rights in the Limited Partnership in which they invest.
Limited Partnership: a partnership that is managed by one or more
General Partners with unlimited liability, with one or more generally
passive Limited Partners who are not involved in the day-to-day
management of the partnership and whose liability for partnership
matters is limited to their investment in the partnership.
76
Limited Rental Exception: a rule under which Rent a REIT receives
from a TRS that is a Related Party Tenant will not be excluded from
Rents From Real Property where at least 90% of the space at the
property to which the Rent relates is leased to third parties, and the
Rent paid by the TRS is substantially comparable to Rents paid by other
tenants of the REIT for comparable space.
Liquidated Damages: a contractual agreement upon a stated amount
of Damages, or a specied formula to calculate Damages, in the
event of a breach or Default if the actual Damages would be dicult or
impossible to determine with precision. There are two requirements for
a Liquidated Damages provision to be enforceable: (i) actual Damages
must be dicult or nearly impossible to calculate, and (ii) the formula
used must be a reasonable approximation of actual Damages.
Liquidation: when a company’s existence is terminated, its assets are
sold, and the proceeds are used to pay creditors and any remaining
proceeds are distributed to its owners.
Liquidity: a person’s ability to meet near-term payments and the
degree to which that person’s assets are cash or are readily convertible
into cash.
Lis Pendens: Latin for “suit pending.” Lis Pendens is a written notice
led in the oce of land records stating that title to or ownership interest
in a Property is the subject of a lawsuit. Potential purchasers and
lenders are thus on notice about claims against the Property.
Listing: a record of a Property for Lease or sale by an authorized real
estate broker.
Listing Agreement: an agreement between a Property owner and
a real estate broker whereby the owner agrees to oer to sell or Rent
a Property within a specied time period and authorizes the broker to
solicit purchase or Lease oers.
Loan Commitment: a letter by which nancial institutions commit
to provide loans. A Loan Commitment consists of the actual text of a
Commitment Letter, along with annexes and exhibits that lay out the
Terms of the loans and the Conditions Precedent to funding.
Loan Component: a portion of a loan that may comprise a Senior or
subordinate portion of one piece of Indebtedness, such as a Senior “A”
Note or a subordinate “B” Note.
Loan to Own: a strategy used by a party that purchases a distressed
real estate secured loan or a piece of a real estate secured loan,
typically at a discount, with the goal of Foreclosing on and acquiring
77
the Property securing such loan. For its return, this party looks to the
Property’s Cash Flow and/or the value of the Property upon sale after
refurbishment or implementation of other value-add strategies, as
opposed to the Interest Rate on the loan.
Loan to Value (LTV) Ratio: a ratio expressed as a percentage of the
amount of the loan that encumbers or will encumber a Property to the
value of the Property. This ratio is used in underwriting new loans as
well as in the context of a maintenance Covenant or nancial test (e.g.,
as a condition to the extension of a loan) during the Term of a loan.
Locals Market: the local market for a casino (i.e., people who live in
the area).
Lockbox (Lockbox Account): an account held at a nancial
institution, subject to a Security Interest in favor of a lender, that is
the repository of all revenue produced by a Property. See also Hard
Lockbox and Soft Lockbox.
Lockbox Account Agreement: an agreement among a nancial
institution holding a Lockbox Account, a lender, and a Borrower. The
Lockbox Account Agreement provides for the maintenance of the
Lockbox Account and the circumstances under which cash may be
released therefrom.
Lockout Period: the period during which a real estate loan cannot be
prepaid voluntarily.
London Interbank Oered Rate (LIBOR or L+): a discontinued
Interest Rate at which major nancial institutions could usually borrow
dollars from each other in the London interbank market. Most credit
facilities had Interest Rates that were set at certain Margins above
LIBOR (i.e., “L+ Margin”). See Applicable Margin.
Long-Term Capital Gain: a gain on the sale or other taxable
disposition of a capital asset generally held for longer than one year.
Long-Term Capital Gain is often subject to taxation at lower rates
than other forms of income (e.g., short-term Capital Gain or so-called
Ordinary Income).
Long-Term Capital Loss: a loss on the sale or other taxable
disposition of a capital asset generally held for longer than one year.
Long-Term Capital Losses can generally be used to oset Long-Term
Capital Gains, but the ability of Long-Term Capital Losses to be used to
oset other types of income is generally limited.
Long-Term Incentive Plan (LTIP) Units: OP Units issued to
executives and other employees of an UPREIT as part of an incentive
78
compensation program based on the performance of the company.
LTIP Units are typically intended to be treated as Prots interests for tax
purposes, and not taxable on receipt regardless of whether a Section
83(b) Election is made in connection with the receipt of such LTIP Units.
Loss of Rental Income Insurance: a type of insurance coverage
that covers Property owners for loss of rental income from a Property
starting from the date of the loss until a specied date following
such loss. Loss of Rental Income Insurance is distinct from Property
Insurance in that it covers the Property owner for the rental income
that would have otherwise been received from the Property, not just
the value of the cost to replace the Property. Also known as Business
Income Insurance.
Loss Payee: the person or persons to whom an insurance company
writes a check for the proceeds of a claim under a Property Insurance
policy. Secured lenders want to be a Loss Payee because a casualty
negatively aects their Collateral’s value, and they want to ensure that
the proceeds payable under the Property Insurance policy are used to
either restore the Collateral or repay the debt.
Lost Note Adavit: a statement provided by a lender or other
noteholder who no longer has Possession of such Note, certifying
the loss, mutilation, or destruction of the Note to another party who
may be purchasing the Note or taking the Note by assignment. Many
such certicates also include an indemnity from the current noteholder
against claims resulting from an inability to deliver the original Note.
Lot: a parcel of real Property designated as SNDA by its Legal
Description.
Lot and Block: a survey method used to locate and identify a parcel
of land (see Legal Description). This system involves referencing the
individual Lot within a plat map of a subdivision as well as the map’s
place of record.
Loyalty Program: a hotel chain’s marketing eort that rewards and
encourages loyal behavior from its guests, usually in the form of
upgrades and complimentary rooms or services based on the number of
repeat stays (or loyalty) of such guests.
MAE Qualier: an exception to what would otherwise be an absolute
assertion or representation within a loan document to account for events
that may (or may not) have a Material Adverse Eect. For example,
“There are no litigation proceedings, except those which, if adversely
determined, would not reasonably be expected to result in a Material
Adverse Eect.”
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Magic Page: the page in the oering document for a REIT IPO that
describes the REIT’s initial distribution policy, including the amount that
the REIT expects to pay in dividends during its rst year and the related
annualized distribution rate and Dividend Payout Ratio.
Maker: the party to a Promissory Note that makes a promise to pay.
Make-Whole: a payment made to a lender that had lent at a Fixed
Rate of Interest when the loan was prepaid, in order to compensate
the lender for its foregone Interest if it has to reinvest the prepayment
proceeds at a lower Interest Rate than the Fixed Rate of Interest
under the loan. The payment is usually calculated by discounting
foregone Interest payments over what would have been the remaining
Term at a Discount Rate equal to the Yield on a US Treasury security
having a Maturity equal to the weighted remaining average life of the
prepaid loan, plus a pre-determined percentage (in real estate loans,
typically 1%). The Discount Rate used in this calculation is sometimes
negotiable.
Managed by Board Requirement: in order to qualify as a REIT, a
REIT must be managed by a Board of Directors or trustees.
Management Agreement: an agreement that describes multiple
services to be provided with respect to the operations of a Property.
Services may range from day-to-day management (including the
collection and disbursement of revenues and expenses for the Property)
to the running of Restoration, maintenance, and Capital Improvement
projects.
Management Fee: a fee paid to the manager of a hotel, which typically
includes a base fee (usually based on a percentage of gross revenue)
and an Incentive Fee.
Managing Member (Managing Partner): a Member or Partner
responsible for the day-to-day operations and management of an entity.
The Managing Member or Partner typically has discretion to make
routine decisions without the approval of other investors; however,
certain agreed-upon major decisions will typically require the approval of
the other investors.
Mandatory Advance: an advance under a Loan Agreement that must
be made by a lender upon certain conditions of the Borrower being
satised. Also known as Obligatory Advance and Future Funding
Obligation.
Mandatory Prepayment: the repayment of loan Principal prior to the
payment due date that is required to be made under a loan in specied
situations, such as when casualty or Condemnation proceeds are
80
received, assets are sold, or certain other capital events occur. In those
situations, the lender wants the proceeds of such events to be used to
pay the loan and, therefore, requires the prepayment of the loan. See
also Voluntary Prepayment.
Margin (Spread): the dierence between a lender’s cost of funding
(e.g., issuing CDs, borrowing on the Eurodollar market, taking savings
account or checking account Deposits) and the Interest Rate it charges
on a loan.
Mark to Market (MTM): an accounting requirement to write the value
of assets up or down in order to update a nancial instrument’s value
relative to its current market price. GAAP requires Mark to Market for
certain assets in certain industries.
Marshaling: the process of organizing, ranking, and distributing funds
in order to satisfy creditors eectively and equitably.
Maryland General Corporation Law (MGCL): a signicant majority of
publicly traded REITs are organized in Maryland. MGCL comes up often
in REIT land.
Master Landlord: in the context of a Sublease, the landlord under the
Master Lease or “overlease.” In other words, the Sublandlord’s landlord.
Also known as Overlandlord.
Master Lease: a Lease that allows an existing lessee to lease
additional assets under similar terms and conditions as the current
Lease without being required to negotiate a new contract. In the context
of a Sublease, the Master Lease is the controlling Lease or “overlease”
under which the Sublandlord is the tenant.
Master Repurchase Agreement (Master Repo): the nancing
vehicle structured as a sale of the underlying asset (loans, equity
interests) that would otherwise serve as Collateral in a regular loan
transaction. The facility is exible in that a Borrower can add assets to
the facility in exchange for funds in order to provide Leverage for its
underlying business. This structure is used so that a lender/purchaser
holds a direct interest (rather than a Lien) so it can, in theory, avoid the
Automatic Stay that occurs when the Borrower/seller enters Bankruptcy.
Master Servicer: the servicer that oversees servicing activities
when assets from multiple originators are pooled together in a single
Securitization.
Material Adverse Eect: often dened to include a material adverse
event with respect to (i) a party’s business, operations, properties,
assets, condition (nancial or otherwise), or prospects; (ii) the ability
81
of a party to fully and timely perform its Obligations under the loan
document(s); (iii) the legality, validity, binding eect, or enforceability
against a party of a loan document to which it is a party; and/or (iv) the
rights, remedies, and benets available to the lender under the loan
document(s). See MAE Qualier.
Material Modication: can occur in multiple contexts. Most commonly,
a Material Modication is a modication to an underlying loan that could
result in the loss of Priority of a Mortgage securing such loan. The
analysis of whether a modication is material for purposes of aecting
Mortgage Priority is a question of US state law, but it is always a holistic
analysis that must consider all facts, including how such modications
would aect a third party and whether a third party should receive
notice of the modication. Material Modications include changes to the
Interest Rate, Term, and/or amount of the loan, among other changes. If
a modication is determined to be material, typically a lender will require
the Recordation of a Mortgage modication, as well as a Datedown
Endorsement to the applicable title policy (and potentially legal opinions
concerning the modication). Additionally, the term Material Modication
is signicant in the context of REMICs. If a Securitized loan sold into a
REMIC has a Material Modication, the Securitized loan could blow up a
REMIC, which has signicant negative tax consequences.
Maturity: the date when the amount outstanding under a loan or bond
must be repaid.
Mechanic’s Lien: a type of Lien against a Property by a party that has
supplied labor or materials to improve that Property.
Member: the owner of an interest in a limited liability company.
Member, Appraisal Institute (MAI): a professional designation held
by appraisers who are experienced in the Valuation and evaluation of
commercial, industrial, residential, and other types of Properties, and
who advise clients on real estate investment decisions. To receive this
designation, appraisers must meet certain standards for education and
experience. See also Appraisal Institute.
Membership Interest: a Member’s interest in a limited liability
company (including, without limitation, capital and residual Prots of
the company), and the right, if any, to participate in the management of
the business and aairs of the company, including the right, if any, to
vote on, consent to, or otherwise participate in any decision or action of
or by the Members and the right to receive information concerning the
business and aairs of the company.
Memorandum of Lease: a summary of a Lease’s provisions that is
recorded, becomes public record, and puts the world on notice of the
existence of the Lease. See also Short-Form Lease.
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Memorandum of Understanding (MOU): a high-level agreement
between two parties (not constituting denitive documentation) that most
often comes up in the context of a plan for the development of a real
estate project. In this context, the two parties are usually a governmental
body and a developer.
Merger Clause (Integration Clause): a contractual provision stating
that the contract represents the parties’ complete and nal agreement
and supersedes all informal understandings and oral agreements
relating to the subject matter of the contract. For example, in a Purchase
and Sale Agreement, the parties will want to provide that the provisions
of the Purchase and Sale Agreement that should survive the purchase
do not “merge” with the Deed.
Metes and Bounds: a survey method used to locate and identify a
parcel of land (see Legal Description). This system uses a combination
of directions, distances, and descriptions of geographical features.
Mezzanine Loan: a loan secured by a pledge of Equity in real Property
as opposed to a Mortgage on real Property. In a typical real estate
mezzanine nance Capital Structure, the Borrower under a Mezzanine
Loan is the parent of the Mortgage Borrower and that mezzanine
Borrower pledges its ownership interests in the Mortgage Borrower. As
a result, the mezzanine lender’s security is the residual Equity value
in the real Property after repayment of the Mortgage lender. There
can be multiple layers of mezzanine debt, known as Senior and junior
mezzanine debt or rst, second, and third mezzanine debt.
Mezzanine Purchase Option: a right given to a mezzanine lender, by
means of an Intercreditor Agreement between a Mortgage lender and
the mezzanine lender, to purchase the Mortgage loan from the Mortgage
lender at Par Value. This right is given in order to prevent the Mortgage
lender from exercising remedies under the Mortgage loan, which would
result in the mezzanine lender’s loss of all of its remaining security.
Mineral Rights: a possessory interest that entitles a person to take
minerals in the ground, with or without ownership of the surface of the
land. It includes the right to enter the land and occupy it in order to
remove the minerals. Mineral Rights can be leased or sold, or retained
upon the conveyance of Property. A landowner who leases Mineral
Rights often receives a royalty, or a percentage of the value of the
minerals mined by the leaseholder.
Minimum Rent: the Floor on a rental amount payable by the tenant
typically arising when there is a variable rental rate in a Lease. For
example, if a tenant is required to pay a percentage of Gross Sales as
Rent, the Lease may include a Minimum Rent Floor on such percentage
amount.
83
Mitigation: a common law duty imposed on those who are injured by
a breach of contract to take all steps necessary to reduce (or mitigate)
their Damages, rather than simply allowing themselves to be damaged
and then seeking compensatory Damages from the breaching party.
For example, absent a contractual provision to the contrary, if a tenant
vacates Premises prior to the end of the Term of the applicable Lease,
the landlord has an obligation to attempt to nd another tenant. The
defaulting tenant is then given credit for the value of the replacement
Lease when determining the compensatory Damages owed to landlord.
Mixed Use: the multiple Property types or market requirements that a
particular Property may serve, such as a mix of residences, oce, and
retail.
Modied Accelerated Cost Recovery System (MACRS): an
accelerated system of Depreciation introduced for US federal income
tax purposes in 1986, based on IRS predetermined recovery periods set
forth in the Internal Revenue Code rather than the useful life standard.
See also Accelerated Depreciation and ACRS.
Modied Funds From Operations (MFFO): a measure of nancial
performance used primarily by non-listed REITs. MFFO is net income
or earnings increased by Depreciation, Amortization, and certain other
generally non-recurring expenses, including acquisition expenses.
MFFO does not have a uniformly agreed-upon denition.
Modied Gross Lease: a Lease in which a tenant pays Base Rent plus
a proportionate share of other costs such as utilities and maintenance
over time. See also Gross Lease With Base Year.
Modied Net Lease: a Lease whereby the landlord and the tenant split
the cost of maintenance and expenses (including utilities, taxes, and
insurance). Modied Net Leases are in contrast to Triple Net Leases by
which the tenant is responsible for payment of all such costs.
Monetary Event of Default: a breach, under the denitive
documentation in a real estate transaction, that relates to the payment
of monetary sums that the party required to perform has not paid, even
after any applicable notice and Cure periods have passed.
Month-to-Month Lease: a Lease for an undened period of time that
typically extends every 30 days on an automatic basis and is terminable
at will by either landlord or tenant.
Monument Sign: a freestanding (i.e., not attached to a building) ground
sign with little or no clearance underneath, and generally of low to
medium height.
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Moody’s: shorthand for Moody’s Investors Service, Inc., a Subsidiary
of Moody’s Corporation, one of the most powerful Rating Agencies. S&P
and Fitch are other big ones.
Mortgage / Deed of Trust: a document that creates a Lien on real
Property to secure debt of the Borrower. Like a Security Agreement,
but for real Property. The law of the jurisdiction where the Property is
located will dictate whether a Mortgage or Deed of Trust (or some other
form of real Property security instrument) is the appropriate instrument,
but they are functionally equivalent.
Mortgage Pool: a group of Mortgages that REMICs hold in trust as
Collateral for a CMBS or mortgage-backed security issuance.
Mortgage REIT: a REIT that invests in and holds primarily real estate
Mortgages or mortgage-backed securities and derives its revenue
primarily from Interest payments on those investments. A Mortgage
REIT is in contrast to an Equity REIT or Hybrid REIT.
Mortgaged Property: the real Property that serves as Collateral to
secure the loan that a Borrower used to purchase or maintain the
Property (i.e., home, land, or other type of real estate).
Mortgagor: the owner of an interest in real Property who grants a Lien
on the real Property in the form of a Mortgage.
MSCI US REIT Index: a free-oat adjusted market capitalization Index
comprised of Equity REITs published by MSCI.
Multiple Listing Service (MLS): an information database that
accumulates and disseminates information regarding Properties and
Commissions, thus facilitating cooperation between real estate brokers.
Mutatis Mutandis: a Latin phrase meaning necessary changes have
been made throughout. Mutatis Mutandis is a shorthand way to ensure
that a concept is implied throughout a document without having to make
numerous drafting changes.
National Association of Real Estate Investment Trust (Nareit): the
primary trade association of the REIT industry.
National Indian Gaming Commission (NIGC): an independent
US federal regulatory agency within the Department of the Interior
tasked with implementing the Indian Gaming Regulatory Act of 1988.
NIGC has the power to approve tribal gaming ordinances and oversee
management contracts.
Negative Amortization: a contractual provision in an agreement
(typically a Loan Agreement but can be a Lease or Purchase
85
Agreement) that prohibits a party (typically the Borrower, tenant, or
buyer) from engaging in specied activities such as making investments,
incurring new debt or Liens, selling assets, operating Property in a
certain manner, or making acquisitions. Think of these as the “thou shalt
not” Covenants. Negative Covenants are usually highly structured and
customized to a party’s specic condition. In contrast, see Armative
Covenant.
Negative Easement: the right to restrict another from using their
Property in an otherwise legally allowable way. For example, if B is
prevented from building a fence that blocks A’s ocean view, A has a
Negative Easement from B.
Negative Pledge: a Covenant not to grant a Lien on a particular
Property to any other person.
Negligence: Active, Passive, Gross, Simple, Ordinary: a legal
standard meaning the failure to exercise the standard of care that a
reasonably prudent person would have exercised in a similar situation,
according to Black’s Law Dictionary. Active Negligence is negligence
resulting from a positive or armative act. Passive Negligence is
negligence resulting from a person’s failure or omission to act (such as
failure to remove a hazardous condition from one’s Property). Gross
Negligence is the failure to exercise the care that a reasonably careful
person would use; also sometimes termed Reckless Negligence or
Willful and Wanton Negligence. Simple and Ordinary Negligence refer to
run-of-the mill, non-Gross Negligence.
Net Asset Value (NAV): the net value of a company’s total assets (not
limited to real Property), after subtracting its total liabilities.
Net Asset Value Per Share (NAVPS): one measure for estimating the
price that a REIT should trade at, calculated as the Net Asset Value of a
REIT, divided by the number of shares outstanding.
Net Capital Gain: a taxpayer’s aggregate net Long-Term Capital Gain
(Long-Term Capital Gains minus Long-Term Capital Losses) reduced by
such taxpayer’s aggregate net short-term Capital Loss for a particular
period.
Net Debt: a business’s total short- and long-term debt, less its cash and
Cash Equivalents.
Net Operating Cash Flow: cash generated from the operations of a
company after the payment of all Operating Expenses, but calculated
through a series of adjustments to net income.
86
Net Operating Income (NOI): a measure of a company’s nancial
performance consisting of gross Operating Income reduced by
Operating Expenses but not taxes, Interest, Depreciation, and other
non-operation costs.
Net Proceed: the amount left over from a sale of an asset after
subtracting the costs associated with the sale (e.g., taxes, marketing
costs, brokerage fees), or a settlement of an insurance claim after a
casualty. If Mandatory Prepayments are required under a loan, the Net
Proceed is the amount that must be prepaid. Also known as Net Capital
Proceed.
Net Worth: the total value of a company’s or individual’s assets less
total liabilities.
Net Worth Covenant: a promise or an agreement whereby one party
assures another that it will maintain at least a stated minimum Net Worth
(often including a minimum amount of liquid assets), and typically will be
required to report on a periodic basis its compliance with such promise
or agreement.
New York Style Closing: a Closing where all the parties involved in
a transaction meet in person to “sit down” and close the transaction. In
contrast, see Escrow Style Closing.
No-Action Letter: an opinion provided by a regulatory agency related
to a particular set of circumstances, often at the request of an individual
who is uncertain whether those circumstances could result in legal
action. The determination in the opinion is contingent upon the specic
facts contained in the request.
NOI: acronym for Net Operating Income.
Non-Circumvention: a provision designed to protect the opportunities
of a company by preventing the investors from using condential or
proprietary information for its own use or benet.
Non-Compete (Competition Restrictions): a provision that prohibits
a person or an entity from engaging in activities that may be competitive
with the business purpose of a company.
Nonconforming Use: the use of a Property that does not comply with
Zoning regulations and restrictions but is sometimes permitted because
such use was lawful prior to the enactment of the current Zoning laws
(i.e., such use is Grandfathered).
Non-Consolidation Opinion (Non-Con): the opinion of counsel
(many times delivered by special counsel) given in connection with real
87
estate loan transactions, and always required for a CMBS origination
transaction for loans above a threshold determined by S&P. The opinion
describes the organizational structure of a Borrower and states that the
Borrower (and certain other identied parties) will not be Substantively
Consolidated with their parent, and other entities in the Borrower’s
organizational structure, in the event that such parent entities le for
Bankruptcy. To obtain the opinion, a Borrower must comply with a
dened list of SPE Covenants designed to ensure that the Borrower is
clearly operating as an entity separate and apart from its parent.
Non-Contributing Member or Partner: a Member or Partner in a
company who fails, or elects not to, contribute capital to a company or
partnership contrary to its obligation to do so.
Non-Judicial Foreclosure: in certain jurisdictions, a lender can carry
out a Foreclosure without a court order through an out-of-court private
sale.
Non-Monetary Event of Default: a breach, under the denitive
documentation in a real estate transaction, that relates to anything other
than the payment of monetary sums (such as breach of an Armative
Covenant or Negative Covenant) that the party required to perform has
not performed, even after any applicable notice and Cure Periods have
passed.
Nonqualied Publicly Oered REIT Debt Instrument: any debt
instrument a Publicly Oered REIT issues that would not otherwise
qualify as a Real Estate Asset if the denition of “Real Estate Asset”
did not include the reference to such debt instruments (e.g., a debt
instrument issued by a Publicly Oered REIT that is not secured by a
Mortgage on real Property).
Nonqualifying Asset (Bad Asset): generally, an asset that is not
counted in the numerator for purposes of computing the test percentage
under the 75% Asset Test (i.e., generally an asset that is not a Real
Estate Asset, cash, or cash item (including a receivable), or a US
government security). May also apply with respect to other Asset Tests
(e.g., an asset the ownership of which does not comply with the 10%
Asset Test).
Nonqualifying Income (Bad Income): an item of income that is not
counted in the numerator for purposes of computing the test percentage
under the 95% Income Test or the 75% Income Test, as applicable.
For example, Interest income from an unsecured loan is Nonqualifying
Income under the 75% Income Test but not under the 95% Income Test.
Non-Recourse Carve-Out Guaranty (Bad Boy Guaranty): a
Guaranty that is provided in connection with a Non-Recourse Loan /
88
Limited-Recourse Loan whereby a Guarantor (typically a “warm body” or
credit-worthy entity) guaranties to a lender the payment of losses under
certain enumerated circumstances (e.g., fraud, misappropriation), and
also guaranties the payment of the entire loan (full recourse) under other
circumstances, such as Bankruptcy events. These guaranties are used
as Collateral support and to help shape the behavior of Borrowers in
an attempt to prevent the enumerated guaranteed items from occurring
during the life of the loan.
Non-Recourse Loan / Limited-Recourse Loan: a loan secured only
by the Collateral therefor (such as the real estate securing such loan)
and not by any other assets of the Borrower or its Aliates. Thus, a
Borrower under the loan is not liable for payment of the Indebtedness
if the value of the Collateral is insucient to repay the lender. In a real
estate context, non-recourse or limited-recourse nancing typically
includes a Non-Recourse Carve-Out Guaranty that provides recourse
to the Borrower and, usually, a parent entity for payment under certain
circumstances.
Non-Traded REITs: REITs that have registered the sale of their
securities with the SEC, but such securities are not traded on any
securities exchange.
Non-Traditional REIT: a REIT that owns assets that may be viewed
as more unique than those owned by Traditional REITs and which may
be made available to users through arrangements other than leases or
licenses. Examples of such non-traditional assets include billboards,
cell towers, data centers, pipelines, records storage, and marinas,
among others.
Non-Transferring Member or Partner: a Member or Partner who is
not transferring its ownership interests in the entity in the context of a
transaction where an entity’s Members or Partners are transferring their
ownership interests in the entity.
Note / Promissory Note: a document by which a Borrower makes
a promise to a lender to repay the full Principal amount lent to the
Borrower plus Interest, Default Interest (as applicable), and costs to the
lender.
Notice of Commencement: a recorded document required in
certain US states establishing the date that Construction of a project
commenced. Any Mechanic’s Lien led with respect to such project will
date back to the date a Notice of Commencement was led, thereby
protecting the Lien of the Construction Mortgage led prior to such
notice.
89
Notice of Completion: a recorded or published Notice of Completion
of Construction of a project setting forth the applicable time frame for
a creditor to le a Lien against the project for amounts owed (e.g., a
Mechanic’s Lien).
Notice of Non-Responsibility: an ocial announcement, recorded
with the county and/or posted on the Property, to signify that the owner
of the Property is not responsible for any debts incurred by a third party
reconstructing, remodeling, or making Improvements on the Property.
This notice is typical when a lessee makes changes to a Property, so
the landlord is not liable for those debts.
Nuisance: the unreasonable, unwarranted, or unlawful use of one’s
Property in a manner that substantially interferes with the enjoyment or
use of another person’s Property, without an actual trespass or physical
invasion to the land.
Objection Letter (Title Objection Letter): a letter sent to the seller
of a Property and/or the title insurance company that issued a title
Commitment for the Property objecting to the standard exceptions to
title shown in the title Commitment and any other exceptions listed in the
Commitment that are unacceptable to the buyer of the Property.
Obligation: a Borrower’s responsibility to repay Indebtedness and
perform its related Covenants.
Occupancy Rate: a numerical value calculating the percentage of
occupied or unoccupied units or rooms in a rental or hotel Property
compared with the total available units. Occupancy Rate is based on the
percentage of occupied units. See also Vacancy Rate.
Occurrence Policy: an insurance policy providing coverage for any
loss from an event that occurs within the policy period, regardless of the
date on which a claim is made.
Oering Legends: with respect to a fund, notications contained in
a fund’s Private Placement memorandum describing the terms and
conditions of the sale of interests in the fund. The terms and conditions
of such sale will vary by jurisdiction (state and country); thus, if the sale
occurs in more than one jurisdiction, multiple Oering Legends will be
required.
Oce of Foreign Assets Control (OFAC) List: a list of individuals
and companies owned, controlled by, or acting on behalf of targeted
countries (e.g., Syria, Iran, North Korea, Cuba). It also lists individuals,
groups, and entities, such as terrorists and narcotics trackers,
designated under programs that are not country-specic.
90
Ocer: each person designated as an Ocer of a company pursuant
to a company formation document.
Ocer’s Certicate (Secretary’s Certicate): a document delivered
by the secretary or another responsible Ocer of a company that
certies the truth and accuracy of the statements made in the certicate
(e.g., conditions to a release have been satised, certain documents
have been issued and remain in force and eect, etc.).
O-Track Betting (OTB): legal gambling on horse Racing that is
conducted outside of a race track.
One Action Rule (One Form of Action Rule): a rule of law in some
jurisdictions (e.g., New York and California) that forces a lender to bring
only one court action or proceeding against a Borrower when the debt
is secured by real Property. This rule can be a trap for the unwary. In a
shocking California case, a bank exercised its statutory right to set o
amounts in its defaulted Borrower’s bank account against the debt, and
that was ruled a “one action,” precluding the bank from Foreclosing on
the real Property security. In Portfolio deals, it is important to analyze
any One Form of Action Rule implications as part of an initial action plan
and prior to exercising remedies.
One-O: something that is made or completed only once.
OP Unit Redemption Right: in an UPREIT, the right of a holder of
OP Units to cause the Operating Partnership to redeem, at the holder’s
election, such holder’s OP Units for an amount of cash equal to the
current market price of an equivalent number of shares of REIT stock.
Upon exercise of this redemption right, the REIT typically has the right to
exchange REIT shares on a one-for-one basis for the OP Units instead
of having the Operating Partnership redeem the OP Units for cash.
Similar redemption and exchange rights exist with respect to DownREIT
OP Units.
OP Units: units of ownership interests in the Operating Partnership of
a REIT making use of the UPREIT or DownREIT structure. Holders of
OP Units generally are entitled to a distribution equal to the dividend
paid on an equivalent number of shares of the REIT Partner’s stock and
generally will have a OP Unit Redemption Right.
Opco / Propco Structure: a type of structure commonly used in
hotel REITs and the healthcare industry whereby certain company
Subsidiaries (the Property companies, or Propcos) own all revenue-
generating properties and certain other of the company Subsidiaries
serve as operators of the business at such properties (the operating
company, or Opco). Opco/Propco deals allow all nancing and Credit
Rating issues of the Opco and Propco companies to remain separate.
91
As a result, such deals allow further Leverage on the company as a
whole than would be permitted had the Opco and Propco functions been
contained within one entity or group of entities. This structure is used
at times to insulate the liabilities related to operating the business of a
company in the Opcos, which do not own any of the company’s hard
assets.
Open Listing: a non-Exclusive Property Listing that uses multiple
real estate agents. The agent that sells the Property collects the
Commission.
Operating Account: the account into which all of a business’s
revenues are typically deposited, or directed to be deposited, so that
the revenues may be used to pay Operating Expenses, debt service,
and other items. For transactions in which a lender has full control over
all Borrower funds, the Operating Account is an account into which the
lender deposits the Borrower’s budgeted amount of Operating Expenses
(on a monthly basis), after all revenues generated by the Borrower’s
business have been deposited into a lender Lockbox Account.
Operating Cost: the total xed and variable cost associated with the
operation of a business.
Operating Expense: an ongoing or day-to-day expense incurred while
running a business or operating a building. Examples of Operating
Expenses for an oce building include utilities, Amortized building
Capital Improvements, and real estate taxes.
Operating Expense Base: in negotiating a commercial Lease, one
of the most important provisions is how the landlord will recover its
Operating Expenses. In most Leases, the landlord charges the tenant a
xed Rent that will cover the landlord’s Operating Expenses. In contrast,
in a Triple Net Lease, the tenant pays its share of Property taxes,
maintenance, and insurance for the Property in addition to the Rent
owed. The Base Year is an estimate of these Operating Expenses in the
rst year. In subsequent years, the tenant will either owe the landlord
additional money to cover an increase in those expenses or the landlord
may give the tenant a credit toward Rent. The tenant may be required
to reimburse the landlord for its share of the Operating Expenses if the
expenses exceed the amount estimated in the Base Year.
Operating Expense Exclusion: items with respect to which a tenant
is not required to reimburse a landlord if the tenant is otherwise
responsible for payment of its share of Operating Expenses at its
leased Premises. Examples of items often excluded include Capital
Expenditures, the cost of preparing space for Tenancy, costs arising
from the landlord’s breach of the Lease, or failure to comply with
applicable law.
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Operating Income: the amount of Prot realized from a business’s
operations after taking out Operating Expenses — such as cost of
goods sold and wages — and Depreciation. Operating Income is
calculated by taking gross income (revenue minus cost of goods
sold) and subtracting other Operating Expenses, and then removing
Depreciation. Operating Income is typically a synonym for Earnings
Before Interest and Taxes; it is more common to see EBITDA.
Operating Lease (True Lease): a Lease that is treated as a true lease
(as opposed to a loan or a Capital Lease) for accounting purposes. An
Operating Lease is accounted for by a lessee without showing an asset
(for the leased asset) or a liability (for the Lease payment Obligations)
on its Balance Sheet. Periodic payments are accounted for by a lessee
as Operating Expenses for the period.
Operating Partnership (OP): in an UPREIT or DownREIT structure, a
Subsidiary partnership through which a REIT holds certain of its assets.
Ordinary Income: income that for US federal income tax purposes
is not subject to taxation at preferential rates. Ordinary Income is
typically income earned through the sale of products (as opposed to
capital assets held for investment), the performance of services for
compensation, or as Interest, Rents, or royalties.
Organizational Expense: with respect to a fund, expenses incurred in
connection with the fund’s organization and startup, typically including
legal, travel, accounting, Filing, printing, capital raising, and similar
expenses.
Owner’s Policy: a type of title insurance issued to an owner of a
Property that insures the owner from title defects to the extent not
excepted or excluded from the policy coverage.
Ownership Limit: a limit on the actual ownership, Benecial
Ownership, and Constructive Ownership of a REIT’s stock that is
typically set forth in the REIT’s Charter and is intended to protect the
REIT’s qualication as a REIT. Such limit is typically specied as a
maximum percentage that is less than 10% (e.g., 9.8%) of the REIT’s
outstanding Class of Stock, so that, for example, even if ve individuals
actually own or Benecially Own such maximum percentage of the
REIT’s stock, the 5/50 Test could not be violated.
Ownership Limit Waiver (Excepted Holder Limit): an exemption that
a REIT’s Board of Directors may grant to allow a person to actually own,
Benecially Own, or Constructively Own stock of the REIT in excess of
an Ownership Limit. The requirements and procedures for the grant of
an Ownership Limit Waiver are typically set forth in the REIT’s Charter.
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Paired-Share: equity securities in two separate companies, typically
under unied management and traded as a single investment unit. Also
sometimes referred to as Stapled Stock.
Paper Clip REIT: a REIT that does not own an operating Subsidiary,
but has an intercompany agreement with a separate operating company
(that typically has the same management team and stockholder base)
whereby the operating company agrees to lease real Property (or
provides the REIT with a Right of First Refusal to provide such real
Property). Paper Clip REITs have similar tax benets to Paired-Share
REITs.
Par Value: the stated or face value of an instrument of Indebtedness.
For example, if a US$1,000 Note is redeemed at Par Value, it is
redeemed for the full US$1,000 (plus accrued Interest). Instruments of
Indebtedness are said to be redeemed “above par” or “below par” if they
are redeemed for more or less (respectively) than their Par Values. For
a duer on the golf course, Par Value may be an unattainable dream.
Pari Mutuel: a betting system in which all bets of a particular type are
placed together in a pool; the house take is then removed and payo
odds are calculated by sharing the remaining pool among all winning
bets.
Pari Passu: a Latin phrase meaning “with equal step” that is used to
denote an obligation that is equal in right and order of payment.
Partial Taking: a public authority’s seizure of only a portion of, or
certain rights with respect to, a Property in Condemnation.
Participating Loan: a loan in which all or a portion of the return to the
lender is obtained through a “kicker” or Participation in the Prots or
other upside of the Borrower’s business or Property.
Participation: a contract between a lender and another nancial
investor whereby the investor purchases an interest in all of the benets
and burdens of being a lender under a particular credit facility, but
is not actually a party to the Loan Agreement (thus diering from an
assignment). Participations carry additional risk over Syndications, since
the investor is subject to the Bankruptcy risk of the lender who originally
made the loan, such that if said lender were to le for Bankruptcy, it is
possible that the payments due to the investor would be stuck in the
Bankruptcy proceeding and not easily paid out to the investor even
though the initial lender is not entitled to retain such payments.
Partner: the owner of an interest in a general partnership or Limited
Partnership. May also refer to a Member of a limited liability company
that is treated as a partnership for US federal income tax purposes.
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Partner Minimum Gain (Member Minimum Gain): a Partner’s or
Member’s share of the income or gain that would be recognized if an
asset were transferred solely to satisfy the non-recourse liability with
which it is encumbered. Its meaning is set forth in Treasury Regulations
Sections 1.704-2(i)(2) and 1.704-2(i)(3).
Partner Nonrecourse Deduction (Member Nonrecourse
Deduction): a Partner’s or Member’s share of a deduction attributable
to a Non-Recourse Loan. A Partner Nonrecourse Deduction or Member
Nonrecourse Deduction usually covers Depreciation attributable to an
asset when the value of such asset is lower than the value of the Non-
Recourse Loan with which it is encumbered.
Partnership Built-In Gain/Loss: unrealized gain or loss associated
with Property transferred to a partnership (such as an Operating
Partnership) in a wholly or partially tax-deferred contribution in exchange
for an equity interest in the partnership. The amount of such unrealized
gain or loss is generally equal to the dierence between the Fair Market
Value and the tax basis of the contributed Property at the time of the
contribution, as adjusted from time to time. Under the provisions of
the Internal Revenue Code dealing with the allocation of partnership
income, the contributing Partner generally will be allocated the built-in
gain or loss when it is recognized by the partnership.
Partnership Expense: with respect to a fund, expenses that are
paid (or reimbursed by) the fund on an ongoing basis, often including
Organizational Expenses.
Partnership Interest: a Partner’s interest in a partnership (including,
without limitation, capital and residual Prots of the partnership), and
the right, if any, to participate in the management of the business and
aairs of the company, including the right, if any, to vote on, consent to,
or otherwise participate in any decision or action of or by the Partners
and the right to receive information concerning the business and aairs
of the partnership.
Partnership Minimum Gain (Company Minimum Gain): the amount
resulting when, as a result of deductions such as Depreciation, a
partnership’s basis in Property falls below the outstanding balance of
non-recourse debt encumbering such Property. Partnership Minimum
Gain also refers to when a partnership makes a Distribution of proceeds
of a Non-Recourse Loan that exceeds the partnership’s net tax basis in
the encumbered Property.
Partnership Representative: a person designated by a partnership
or limited liability company to have the sole authority to act on behalf of
the partnership or limited liability company in a US federal income tax
95
audit, generally for Taxable Years beginning after 2017. If a Partnership
Representative is an entity, the partnership or limited liability company
must appoint a Designated Individual to act on behalf of the Partnership
Representative and the partnership or limited liability company. See also
Tax Matters Partner.
Pass Through: in Leases and purchase agreements, Property-related
costs (such as Property taxes or maintenance expenses) imposed on
a landlord or seller that the landlord or seller imposes on the tenant or
buyer. See also Flow Through Entity.
Pass Through Expenses: in Leases and purchase agreements,
Property-related costs (such as Property taxes or maintenance
expenses) imposed on a landlord or seller which the landlord or seller
imposes on the tenant or buyer.
Passive Income/Losses: income that for US federal income
tax purposes is treated as derived from certain so-called “passive
investments,” including Property rentals and Limited Partnerships.
Passive Losses may generally be used to oset Passive Income, but
their ability to be used to oset other sources of income is generally
limited.
Patriot Act: provisions in credit documents notifying a Borrower
(and potentially others) that pursuant to the USA PATRIOT Act, each
lender may be required to obtain, verify, and record certain information
regarding the Borrower and its Sponsor(s).
Payment in Kind (PIK): another term for Capitalized Interest whereby
instead of paying cash Interest, a Borrower increases the Principal
amount payable to a lender by that amount that would otherwise be paid
as cash Interest, which in turn earns Interest in subsequent periods. Not
to be confused with a small tool for removing small bits of food between
teeth.
Payment in Lieu of Taxes Agreement (PILOT Agreement): an
incentive, oered by a jurisdiction, such as a city or county, to bring
business and jobs to the jurisdiction, under which a company will pay,
for the period of time designated in the agreement, lower Property taxes
on its real and personal Property located in the jurisdiction than would
ordinarily apply.
Payo Letter: a document provided by a lender that describes loan
details and the amount and how the seller/Borrower is to pay o the loan.
Penetration Index: reects a hotel’s RevPAR in relation to the RevPAR
for that hotel’s Competitive Set.
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Pension-Held REIT: a REIT that (i) would not satisfy the 5/50 Test
but for a look-through rule applicable to shareholders that are qualied
trusts (e.g., pension plans) and (ii) is “predominantly held” by qualied
trusts. A REIT is “predominantly held” by qualied trusts if any such
shareholder holds more than 25% (by value) of the REIT’s stock or one
or more such shareholders (each of whom owns more than 10% by
value of the REIT’s stock) together hold more than 50% (by value) of
the REIT’s stock. Pension-Held REIT status is relevant to tax-exempt
shareholders of a REIT because, although dividend income generally
is not UBTI to a tax-exempt shareholder, a portion of the dividends
paid by a Pension-Held REIT may be treated as UBTI with respect to
shareholders that are qualied trusts and hold more than 10%, by value,
of the REIT’s stock.
Percentage Interest: the amount of ownership an investor has in a
company, expressed as a percentage.
Percentage Rent: a form of Rent, the amount of which is determined
by multiplying the percentage stated in the Lease by the Gross
Revenues (sometimes absolute, sometimes in excess of a stated
Breakpoint) generated by the tenant while doing business at the leased
Premises. Percentage Rent is a common component of Rent in retail
Leases.
Perfect / Perfection / Perfection Under Article 9: steps a Security
Interest holder must take to make a Security Interest in UCC collateral
enforceable against third parties and ensure it has Priority over later
holders of an interest in such UCC collateral. A Security Interest that
is valid and enforceable but has not been perfected is enforceable
only against the debtor but not against third parties, and, most notably,
not against a trustee in the debtor’s Bankruptcy. There are ve basic
methods of Perfection under Article 9: Filing of a Financing Statement,
Control, Possession (either directly or through a third party), temporary
Perfection, and automatic Perfection. The easiest and most common
method of Perfection is Filing a Financing Statement, which is sucient
to Perfect a Security Interest in most (but not all) UCC collateral.
Performance Test: a test applied to a hotel manager pursuant to which
the owner of the hotel can terminate the hotel manager if not satised.
The test typically requires a hotel manager to fail two prongs, one tied to
its RevPAR Index and one tied to the Specic Performance of the hotel
compared to a budget or a specied return on investment to the owner.
Periodic Tenancy: a Tenancy that automatically continues for
successive periods of time such as month-to-month or unless
terminated at the end of a period by notice from either tenant or
landlord.
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Permanent Lender (Take Out Lender): a Mortgage lender that
provides long-term nancing for a real estate project after the
completion of the Construction phase of the project.
Permitted Debt / Permitted Encumbrances / Permitted Exceptions
/ Permitted Liens: exceptions to a Negative Covenant in secured
loan transactions that otherwise prohibit a Borrower from incurring
other Indebtedness, Liens, or Encumbrances on the Collateral for
the loan. The denition of Lien and debt is usually so broad that the
Negative Covenant would trip up even normally operating companies
with no consensual Liens outstanding. Permitted Liens are the types
of Liens that would normally not bother a Senior secured lender, such
as Easements on the Borrower’s land, Mechanic’s Liens while the
work is still in progress, existing consensual Liens (i.e., Liens to other
secured creditors), debt for Trade Payables and normal Operating
Expenses, Liens for taxes not yet due and payable and other negotiated
exceptions.
Permitted Investments: limitations imposed upon the type of
investments a company may invest (or allow its account bank to invest)
its funds in. Permitted Investments are typically limited to cash and
Cash Equivalent-type investments (e.g., Treasuries).
Permitted Transfer: the Transfer of direct or indirect interests in an
asset or company that does not require the consent or approval of a
third party.
Perpetual Easement: an Easement without a specied Term that will
continue indenitely. These Easements often Run With the Land and
remain in place even if the aected Properties are sold.
Personalty: movable assets that are not real Property, money, or
investments.
Phase I Environmental Site Assessment (Phase I ESA): a
supercial investigation of real Property to determine the possibility
of contamination, based on visual observation and the history of the
Property. No physical testing is conducted. A Phase I ESA is mandatory
in order to assert CERCLA defenses that shield from liability for future
cleanup.
Phase II Environmental Site Assessment (Phase II ESA): the
collection and laboratory evaluations of samples of a site’s soil,
groundwater, building materials, or other environmental media, to
conrm whether any contamination above applicable regulatory criteria
exists. The location and extent of sampling will depend upon the nature
of a site and the objective of an investigation. It is typically performed
after completion of a Phase I ESA. Depending on the results, further
98
sampling events (sometimes referred to as a Phase II A, or Phase III)
may be needed to delineate the extent of contamination.
Placement Agent: with respect to a fund, an individual, or an entity
that is engaged by the fund to sell or “place” interests in the fund to
investors.
Plan Asset Regulations: regulations promulgated by the US
Department of Labor that regulate Plan Assets. Can be found at
Department of Labor Regulation 29 C.F.R. § 2510.3-101.
Plan Assets: assets belonging to a pension, Prot-sharing, and other
employee benet plan to which the Employee Retirement Income
Security Act (ERISA) applies; a tax-qualied retirement plan described in
Section 401(a) of the Internal Revenue Code; or a tax-qualied annuity
plan described in Section 408 of the Internal Revenue Code.
Plan of Reorganization: a plan led under Chapter 11 of the
Bankruptcy Code providing for the reorganization and continuation of
the debtor and for the treatment of claims and interests. Also known as
a Reorganization Plan.
Planned Unit Development (PUD): an alternative to traditional
Zoning that permits varied Land Uses within one land area, such as
commercial, residential, and public uses that are located within a single
subdivision.
Plans and Specications: scaled drawings detailing the Construction
or Alteration of a building. Plans and Specications are intended to
provide precise details relating to the size, shape, height, and other
necessary information relating to the Construction or Alteration project.
Plat Act: a statute that governs the subdivision of land and sets forth
requirements for plats (or maps) to be recorded in the land records.
Pledge Agreement: an agreement that creates a Security Interest in
a Pledgor’s Equity interests owned in favor of the applicable secured
parties, therefore allowing lenders to take shares of the pledged
entity (typically a Borrower or its Subsidiaries) as Collateral. In many
instances, the pledge of Equity interests is included in a blanket Security
Agreement and a separate Pledge Agreement will not be required.
However, separate Pledge Agreements are always used to take a
pledge of Equity securing a Mezzanine Loan.
Pledgor: the person, under a Pledge Agreement in favor of a secured
party, granting a Security Interest in its Property (sometimes all or
sometimes a dened scope of the Property) to the secured party as
security for the payment and performance of Obligations under a loan or
other agreement.
99
Political Risk Insurance (PRI): an insurance policy covering a
Sponsor’s Equity investment in a project, or a lender’s loans or other
nancing provided to a project, against political risk, such as the risk of
expropriation or government instability.
Portfolio: a collection of investments held by a particular company or
investor, or properties held by a particular company.
Portfolio Company: a company that an investment vehicle has
purchased and now constitutes a part of the investment vehicle’s
Portfolio.
Portfolio Financing: a loan secured by more than one piece or site of
real Property.
Positive Spread Investing (PSI): raising capital (by selling Equity and/
or debt) at a signicantly lower cost than the initial rate of return that can
be obtained in real estate investments.
Possession: the fact of having, holding, controlling, or occupying
Property.
Possessory Collateral: a type of Collateral that a secured party must
physically hold Possession of in order to Perfect its Security Interest
properly under the UCC, and should physically hold in order to have
superior Priority. Examples include Promissory Notes, certicated
securities, and Chattel paper.
Power of Attorney: a legal right granted to a third party that enables
such third party to act on behalf of another. US state governments have
specic forms of Powers of Attorney, so attention must be paid to form
in the event a Power of Attorney will be used to eectuate a Closing or
otherwise.
Preference: Transfers made during a certain period (either the 90 days
preceding a Bankruptcy Filing or one year for Transfers to insiders) (i)
to a creditor; (ii) on account of an antecedent debt owed by a transferor
before the Transfer is made; (iii) while the transferor was insolvent; and
(iv) that enable the creditor to receive more than it would have received
in a Chapter 7 Liquidation case under the Bankruptcy Code. Preferential
transfers are subject to Clawback, but creditors may avail themselves of
certain defenses to a Clawback action, such as the “ordinary course of
business” defense and the “new value” defense. One rationale behind
Preference rules is that they prevent creditors from making a mad grab
for assets once they learn that a debtor is becoming insolvent and
prevent debtors from favoring some creditors over others as Bankruptcy
nears.
100
Preferential Dividend: a distribution that provides a preference to
any share of stock as compared with other shares of the same class,
or a preference to one Class of Stock as compared with another class,
except to the extent that the class receiving the preference is entitled
to such preference. Except in the case of a Publicly Oered REIT,
a Preferential Dividend is not considered a dividend for purposes of
computing the Dividends Paid Deduction.
Preferred Return: with respect to a fund, the minimum return required
to be earned by fund investors prior to Participation by the fund’s
Sponsor or General Partner in Carried Interest (or, if more than one
level of Carried Interest, the next level of Carried Interest). See also
Hurdle Rate.
Preferred Stock / Preferred Equity: a form of debt structured as an
Equity interest that sits between debt and common stock or other equity
interests in the Capital Structure of an entity. Preferred Stock / Preferred
Equity has Priority over common stock in a Liquidation, generally pays a
xed dividend (the equivalent of the Interest paid on debt) and does not
share in the upside of the entity to the same degree as common stock.
Preliminary Plans: initial development plans for a project, which are
often used for the Construction bidding process and may be submitted
to the local county for approval.
Preliminary Title Report (PTR): a legal document prepared after
Escrow opens but before Closing that provides information about
Property title, including Legal Description, Liens, Easements,
Covenants, restrictions, Property taxes, and the like.
Premises / Demised Premises: the Property that is being leased or
transferred under a Lease contract.
Prepackaged Bankruptcy (Pre-Pack): a Bankruptcy Plan of
Reorganization that is formulated and agreed to between a company’s
equity holders and its creditors prior to the company’s Filing for
Bankruptcy. In fact, votes on the plan are solicited even before the
Bankruptcy case is led. A Pre-Pack is led with the Bankruptcy court
at the time of the Bankruptcy Filing, and conrmation of the plan could
follow a few weeks later. The purpose of a Pre-Pack is to shorten the
duration of the Bankruptcy proceedings and reduce costs.
Prepayment Penalty / Prepayment Premium / Yield Maintenance
/ Prepayment Fee: a fee paid by a Borrower for prepaying a loan. This
fee can be expressed in a number of ways. The most simple fee is one
expressed as a percentage of the amount of the loan being prepaid.
Typically, Prepayment Fees will be set on a sliding scale, e.g., 2% in
101
year one and 1% in year two. Additionally, a Prepayment Fee can be
based upon a Yield Maintenance formula that looks to replicate the
return a lender would have obtained if the entire loan had remained
outstanding to Term. The Prepayment Fee may be applied to all
prepayments of Term Loans or only those made as a result of Voluntary
Prepayments, or some combination of the two. See also Mandatory
Prepayment.
Prescriptive Easement: an Easement acquired by one’s use in an
open and continuous manner without permission for a period longer
than the statute of limitations under US state law.
Prime Rate: the variable lending Rate set by banks that refers to the
Interest Rate at which banks lend money to high-credit customers.
Typically, the Prime Rate is approximately 300 Basis Points above the
Federal Funds rate.
Priming Lien: a Lien that has Priority over other Liens currently
encumbering a piece of Collateral even though the other Liens were
recorded or Perfected rst. Used frequently in the context of DIP
Financing for a Borrower in Bankruptcy whereby a lender who provides
a DIP loan obtains a Priming Lien that has Priority over all other debt.
The Priming Lien allows the DIP lender to be paid before the other debt
even though the other debt was rst in time. The rationale is that a DIP
lender is making a DIP loan at a risky time in a Borrower’s life and is
providing capital that will ultimately allow the pre-existing lenders to get
repaid (at least in part).
Principal: the sum of money borrowed or remaining unpaid, upon
which Interest is calculated.
Principal Balance: the outstanding balance of a debt, exclusive of
Interest or other charges.
Priority: the right of a person’s rights and claims to be ahead of the
rights and claims of others. Applies to both the order in which creditors
can claim against a Borrower or Collateral and to Mortgages, Deeds
of Trust, or other Liens (typically given the Priority in the order of
Recordation).
Private Company: a company that is privately owned and, as a result,
is not generally subject to the disclosure and other legal requirements
imposed on companies whose securities are more broadly held.
Private Equity: Equity capital raised from private sources, including
retail or accredited investors and institutional investors (as opposed to
public markets).
102
Private Placement: the sale of securities to a relatively small number
of select investors that does not have to be registered with the SEC.
Private REIT (Baby REIT or Subsidiary REIT): a REIT, sometimes
holding a single asset, the common stock of which is often owned
by another REIT or in connection with a partnership or joint venture
transaction. A Private REIT structure may be used to facilitate an
investment that is tax-ecient for non-US or tax-exempt investors.
Privity of Contract: the direct relationship between the parties to a
contract, giving them rights and Obligations with respect to each other
that generally do not apply to third parties that are not party to the
applicable contract.
Pro Forma: a Financial Statement that is calculated using certain
assumptions and projections and/or to give eect to a particular
transaction as of or during a period prior to which it occurred. Publicly
traded REITs regularly are required to le Pro Forma Financial
Statements giving eect to signicant acquisitions or dispositions of
assets.
Pro Forma Title Policy: the negotiated form of title policy to be
issued upon satisfaction of all of the title company conditions. This
document does not provide coverage or commit a title company to
provide such coverage, but the Pro Forma can serve as a basis for
interim Title Coverage, pursuant to the Closing Instruction letter, until
the title policy is issued. The Pro Forma Title Policy contains the policy
jacket, completed Schedules A and B, and shows the proposed insured,
amount of insurance, and exceptions and Endorsements that will appear
in the nal policy.
Procuring Cause: the standard for determining which agent rightfully
deserves the Commission for ultimately producing a sale.
Prot: the nancial benet created by a person or company when
revenue exceeds expenses.
Prohibited Transaction: the sale or other disposition by a REIT of
Property that is not Foreclosure Property, is Dealer Property, and fails
to satisfy certain safe-harbor requirements. A REIT is subject to a 100%
tax on the net income from Prohibited Transactions.
Prohibited Transaction Safe Harbor: a safe harbor, which, if met,
prevents certain sales or dispositions by a REIT from being treated as
Prohibited Transactions.
Project Cost: used in Project Finance to denote the cost of a project
allowed under a use of proceeds Covenant of a Credit Agreement.
103
These costs include development costs, land acquisition, equipment,
consultant fees, Construction, legal fees, initial reserves, etc.
Project Finance: a type of limited recourse nancing whereby a
project developer (known as the “project company” that is formed by
a Sponsor) incurs debt, and in combination with Equity contributed by
the Sponsor, is used to nance the development and Construction of a
capital-intensive project (e.g., power plant, toll road), typically through
Construction Loans that convert to Term Loans upon completion of the
project. A primary feature of Project Finance is that the lenders advance
debt on the basis of their evaluation of the projected revenue-generating
capability of the project, rather than the credit quality of the project
Sponsor. The Equity of the project company and the project assets,
including the project documents and other Cash Flows, are pledged as
Collateral for the debt.
Project Loan: a Mortgage loan to nance a large-scale building that
provides a public benet, such as multiple-family housing complexes,
hospitals, and nursing homes. The Federal Housing Administration or
a branch of the US Department of Housing and Urban Development
guarantees the Project Loan.
Property: anything in which a person or an entity can hold legal title.
Property may be tangible (such as goods and equipment) or intangible
(such as intellectual property, contract rights, and goodwill), real (such
as land and anything attached to, or erected on it, excluding anything
that may be severed without injury to the land and certain rights therein,
such as Easements), or personal (as in everything else but real estate).
Property Diligence Questionnaire (PDQ): a questionnaire used
to determine the types of income derived from, and the services
provided at, a Property. REITs and their tax advisers often use such
questionnaires as part of their Due Diligence to determine whether
a Property generates Qualifying Income. Also known as a Property
Service Questionnaire (PSQ).
Property Management Fee: a fee paid to a party that is responsible
for managing the day-to-day operations of a building.
Property Manager: the person or rm charged with operating a real
estate Property in exchange for a fee. Typically, Property Managers are
responsible for dealing with tenants, repairs and maintenance, cleaning,
security, landscaping, collecting Rent, paying insurance premiums,
taxes and other expenses, and making periodic reports to the owner.
Prorations: Rent, Tax, Utilities, Insurance: to divide the amount due
into proportionate amounts based on a party’s share of the cost based
on time of ownership or space occupied.
104
Protective Advance: the money advanced by a lender to fulll or
perform an Obligation of a Borrower, which the Borrower has failed to
perform (e.g., renewing insurance, paying taxes), in order to preserve
the Priority of the lender’s Security Interest in or Lien on the Collateral
or the value of the Collateral, or for expenses, including attorneys’ fees,
that the Borrower has agreed to reimburse.
Publicly Oered REIT: a REIT that is required to le annual and
periodic reports with the SEC under the Securities Exchange Act of
1934.
Punchlist: the part of the Construction work on a Property or Alteration
that remains after Substantial Completion, consisting of tasks which,
if they were never completed, would not interfere with the Property
basically running as intended. For example, painting and landscaping
land on the Punchlist. This is not to say the owner doesn’t care if the
Punchlist is ever completed; the owner does. Often, the owner is entitled
to hold back two times the cost of completing the Punchlist and release
those funds only as each item is crossed o.
Punitive Dilution: a disproportionate or punitive reduction in the
ownership interest or Equity an investor holds in a company.
Purchase and Sale Agreement (PSA): a real estate contract that
sets forth the terms and conditions of the agreement for the sale of a
Property between the buyer and seller.
Purchase Money Mortgage / Owner Financing: a Mortgage granted
by a purchaser, as Borrower, of real Property to a seller, as lender, as
part of a purchase transaction. See also Seller Financing.
Purchase Option: an option in a contract in which the seller extends
and keeps open an oer, for a xed amount of time, to sell real estate to
a particular potential buyer at a certain price.
Put Right: a contractual right pursuant to which an owner of a company
has the right to force the company or another owner to purchase its
ownership interest on certain terms and conditions.
Qualied Foreign Pension Fund: a non-US trust, corporation, or
other organization or arrangement that (i) is established to provide
retirement or pension benets to participants or Beneciaries that are
current or former employees for services rendered, (ii) does not have
a single participant or Beneciary with a right to more than 5% of its
assets or income, and (iii) is subject to certain reporting requirements
and favorable tax treatment under the laws of the country in which it is
established or operates. Any sale of a USRPI held directly (or indirectly
through one or more partnerships) by, or any distribution received from
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a REIT by, a Qualied Foreign Pension Fund (or an entity wholly owned
by a Qualied Foreign Pension Fund) is exempt from taxation under the
FIRPTA rules.
Qualied Healthcare Property: any real Property, and any personal
Property incident to such real Property, that is a healthcare facility (i.e.,
a hospital, nursing facility, assisted living facility, or other facility that
provides certain medical or nursing or ancillary services to patients) or is
necessary or incidental to the use of a healthcare facility. See also EIK.
Qualied Lodging Facility: a hotel, motel, or other facility in which
more than one-half of the units are used on a transient basis, provided
that wagering activities are not conducted at or in connection with such
facilities. See also EIK.
Qualied Shareholder: a non-US publicly traded entity that maintains
records on the identity of each of its 5%-or-greater owners and satises
certain other requirements. Any sale of REIT stock held directly (or
indirectly through one or more partnerships) by, or any distribution
received from a REIT by, a Qualied Shareholder is exempt from
taxation under the FIRPTA rules, subject to certain exceptions.
Qualied Transferee: an entity that meets eligibility requirements —
typically nancial requirements as well as qualitative requirements —
and may, therefore, be a transferee of mezzanine debt on the theory
that the new mezzanine lender may end up Foreclosing on the Equity of
the Mortgage Borrower. In a CMBS context, a transferee of a controlling
interest in mezzanine debt is required to be a Qualied Transferee in
order to preserve the Credit Rating of the Senior debt.
Qualifying Asset (Good Asset): an asset that is counted in the
numerator for purposes of computing the test percentage under the
75% Asset Test (i.e., generally a Real Estate Asset, cash, or cash item
(including a receivable), or a US government security). May also apply
with respect to other Asset Tests (e.g., ownership of a security that
complies with the 10% Asset Test).
Qualifying Income (Good Income): an item of income that is counted
in the numerator for purposes of computing the test percentage under
the 95% Income Test or the 75% Income Test, as applicable. For
example, Interest income from an unsecured loan is Qualifying Income
under the 95% Income Test but not under the 75% Income Test.
Quiet Title: a legal action to settle a title dispute.
Race Statute: a statute that provides Priority of title to the rst to record
a conveyance even if they had knowledge of a prior conveyance or
prior unrecorded claims on the Property. These statutes are currently
uncommon and viewed as unfair. In contrast, see Race-Notice Statute.
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Race-Notice Statute: a statute that provides Priority of title to the
rst to record conveyance but only if they had no knowledge of a prior
conveyance or prior unrecorded claims on the Property. In contrast, see
Race Statute.
Racing: the type of gaming centered around horse or dog races.
Rack Rate: the ocial or advertised price of a hotel room.
Racketeer Inuenced and Corrupt Organizations (RICO): US
federal law that punishes acts performed as part of an ongoing criminal
enterprise. The law provides for both criminal penalties and a civil
Cause of action. Not to be confused with Rico Suave.
Rate: Adjustable/Variable/ARM (Adjustable Rate Mortgage):
Interest charged on a loan. A Rate can be either a xed percentage
(Fixed Rate), typically quoted as an annual rate but payable on a
monthly basis, or it can be a Variable/Adjustable Rate that uctuates
based on an underlying benchmark Interest Rate or Index that changes
periodically (typically LIBOR).
Rating Agency: an agency that rates companies, securities, and loans
on a risk spectrum. The ratings directly impact the cost of borrowing.
As a result, the Rating Agencies are feared by companies and bankers
alike.
Ready, Willing and Able Buyer: a prospective buyer who is legally
capable, prepared to comply with the terms and conditions of a
purchase contract, and nancially able to complete the transaction.
A broker who procures this type of buyer often earns a Commission,
regardless of whether the sale is completed or not.
Real Estate Asset: for purposes of the Asset Tests, this term means
real Property (including interests in real Property and interests in
Mortgages on real Property or on interests in real Property), shares
(or transferable certicates of benecial interest) in other REITs, debt
instruments issued by Publicly Oered REITs, and any Property (not
otherwise a Real Estate Asset) attributable to the temporary investment
of new capital, but only if such Property is stock or a debt instrument,
and only for the one-year period beginning on the date the REIT
receives such capital.
Real Estate Board of New York (REBNY): an organization that
promotes professional practice and ethics in the real estate eld through
industry standards, services, and education.
Real Estate Investment Trust (REIT): a company that owns primarily
income-producing real estate, Mortgages, or other real estate-related
107
assets. REITs are often described as “mutual funds” for real estate and
allow investors, through their ownership of REIT stock, to acquire an
interest in a large Portfolio of real estate-related assets. Some REITs
(often referred to as Equity REITs) invest primarily in real estate (or
specic types of real estate such as oces, multi-family or single-family
residences, hotels, retail and shopping centers, datacenters, healthcare
facilities, cell towers, pipelines, marinas, cold storage or self-storage),
whereas other REITs (often referred to as Mortgage REITs) invest in
Mortgages or real estate securities. Many REITs are listed on public
stock exchanges, but there may also be Private REITs or Non-Traded
REITs. In order to qualify as a REIT, a company must meet a number
of requirements set forth in the Internal Revenue Code related to the
nature of its assets, income, distributions, and organizational structure,
among other things. Provided a company qualies as a REIT, it is
entitled to deduct the dividends it pays to its shareholders, substantially
eliminating the “double taxation” that ordinarily results from investment
in a regular C Corporation. Although a REIT generally does not pay
income tax on the income it currently distributes to its shareholders, a
REIT’s taxable shareholders will be required to pay tax on the dividends
they receive from the REIT. Because REITs typically distribute all or
substantially all of their taxable income, investments in REITs can
provide investors with regular dividends and attractive Yields.
Real Estate Mortgage Investment Conduit (REMIC): an entity that
holds a xed pool of Mortgages, issues multiple classes of securities in
itself to investors, and meets certain other requirements.
Real Estate Operating Company (REOC): a real estate company that
has not elected to be taxed as a REIT and that, as a result, does not
benet from the favorable tax treatment aorded to REITs. At the same
time, REOCs are not subject to the myriad limitations and requirements
that are imposed on REITs under US tax law.
Real Estate Owned (REO): a class of Property owned by a lender
(typically a bank, a government agency such as Fannie Mae, or the
US Department of Housing and Urban Development, or a government
loan insurer) after an unsuccessful sale at a Foreclosure auction.
During a Foreclosure, the holder of a Mortgage will typically bid the
full outstanding balance of the secured debt. In cases where the debt
exceeds the value of the Property, the Mortgage holder will repossess
the Property and list it on their books as REO. Goes well with a
Speedwagon.
Realty: synonymous with real estate or real Property. Land together
with Improvements thereon.
108
Reasonable Cause Opinion: in the event a REIT fails to satisfy one
or more of the requirements for qualication as a REIT, it may be able
to cure such failure if certain requirements are met, including, in most
cases, that the REIT has reasonable cause for such failure. A reasoned
written opinion of a tax adviser with respect to the applicable tax issue
generally will establish that the REIT’s failure to meet the applicable
requirement was due to reasonable cause and not willful neglect.
Recapture (Recapture Right): a provision in a Lease agreement
that allows the landlord to terminate the lease prior to the end of the
scheduled Term as a consequence of the tenant’s desire to sublet the
space demised by the lease or assign the lease if certain conditions are
met or not met.
Recapture of Depreciation (Depreciation Recapture): a US tax
rule whereby certain Depreciation expenses related to assets held by
a taxpayer that reduced such taxpayer’s Ordinary Income are required
to be added back to the Ordinary Income of such taxpayer if the
depreciated assets at issue are subsequently sold at a gain.
Receiver (Receivership): a court-appointed Custodian of real Property
who takes over control and management of the Property in order to
preserve money or manage a Property that is subject to litigation.
Receivers are appointed following a hearing involving all interested
parties, unless such interested parties have waived the right to notice or
the party seeking the appointment of a Receiver can demonstrate that
an emergency exists (in which case the hearing will be held as soon as
possible thereafter).
Reciprocal Easement Agreement (REA): a contract that allows two
or more owners of real Property mutually to use and maintain specied
areas on their respective real Property, such as Access and parking.
REAs are common in shopping centers where a developer will own
much of the real Property, but major retailers own certain parcels. The
Terms of an REA often will extend beyond Easements to address use
Covenants (such as hours of operation), design requirements for the
shopping center, Common Area maintenance and operation, insurance,
and other areas of mutual interest to the parties. The REA will usually be
recorded against all of the aected land and will Run With the Land to
bind successors and assigns.
Recorder: the governmental oce that maintains a public record of the
details of properly executed legal documents relating to real Property,
including a Mortgage or a Deed. Also known as a Recording Oce or
Register of Deeds.
109
Recording Instruction: written instructions from the parties to a
transaction or their attorneys provided to the title company specifying
the conditions that must be satised before submitting documents for
Recordation and specifying the order in which the documents should be
recorded.
Recording Taxes (Recording Fees): the county keeps a public
record of all Property purchases, Mortgages, and other Encumbrances
recorded against a Property and charges this fee to record (or register)
any such document. The fees vary in each jurisdiction.
Redemption: a process by which real estate is released or reclaimed
from a Mortgage by paying the debt owed or fullling other conditions
(see Clogging the Equity of Redemption). In certain jurisdictions,
a Mortgagor has the right to redeem the real Property even after a
Foreclosure has been completed (for a set period of time).
Redevelopment: any Construction on or development of Property that
had been previously developed.
Redevelopment Agency: a government entity whose purpose is to
promote development in areas that are underdeveloped and/or have
become neglected.
Redevelopment Yields: additional Net Operating Income that is
expected to be generated from the Redevelopment of an asset upon
the Stabilization of such asset, expressed as a percentage of the cost of
redeveloping such asset, including the cost of a Lease-Up.
Renancing: the replacement of an existing debt with a new debt but
on dierent Terms. Typically, debt is renanced to extend Maturity, take
advantage of more favorable Interest Rates, or take Equity out of a
Property (if the value of the Property has appreciated).
Registered Representative: a person, typically employed by a
brokerage company, who is licensed to buy and sell securities on
behalf of clients. Registered Representatives are required to pass
examinations administered by FINRA and sometimes other state
agencies.
Regulation D (Reg D): an SEC regulation governing Private Placement
exemptions for registration of securities under the Securities Exchange
Act of 1934, and the requirements that must be met in order to
circumvent the registration requirements.
Regulation S-X: an SEC regulation that sets forth the form, content of,
and requirements for Financial Statements led as part of registration
statements, or as part of ongoing reporting requirements.
110
Regulation Z: US federal regulations promulgated under and
implementing the Truth in Lending Act of 1968, which appear at 12
CFR Part 226. Regulation Z generally governs the disclosures (typically
nancial) that are required to be provided in connection with certain
lending transactions.
Reinstatement: a Chapter 11 plan proponent’s ability to reinstate the
pre-default Terms of an accelerated debt by curing all Defaults (typically
including paying o all late payments and arrearages and bringing the
loan current).
Reinsurance: insurance purchased by one insurance company from
other insurance companies as a means to manage risk.
REIT Built-In Gain Tax (Sting Tax): a REIT is required to pay
an entity-level tax at the highest regular corporate tax rate on gain
recognized on the sale of Property (but only to the extent of the REIT’s
built-in gain in the Property at the time of its acquisition) during a
specied recognition period after the REIT acquired such Property from
a C Corporation in a carryover basis transaction. The recognition period
has varied over the years, generally ranging from ve years to 10 years.
REIT Exchange Traded Funds (REIT ETF): funds that invest primarily
in Equity securities of REITs and related derivatives. As the name
implies, REIT Exchange Traded Funds are traded on exchanges.
REIT Investment Diversication and Empowerment Act (RIDEA)
Structure: a structure pursuant to which a REIT leases a Qualied
Lodging Facility or a Qualied Healthcare Property to a TRS and
the TRS hires an EIK to manage such Property. Although Rent from
a Related Party Tenant generally does not qualify as Rents From
Real Property for a REIT, Rent from a TRS in a RIDEA Structure will
constitute Rents From Real Property notwithstanding the TRS’s status
as a Related Party Tenant.
REIT Opinion: a written legal opinion rendered by a tax adviser that a
REIT has satised the requirements for qualication and taxation as a
REIT.
Relate Back Dividends (Pull Back Dividends or Section 858
Dividends): a procedure that allows a REIT to treat dividends paid in a
Taxable Year as paid in the preceding Taxable Year for purposes of the
90% Distribution Test and also for purposes of computing the REIT’s tax
on undistributed income. Such dividends do not relate back for purposes
of the 4% Excise Tax. To use this procedure, the REIT must (i) declare
the dividend before the due date of the tax return (including extensions)
for the preceding Taxable Year, (ii) pay the dividend in the 12-month
111
period following the close of the preceding Taxable Year, and not later
than the date of the rst regular dividend payment made after such
declaration, and (iii) elect in such tax return to have a specied dollar
amount of the dividend treated as if paid in the preceding Taxable Year.
Related Party Tenant: a tenant of a REIT where (i) if the tenant is
a corporation, the REIT actually owns or constructively owns 10% or
more of the total combined voting power of all classes of stock entitled
to vote or 10% or more of the total value of all classes of stock of the
tenant or (ii) if the tenant is not a corporation, the REIT actually owns
or constructively owns 10% or more of the interests in the assets or net
Prots of the tenant. For purposes of the Income Tests, Rents From
Real Property do not include any amount received or accrued by a REIT
directly or indirectly from any Related Party Tenant.
Release of Mortgage/Lien/Claims: a document led and recorded
(or registered) when all or a portion of a loan has been fully paid to
certify that the lender no longer has any interest in the Property that was
secured by a Mortgage that a Borrower had previously delivered to a
lender as security for its loan.
Release Price: the amount a Mortgage Borrower must pay in order to
pay o the entire balance of a Mortgage. Can also refer to the minimum
price that must be obtained for each unit in a development in order to
release that unit from the Lien of a Mortgage.
Releasing Spread: the dierence between the Lease rates for new
Leases compared with Lease rates for expiring Leases. Cash Releasing
Spreads reect the spread between the last cash payment on the
Lease that is expiring versus the rst cash payment on the renewal
Lease. GAAP Releasing Spreads are calculated after giving eect to the
straight-lining of Rents and non-cash adjustments.
Relief From Stay: an order granted by a Bankruptcy court lifting
the Automatic Stay and enabling a creditor to take action against the
bankrupt debtor to collect on the debt or take control of the Collateral
securing it.
Relinquished Property: Property the taxpayer disposes of in a Like-
Kind Exchange.
Renewal Option: a clause in a Lease giving the tenant one or more
rights to renew or extend the Term of the Lease and that species the
terms and conditions to properly exercise such right (such as when and
how notice of exercise can or must be given), as well as the length of
the renewal or extension Term and the rental rate during such Term. See
also Extension Right.
112
Rent: Consideration the tenant pays to the landlord in exchange for the
right to use and occupy the leased Premises for a period of time.
Rent Adjustment: a Lease provision that provides for future changes
— usually increases — in rental Obligations, such as the Pass Through
of future increases in real estate taxes and Operating Expenses,
predetermined and stated rental increases, and rental increases
eected by the application of Consumer Price Index multipliers.
Rent Commencement Date: may be a later date than the
Commencement Date at which time the tenant is obligated to
commence paying Rent under the Lease.
Rent Concession: inducement a landlord oers to a tenant as part
of an overall rental package, such as Rent Abatement, oering or
increasing the Tenant Improvement Allowance, a reduced rental rate,
and oering a moving allowance, oering additional services at reduced
rates, and other economic incentives.
Rent Insurance — Loss Rental / Rental Loss Insurance and
Business Interruption Insurance: insurance that protects the landlord
in the case of re or other damage that renders the Property unusable
and excuses the tenant from paying Rent. This insurance covers the
revenue that would have been earned during the Business Interruption
event.
Rent Roll: a list of tenants of a Property that typically includes the Rent
payable and the expiration date of the Leases.
Rentable Area: the actual area that may be rented to tenants. Rentable
Area is often used to calculate Rent payments. This may include
tenant’s pro rata share of Common Areas. Also known as Rentable
Square Footage (RSF).
Rental Pool (Rental Program): a structure typically associated with
Condo Hotels pursuant to which individual unit owners submit such
units to a Rental Program, pursuant to which such units are rented for
transient occupancy so that the Condominium project functions like a
hotel.
Rents From Real Property: for purposes of the Income Tests, includes
(i) Rents from interests in real Property, (ii) charges for Customary
Services provided in connection with the rental of real Property (whether
or not separately stated), and (iii), if the 15% Personal Property Test is
satised, Rent attributable to personal Property leased in connection
with a lease of real Property, but does not include (a) any Rent
determined based on the income or Prots derived by any person from
the leased Property (although Rent based on one or more percentages
113
of Gross Revenues is generally permitted), (b) any Rent or other amount
received from a Related Party Tenant, or (c) Impermissible Tenant
Services Income. The agreement pursuant to which such amounts are
paid can be in the form of a lease, license, or other agreement, provided
the applicable requirements to qualify as a Rents From Real Property
are met.
Replacement Cost (Replacement Value): a method for determining
the value of an asset based upon the amount that would be required to
replace the asset at the present time.
Replacement Property: Property a taxpayer acquires in a Like-Kind
Exchange.
Representations and Warranties: in the CMBS context, a set of
Representations and Warranties made by Mortgage loan sellers/
originators regarding the loan Terms, Borrower structure, and Collateral
in the Mortgage loan purchase agreements entered into between the
Mortgage loan sellers/originators and the entities creating the CMBS.
Request for Notice: in the context of a Property Lien, a request, put
on record, to be given notice of any default and any Lien enforcement
proceedings (particularly a notice of sale) with respect to Liens recorded
against a Property. In the context of Bankruptcy, a request, led with the
applicable Bankruptcy court, to receive notice of all proceedings in the
Bankruptcy action.
Reserve Accounts (Reserve Funds): accounts created under the
loan documents to hold the cash reserved for the payment of various
Obligations, including debt service.
Restoration: the process of reinstating a Property to its original, prior,
or functional/usable condition following the occurrence of damage or
destruction to (or partial Condemnation of) such Property.
Restriction on Alienation: a clause in a Deed that attempts to
prevent the sale or conveyance of real Property either forever or for an
extremely long period of time. Such a restriction is generally unlawful
and void or voidable. Also known as Restraint on Alienation.
Retainage (Retained Funds): the portion of money due under a
Construction Contract or subcontract, but retained by lenders, owners,
General Contractors, and Subcontractors, as applicable, to incentivize
completion of Construction and issuance of Release of Liens.
Revenue per Available Room (RevPAR): a performance measure for
hotel properties that takes into account total guest room revenue divided
by the total number of available rooms.
114
Reversionary Interest: an interest in Property that the Grantor of
a Property right retains after the conveyance of such Property right
(such as the owner of a Fee Simple estate granting a life estate or a
Leasehold Estate). At the completion of the Property right granted, the
estate retained reverts back to the original Grantor.
Revolver (Revolving Facility): a loan facility that provides a Borrower
with the ability to draw down, repay, and redraw loans advanced.
RevPAR Index: the measurement of a hotel’s market share of its
segment’s (e.g., Competitive Set, market, etc.) RevPAR.
Right of First Oer (ROFO): a contractual obligation of the owner
of an asset to oer the sale of the asset with a specied party before
the owner of such asset may oer it for sale to other third parties. If
the holder of the Right of First Oer is not interested in purchasing the
asset, the seller is typically only free to sell the asset to a third party on
very similar Terms as those oered to the rst party and for a particular
period of time before such right would be reinstated.
Right of First Refusal (ROFR): a contractual obligation of the owner
of an asset to allow a specied party the right to acquire an asset on the
same Terms that have already been agreed to by a third party.
Right of Reentry: a Grantor’s retained right to enter and repossess
Property if a certain circumstance occurs or fails to occur. This is not
automatic, like reversion; the Grantor has to take armative steps to
recover Possession and title, such as suing to Quiet Title. To the extent
permitted under US state law, a Lease may contain a Right of Reentry
allowing the landlord to reclaim the Premises if the tenant fails to abide
by the Terms of the Lease. When the landlord exercises the Right of
Reentry and reclaims the Premises, the tenant has no further right to the
Premises.
Right of Way: a legally granted right-of-Access to travel across a
specic route regardless of Property ownership.
Riparian Right: the right belonging to landowners to use water that
ows naturally either on or adjacent to their Property.
Risk Factor: with respect to a fund, statements made in a fund’s
Private Placement memorandum that describe certain risks associated
with investing in the fund.
Risk of Loss: determines whether the buyer or seller is nancially
responsible for loss that occurs between the time the contract is formed
and fully performed. Most jurisdictions have adopted the UCC rules for
Risk of Loss.
115
Roll-Up: a process or series of transactions in which a number of
smaller companies (Aliated or non-Aliated) are combined into a
single larger company, often in connection with an initial public oering
or other issuance of public securities.
Rule Against Perpetuities: a rule limiting the applicability of Restraints
on Alienation (and other future interests) to a maximum of lives in being,
plus 21 years.
Run With the Land: a legal term that means that a Covenant, right, or
restriction is attached to the Deed and, therefore, subsequent Property
owners take the land subject to the covenant, right, or restriction.
S&P: shorthand for Standard & Poor’s, a major Rating Agency.
S-11: an SEC registration statement form that is used to register
securities that are issued by REITs or by other Issuers whose business
primarily involves acquiring and holding real estate or interests in real
estate for purposes of investment. The analog to Form S-1 for non-real
estate companies.
Sale and Leaseback (Sale-Leaseback): the nancial transaction by
which a party sells an asset (e.g., real Property) and enters into a long-
term Lease of the asset back from the party that purchased the asset.
The transaction functions as a loan, with payments taking the form of
Rent.
Sale Notice: a notice by a company or an investor to the other
investors of an election to sell an asset or interest in the company.
Sale Protection: although a contribution of Property to a
partnership (such as an Operating Partnership) is generally a tax-
deferred transaction, contributors may recognize income in certain
circumstances, including when the partnership sells a contributed
Property. See also Partnership Built-In Gain / Loss. In order to defer
such gain recognition, a contributor may require (e.g., in a Tax
Protection Agreement) that the partnership indemnify the contributor
in the event the partnership sells any Properties contributed by such
contributor or engages in certain merger or sale transactions within a
specied period of time following the contribution.
Same Store: a nancial metric that is used to compare the performance
of an established set of Properties over a given time period (such as a
Fiscal Year or quarter), with the same set of properties in a period in a
previous year. Same Store disregards acquisitions or dispositions during
the relevant periods to focus on a set of Properties continuously held
across the periods.
116
Schedule B-I: in a title Commitment, Schedule B-I typically sets forth
requirements for insurance companies to issue title insurance policies,
including the items that the seller or Borrower must submit to the title
company, which include payment of the premium, executed Deed, or
Mortgage, corporate authority documents, and satisfactions of existing
monetary Encumbrances.
Schedule B-II: in a title Commitment, Schedule B-II typically sets forth
the items excluded from coverage of the title insurance policy, which
generally include standard exceptions, Liens and Encumbrances that
the public records and taxes and Assessments show to be due and
payable.
Schedule III: a required schedule to the Financial Statements setting
forth a company’s real estate and accumulated Depreciation.
Schematic Design: the basic parts and scale of a development project
shown on an initial design plan.
Secondary Shelf: a registration statement led with the SEC providing
for the sale of shares owned by one or more existing security holders
(rather than the Issuer itself), which may be sold all at once, on a
delayed basis, in a number of tranches over a period of time, or on a
continuous basis. Also a good place to store old books.
Section 704(c) Method: a method of allocation of income, gain,
loss, or deduction with respect to contributed Property among a
partnership’s Partners, which allocates the burdens and benets of the
Partnership Built-In Gain / Loss to the contributing Partner. US Treasury
Regulations authorize the following three allocation methods (but also
permit other methods so long as they are reasonable): (i) the traditional
method, (ii) the traditional method with curative allocations, and (iii) the
remedial allocation method. Typically, the traditional method without
curative allocations is the most favorable method from a contributor’s
perspective.
Section 83(b) Election: an election made pursuant to Section 83(b) of
the Internal Revenue Code, which causes the value of unvested stock
and certain other Equity interests or Property received in connection
with the performance of services to be immediately taxable to the
recipient as ordinary compensation income (to the extent of its value
at such time), but permits subsequent Appreciation in those securities,
if and when realized, to be taxable as Capital Gain, often at lower tax
rates.
Section 892 Investor: a non-US investor (including non-US
governments and certain of their agencies, instrumentalities, and
controlled entities, such as sovereign wealth funds) that is exempt
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from US taxation with respect to income received from investments
in the US in stocks, bonds, or other US securities, certain nancial
instruments, or Interest on US bank Deposits. To be eligible for such
exemption, the income must not be derived from the conduct of a
commercial activity, received by or from a commercial entity controlled
by a non-US government, or derived from the disposition of an interest
in a commercial entity controlled by a non-US government. Frequently,
Section 892 Investors will own slightly less than 50% of the stock of a
Private REIT (e.g., 45% to 49%), or of the interests in a partnership that
owns 100% of the common stock of a Private REIT.
Secured Financing: nancing secured by Collateral that allows a
creditor, in the event that the Borrower Defaults, to sell the Collateral to
recover some or all of the debt owed.
Securities Act of 1933: US federal law enacted to protect the investing
public by governing the issuance of securities and requiring more
transparency in Financial Statements. Also known as the ’33 Act.
Securities Exchange Act of 1934 (Exchange Act): US federal
law enacted to protect the investing public by governing securities
transactions on the secondary market (after their initial issuance) and
regulating the activities of securities exchanges and broker-dealers.
Securities and Exchange Commission (SEC): the US federal
agency primarily charged with enforcing federal securities laws and with
regulating the US securities industry.
Securities Investor Protection Corporation (SIPC): a nonprot
corporation created under US federal law and funded by companies in
the securities industry to provide certain protections to investors from
losses if a securities broker fails.
Securitization (Securitized): a nancial transaction in which Portfolios
of Mortgages (or sometimes a single large Mortgage) are pooled to
create securities that are sold to investors.
Securitization Vehicle: a tax-exempt company or trust formed to
take ownership of a Portfolio of Mortgages, fund the purchase of
such Mortgages, and issue securities to raise the funds necessary to
complete the purchase.
Security Agreement: a legal document providing a lender with a
Security Interest in specic UCC collateral.
Security Deposit: money placed with a person as Earnest Money
or security for the performance of a contract, usually a Lease. If the
Obligations under the contract are not performed, then the Deposit may
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be forfeited. Often there are statutory requirements for how a landlord
may hold, apply, or return a Lease Security Deposit.
Security Interest: an interest in specic Collateral created by an
agreement or law for the purpose of securing the payment of debt and/
or the performance of Obligations. The Beneciary of a Security Interest
(the “secured party”) has certain preferential rights over the Collateral,
typically including the right to seize and sell the Collateral to recover the
debt.
Self-Help: when, in an attempt to avoid legal proceedings, a landlord
uses methods such as changing the locks, removing a tenant’s
furniture or cutting o utilities in order to evict the tenant. Most of these
techniques are illegal. Also used in the context of a tenant performing
the obligations of a landlord that has defaulted in its obligations owed to
a tenant under a lease.
Self-Insurance: a risk-management method in which a calculated
amount of money is set aside to compensate for potential future losses
that an insurance policy would otherwise cover. It is also possible that
a large company could have a captive insurance company funded by
the self-insured entity. Typically, only very credit-worthy entities are
permitted to self-insure.
Self-Insured Retention: otherwise known as the “deductible.” Self-
Insured Retention is the amount of an otherwise-covered loss that is
not covered by an insurance policy and the insured usually must pay
before the insurer will pay benets. Generally, the larger the Self-Insured
Retention, the lower the premium for the related insurance policy.
Typically, only very credit worthy entities are permitted to have a Self-
Insured Retention.
Seller Financing: nancing provided by a seller of real estate to a
buyer that is secured by a Purchase Money Mortgage.
Senior: the right of a person’s rights and claims to be superior to the
rights and claims of others against a Borrower or Collateral.
Senior Loan: a loan secured by a Lien against real estate that is
superior in rights of payment to other loans made to the same Borrower
(other than loans of equal Priority that would also be considered Senior)
and in claim rights against the Borrower’s assets. A Mortgage loan that
is superior in Priority to other Mortgage loans encumbering the same
Property.
Separateness: how an entity will be treated as separate and legally
distinct from other entities for corporate and Bankruptcy purposes.
Separateness of an entity can be evidenced by SPE Covenants, such
119
as the requirement to maintain separate bank accounts and stationary,
as well as special purpose provisions limiting the purpose of an entity
to a limited and specic purpose related to a single Property. Lenders
want Separateness protections to ensure entities are Bankruptcy
Remote (that is, not subject to consolidation into another related entity’s
Bankruptcy). See also Single-Purpose Entity.
Separateness Covenants: Covenants included in the loan and
organizational documents of an SPE that attempt to minimize the
likelihood of the SPE becoming insolvent as a result of its own activities,
and insulate the SPE from Bankruptcy proceedings involving related
parties. Also known as SPE Covenants.
Settlement Statement: a document that discloses all the Sources and
Uses of funds and proceeds from a nancing and/or Equity transaction
including all fees, costs, and expenses.
Severing: the legal separation of the Note and the Mortgage, when
each is held by a separate entity, such as the lender (which holds the
Note) and the Mortgage Electronic Registration System, or MERS (the
mortgagee).
Shareholder Demand Letter / Stock Ownership Questionnaire: the
letter or questionnaire a REIT sends to its shareholders of record within
30 days after the end of each Taxable Year (generally, by January 30),
requesting information regarding actual ownership of the REIT’s stock
during the prior year. REITs are required to collect and maintain certain
records regarding ownership of their stock.
Sheri’s Sale: a public sale conducted to satisfy a judgment rendered
by a court or agency, or in connection with a Mortgage Foreclosure, tax
Lien, or tax sale.
Shop Drawings: detailed drawings that provide information regarding
the fabrication or installation of items to be installed in a Construction
project. These drawings are not provided by the architect but instead by
the manufacturer, supplier, contractor, etc. Shop Drawings can be used
for windows or appliances, for example.
Short Sale: a real estate sale in which the proceeds are less than the
balance of the loan secured by the Property, and the lender agrees to
accept less than the amount owed to the lender and release its Lien.
A Short Sale is an alternative to a Foreclosure. Some US states have
legislation preventing a lender from pursuing a Deciency claim after a
Short Sale.
Short-Form Lease: a condensed version of a Lease. Such Leases
can be for uncomplicated tenancies. A Short-Form Lease may also be
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used as a recordable Memorandum of Lease which sets forth the basic
Lease Terms of the actual Lease in a form suitable for recording so
that the Lease can be memorialized in the real Property records (giving
constructive notice of the existence of the Lease), but doesn’t disclose
all of the Lease details (particularly the economic details) to the public.
Short-Term Investment Income: income earned by a fund in relation
to short-term investments made by the fund.
Side Car: an investment vehicle established to invest alongside a
fund in certain (but not all) of the fund’s investments (e.g., if the fund
is unable to make the entirety of an investment itself as a result of
Diversication limits imposed on the fund). Also a classic nightcap.
Side Letter: an agreement between a fund investor and the fund
pursuant to which rights or benets are provided to the investor (which
are distinct from the rights and benets provided in the fund’s governing
documents and subscription booklet).
Sight Draft: a bill of exchange (check) or draft that is payable when
presented.
Signicance Tests: three tests — including the Investment Test, the
Total Asset Test, and the Pre-Tax Income Test — that determine whether
the acquisitions or proposed acquisitions of businesses are “signicant”
within the meaning of Rule 3-05. An acquisition is signicant under Rule
3-05 if: (i) the amount of the acquirer’s investment in the target business
compared to the acquirer’s total assets is more than 20% (Investment
Test) and (ii) the total assets of the target business compared to the
acquirer’s total assets is more than 20% (Total Asset Test). The target
business’s pre-tax income compared to the pre-tax income of the
acquirer for its most recent full Fiscal Year is more than 20% (Pre-Tax
Income Test).
Single-Member LLC: a limited liability company with only one Member.
Sometimes a term means exactly what it sounds like.
Single-Purpose Entity (SPE): an entity (usually an LLC) that holds
title to real estate and owes money to a lender, but has no other assets
or material liabilities. The organizational documents of the entity are
structured to insulate the entity’s assets from other creditors and, in
a Bankruptcy proceeding, to make it easier for the lender to lift the
Automatic Stay and proceed with a Foreclosure. Also known as a
Special Purpose Entity. See also Special Purpose Vehicle.
Site Conditions: the surface and subsurface conditions at a location
planned for Construction. Site Conditions that dier from an earlier
Assessment can cause delays, increases in the project cost, and
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possibly dangerous working conditions. The allocation of risk for
unforeseeable or undetected Site Conditions should be clearly dened
in the Construction Contract.
Situs: the location of real Property for legal purposes (such as
determining jurisdiction).
Soft Cost: the cost related to Construction other than direct building
costs, such as architect and engineering fees, design costs, and legal
fees. In contrast, see Hard Cost.
Soft Lockbox: a Lockbox that permits a Borrower to withdraw funds
without lender approval unless and until a Financial Covenant is tripped
or a Default or Event of Default occurs.
Sold Out Lender: a lender that holds a subordinate Lien and
Forecloses, and where the proceeds are insucient to grant the
subordinate lender recovery.
Sources and Uses: a statement that represents all of the inows and
outows of cash from all sources, including Equity and debt. See also
Closing Statement.
Sovereign Immunity: in the US, immunity provided to foreign nations
under the Foreign Sovereign Immunity Act and various judicial doctrines
whereby foreign governments are immune from the jurisdiction of
federal and state courts.
Special Improvement District: as part of a revitalization plan, the
organization of local businesses and Property owners who agree to pay
additional taxes or fees in order to fund specialized services within the
district. Also known as a Business Improvement District.
Special Purpose Vehicle: a corporate entity Subsidiary created to
hold a specic set of assets and thereby isolate Bankruptcy risk from a
parent company and/or sister Subsidiaries by maintaining assets and
liabilities separate from the parent and the sister Subsidiaries. Also
known as a Bankruptcy Remote Vehicle. See also Single-Purpose
Entity.
Special Servicer: a servicer that deals with CMBS loans that are
currently in or about to go into Default.
Specic Performance: an equitable remedy requiring a party to fulll
the Terms of a contract as bargained for rather than paying Damages or
compensating in some other way.
Splitter: an agreement that splits Notes or Mortgages into two or more
new Notes or Mortgages.
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Sponsor: the ultimate owner of an SPE formed to participate in a given
transaction. A Sponsor is the person with the nancial substance or
“deep pockets” supporting the transaction.
Springing Lockbox: a Lockbox that is required to be established in the
future only if certain events occur, as set forth in the Loan Agreement or
Cash Management Agreement.
Springing Member: a new Member admitted into a Single-Member
LLC in the event of the named Member’s death, Bankruptcy, or
Dissolution, in order to prevent the death, Bankruptcy, or Dissolution of
the individual owner resulting in the Dissolution of the Single-Member
LLC.
Stabilization: for an asset, the point in time at which such asset
achieves a projected Cash Flow and sustains such Cash Flow for a
pre-determined period of time (typically trailing two-to-four quarters).
Stabilization of an asset may entitle a Borrower to additional funding
under a loan, release of cash from Escrows or Cash Management
Accounts, and release of additional Credit Enhancement (Letters of
Credit, etc.). Many REITs have a particular occupancy percentage at
which point they consider a Property to be stabilized.
Standstill: where a creditor is legally and contractually entitled to
exercise remedies against its Borrower due to an Event of Default, but
an Intercreditor Agreement, Forbearance agreement, or some other
arrangement prohibits it from doing so. Often the Standstill expires
after a negotiated period of time or the happening of a specied event
(typically 180 days). When the Standstill applies to the Senior creditor,
it is usually to give the junior creditor time to remedy the Default to keep
from being wiped out in a Foreclosure by the Senior creditor. When the
Standstill applies to the junior creditor, it is because the Senior creditor
does not want its Borrower distracted from xing a problem by the
possibility of a Foreclosure or other action by the junior creditor.
Staple Financing: a nancing package oered up by the investment
bank that is acting as the sell-side adviser in connection with the
auctioning of a target company or asset. Called “staple” because the
nancing package is attached to the bid materials that are sent out to
potential buyers. Staple Financings are a useful way for the investment
bank acting as the adviser to a company that is putting itself on the
auction block to also be involved in the nancing of the acquisition by
the buyer.
Star Report (STR Report): a performance measurement report
produced by Smith Travel Research, an independent market research
company. The Star Report is widely used in the hotel industry to
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compare the performance of a specic hotel to the performance of the
market it is in and to its most comparable competitors.
Statute of Frauds: requires that certain types of contracts be
evidenced by a signed, written contract in order to be enforceable (i.e.,
contracts for the sale of real Property). The Statute of Frauds often
governs contracts involving the sales or Transfer of land.
Step-In Rights: contractual rights (sometimes local statutory rule
or regulation) granted to a party to substitute its performance for the
required performance of a non-performing party. These are rights apart
from rights to appoint a Receiver that are often held by secured parties
to protect their Collateral pending exercise of further remedies.
Stock Purchase Agreement (SPA): an acquisition agreement
pursuant to which the acquirer purchases the shares or Membership
Interests in an entity as opposed to the real estate itself. See also
Purchase and Sale Agreement.
Stock Transfer Restrictions: provisions typically included in the
REIT’s Charter that restrict the ownership and Transfer of the REIT’s
stock to prevent disqualication as a REIT. Such provisions typically
prohibit persons from actually owning, Benecially Owning, or
Constructively Owning the REIT’s stock to the extent such ownership
would be in excess of an Ownership Limit, would result in a violation of
the 5/50 Test, or would otherwise result in the REIT’s disqualication as
a REIT, and prohibit Transfers of the REIT’s stock that would result in a
violation of the 100-Shareholder Requirement.
Stop Notice: a law providing an alternative to a Mechanic’s Lien by
allowing a contractor, supplier, or worker to make a claim against the
Construction lender and, in some instances, the owner for a portion of
the undisbursed Construction-loan proceeds.
Straight-Line: a method of calculating Depreciation or income that
involves evenly spreading expenses or income over the time period an
asset is to be held or used, without Acceleration.
Straight REIT: a REIT that does not employ an UPREIT structure.
Straight REITs often employ DownREIT partnership strategies in order
to oer similar tax-deferred consideration as UPREITs to contributors
of Property that wish to avoid taxation upon the initial contribution and
enjoy the potential benets of returns based on the REIT’s common
stock performance.
Structural Subordination: non-contractual Subordination created if a
Holding Company or other parent entity issues debt, with no guarantee
from the operating Subsidiary that is the Borrower/Issuer under other
124
Indebtedness. The parent debt is eectively subordinated to the debt
held closer to the operating assets since all the operating Subsidiary’s
debt gets paid in full in a Bankruptcy before anything is dividended up
to the Holding Company. Similarly, if the Subsidiary’s debt is in Default,
dividends to the parent will be blocked. As an example, mezzanine debt
is structurally subordinated to Mortgage debt.
Sub Escrow: when the transaction is ready to close Escrow, the new
lender sends loan proceeds to the title company with instructions to pay
o existing Liens or Encumbrances against the Property. The remaining
funds after satisfying all Encumbrances, such as Mortgages or Property
tax Liens, are given to the Escrow holder for disbursement.
Subcontractor: an individual or company who contracts with the
principal contractor (or another Subcontractor) to complete a portion of a
large-scale Construction project.
Subdivide: to divide a parcel of land into individual pieces, typically via
a plat, for purposes of selling or developing such smaller parcels.
Sublease: an arrangement in which a tenant assigns the Lease or part
of the Lease to a third party so that the tenant becomes the Sublessor
and the third party becomes the Sublessee. The original tenant is still
responsible for paying Rent to the original landlord or lessor.
Sublessee (Subtenant): a third party who leases Property from a
tenant as opposed to directly from the Fee owner of the applicable
Property.
Sublessor (Sublandlord): a tenant who leases some or all of its
leased Premises to a third party.
Submetering: the process of separately measuring and billing the utility
usage for each tenant in a multi-tenant Property.
Subordination: involves at least two parties having rights and the
Subordination of the rights of one party to those of the other(s), such
as two classes of creditors (Senior and junior), or the holder of an
Easement and the holder of a Mortgage or Lease. The junior creditor or
interest holder’s rights are subject to the rights of the Senior creditor or
interest holder and may include an agreement to receive payments and
certain performances after the Senior creditor or interest holder.
Subordination and Non-Disturbance Agreement (SNDA): an
agreement between tenants and lenders that: (i) subordinates a
Tenant’s Rights to those of the lender, (ii) assures tenants that even if
the landlord Defaults and the lender Forecloses, the Tenant’s Rights to
their Premises will be preserved, and (iii) provides that the tenant will
Attorn to, or continue its Obligations to the lender, as the new landlord.
125
Subprime: lending that is the making of loans to people who may
have diculty maintaining the repayment schedule. Subprime loans
are typically characterized by higher Interest Rates and less favorable
Terms to compensate for higher credit risk.
Subrogation: not the same as Subordination, or anything like it.
Subrogation is only used in situations where there has been a payment
made under a Guaranty or an insurance policy. If you are the Guarantor
or insurer, Subrogation is your legal right to go after the entity that
caused you to have to pay and recover the amount of the payment.
In a Guaranty context, that would be the primary obligor. This is why
guaranties often have the Guarantor waive Subrogation until the
Beneciary of the Guaranty is no longer a creditor of the primary obligor
(since the Beneciary doesn’t want a new co-creditor). In an insurance
context, the entity that caused you to have to pay is whoever broke
the thing in the case of Property Insurance or injured the person in the
case of liability insurance. For instance, if your neighbor’s dead tree
falls on your house, your insurance company pays you, and is then
Subrogated to your rights against the neighbor, so can sue the neighbor
for negligence. In contracts where your Counterparty agrees to provide
and pay for Property or liability insurance covering the subject of the
contract, you want the Counterparty’s insurer to waive Subrogation
against you. Otherwise, what is the benet of the insurance if you can
be sued for allegedly causing the injury?
Subsidiary: an entity owned wholly or in part by another entity.
Substantial Completion: the completion of a project or Build-Out to
the point where the contractor or landlord is ready to turn the Property
over to the owner or tenant, as applicable, subject to completion
of Punchlist items. Often conditioned upon receipt of a (temporary)
Certicate of Occupancy.
Substantive Consolidation: the pooling of the assets and liabilities
of separate legal entities in a Bankruptcy. Creditors of substantively
consolidated entities will have a claim against the single pool of assets
and Guaranty claims. Historically, Substantive Consolidation has been
reserved for cases where (i) the nancial aairs among Aliates are so
entangled — whether by design or sloppy business practices — that an
accurate assessment of which entity is obligated to a particular creditor
or group of creditors cannot be determined or could only be determined
at undue cost or (ii) if creditors generally had dealt with the enterprise as
a single consolidated entity (rather than separate legal entities). In real
estate lending transactions, Separateness Covenants are often used to
help ameliorate the risk of Substantive Consolidation.
126
Substitute Space / Relocation Right / Swing Space: an interim
working environment, often used while Construction or renovations
are being completed. Some commercial Leases contain provisions
allowing a landlord to move a tenant into an equivalent space for a
variety of reasons, including the appearance of a larger tenant in need
of Contiguous space.
Subsurface Leeching: the process by which water-soluble
contaminants such as pesticides, chemicals, or hazardous or
toxic substances are carried through the soil and can contaminate
groundwater, Surface Water, and surrounding soil. Typical sources
of leeching are farm waste, underground storage tanks, landlls, and
industrial sites.
Successor Agency: a government entity established to wind down the
business of Redevelopment agencies following the enactment of laws
dissolving Redevelopment agencies. In this process, the Successor
Agency manages existing Obligations and the disposition of assets.
Suitability: a measure of whether a person or entity is appropriate for
a gaming license. The person or entity being evaluated makes a series
of disclosures in order for a jurisdiction to determine if a person or entity
is suitable. The disclosures concern a person’s or entity’s background,
Financial Statements, relationships with other entities and persons,
assets, and other information. Persons and entities in this industry
need to be wary of all contractual relationships to ensure they are not
otherwise involved with unsuitable parties that could taint their own
Suitability.
Supermajority in Interest / LP Votes or Bank Group: a situation
where a percentage of the lenders under a Credit Agreement or
Partners/Members under an LLC agreement greater than a simple
majority (typically 66.666%) is required for certain material Amendments
or major decisions.
Surface Water: water-related factors for properties to consider. Surface
Water is water collecting on the ground or in a stream, river, lake,
wetland, or ocean.
Surplus: excess proceeds from a Foreclosure sale after the debt and
all secured Obligations (including costs and expenses in connection
with the Foreclosure sale) are satised. The Surplus is Property of the
Mortgagor.
Surrender: a tenant’s relinquishment of Possession of its leased
Premises before expiration Term of the Lease which permits the landlord
to take Possession and treat the Lease as terminated.
127
Survey Certication: an ocial statement given by a licensed
professional surveyor regarding the conditions under which the survey
has been prepared and indicating which standard survey items have
been included in the survey.
Survey: Arial: a picture of the subject real Property taken from above
that shows Improvements and visible features of such Property and
which also depicts boundary lines imposed by hand by a surveyor.
Survey: As Built: a detailed map of a building or other Improvements
and its relation, As Built, to the plans from which it was built. It is used
to determine if the completed project accords with previously approved
Plans and Specications.
Survey: Boundary: indicates the outer limits/Property lines of the
subject real Property.
Survey: Topographic/Contour Map: indicates the contour, shape,
and physical features of the ground within certain boundaries.
Swap: a derivative transaction in which the parties agree to exchange
specied Cash Flows at specied intervals (e.g., one party agrees with
the other party that it will exchange a Floating Rate for a Fixed Rate on
a specied notional amount of principal at the end of each quarter). This
is a tool that Borrowers use to manage their exposure to changes in
Interest Rates.
Sweep: a concept often found in loan documents, by which (i) revenue
from Property operations or sales is transferred directly to a lender-
controlled Cash Management Account (typically via direction letters),
(ii) monies on Deposit in specied Operating Accounts are transferred
to a lender-controlled Cash Management Account, and (iii) monies
on Deposit in such lender-controlled Cash Management Account are
applied to certain Obligations under the loan (including debt service).
Also Hall of Fame NFL Coach Bill Walsh’s favorite running play.
Syndication: as a verb, the process whereby an arranger of a credit
facility assigns (sells) the loans and Commitments to other banks
and funds or arranges for the making of multiple loans evidenced
by separate Notes by a syndicate or club of lenders. As a noun,
Syndication is the group of banks and funds that have become the
lenders under the credit facility. In nance, investments in an LLC or LP
structure can also be syndicated (Equity Syndication).
Synthetic Lease: a Lease between related parties to allow the user of
the Demised Premises to retain all benets and burdens of ownership
but also keep the real Property o its Balance Sheet. Meaning, the user
(lessee) would retain the benets of Appreciation and Depreciation
128
for tax purposes but would not show the real Property as an asset for
purposes of Financial Statements. A Synthetic Lease is not a substitute
for a Sale-Leaseback and is generally not a structure that is used today
after falling out of favor as a result of the Enron scandal and increased
scrutiny of practices by the FASB.
Synthetic Letter of Credit: a Letter of Credit under a nancing
that has been “pre-funded” by the lender on the Closing Date (with
the proceeds from such funding typically being deposited in a cash
Collateral account) rather than being funded on a later date upon the
occurrence of a contingent event requiring payment under the Letter of
Credit to the third party.
Synthetic Secondary: an oering by an Issuer, the proceeds of which
are used to repurchase or redeem securities from existing Equity
holders. In an UPREIT, the REIT might repurchase shares of common
stock or it might repurchase outstanding common units in its Operating
Partnership. A Funded Redemption is an example of a Synthetic
Secondary.
Table Games: games, such as blackjack, craps, roulette, and baccarat,
that are played on a casino table.
Tag Along Right: the contractual rights of a minority owner to
participate in (or tag along in) a transaction where the majority owner is
selling its interests in a company to a third party. In contrast, see Drag
Along Right.
Tap-in Fee: a fee established by a local government to fund the
Construction or expansion of a new public service or infrastructure or
for the payment of bonds for the cost thereof. Each consumer seeking
to benet from the service must pay a Tap-in Fee to access the service.
See also Impact Fee.
Tax Advance (Tax Distribution): a Distribution to a Partner or
Member to enable them to pay taxes attributable to income or gain
allocated to them when there is not a corresponding Distribution being
made to such Partner or Member in connection with the event giving
rise to such item of income or gain.
Tax Base: actual taxes for a specied Base Year (most often the year
in which the Lease commences), which is used as the basis to calculate
the portion of the taxes for which a tenant is responsible.
Tax Gross-Up: a concept in a Loan Agreement that increases the
amount of any payment by a Borrower to a lender such that, after
payment of applicable withholding taxes, the lender receives what it
129
would have received if no withholding taxes had been imposed. A Tax
Gross-Up generally protects lenders that are not otherwise subject to
tax in the lender’s jurisdiction from the possible imposition, after the
Closing Date, of withholding taxes by a taxing authority. Tax Gross-Ups
may be included in other agreements, as well.
Tax ID Number: a corporate entity’s federal Employer Identication
Number (EIN). It is one of the items of information a lender must obtain
from the Borrower in order to comply with Patriot Act requirements.
Tax Liability Distributions: distributions made to a Partner or Member
intended to assist such person with paying taxes on income or gain
allocated to them by a partnership or limited liability company.
Tax Matters Partner (Tax Matters Member): a Partner or Member
designated to represent the partnership or company in the event of a US
federal income tax Audit generally prior to 2018. See also Partnership
Representative.
Tax Protection Agreement (Tax Matters Agreement): an agreement
entered into between a person who contributes Property to a partnership
(such as an Operating Partnership) and the partnership, governing
certain tax issues related to the contribution and the ownership of the
contributed properties by the partnership, including Sale Protection,
Debt Maintenance, and Section 704(c) Method.
Taxable REIT Subsidiary (TRS): a Subsidiary of a REIT that has
made an election with the REIT to be treated as a TRS. A TRS is treated
as a regular C Corporation for US federal income tax purposes and
therefore is required to pay regular US federal corporate taxes on its
income. Other than some activities relating to lodging and healthcare
facilities, a TRS may generally engage in any business, including the
provision of Customary Services or non-customary services to tenants
of its parent REIT. A REIT’s ownership of securities of a TRS is not
subject to the 5% Asset Test or the 10% Asset Test. However, the
aggregate value of the TRSs that may be held by a REIT is limited (see
TRS Asset Test), and a REIT may be subject to a penalty tax if it fails to
deal with its TRS at other than arm’s-length terms.
Taxable Stock Distribution: a distribution of stock by a corporation
to its shareholders that is treated as a taxable distribution of Property
rather than a nontaxable distribution of stock. In the case of a REIT, any
taxable stock dividend (i.e., the portion of a Taxable Stock Distribution
made out of the REIT’s current or accumulated earnings and prots) will
qualify for the Dividends Paid Deduction. REITs typically pay at least
20% of their taxable distributions in the form of cash distributions.
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Taxable Year: a company’s Taxable Year ends on the last day of each
calendar year or such other year as is determined by the company’s
Board of Directors / managers or the Internal Revenue Code.
Temporary Easement: an Easement granted for a specied amount of
time.
Temporary Taking: when a government takes Property by
Condemnation for a nite period of time.
Tenancy: temporary Possession by a tenant of lands or Property
owned by another person.
Tenancy at Suerance: a “hold-over” Tenancy in which a tenant
remains in a Property after the Lease has expired and the landlord has
not ordered the tenant to vacate. During this period, the tenant is bound
by the Terms of the expired Lease.
Tenancy at Will: a Tenancy in which the tenant holds Possession of
the Premises with the landlord’s consent but without xed Terms (such
as for duration or Rent). The Tenancy is terminable by the landlord or
the tenant upon prior notice — typically 30 days in advance and possibly
reset on a calendar month.
Tenancy in Common: a form of concurrent ownership of Property. Two
or more persons hold an individual, undivided ownership interest in the
Property, which they can independently Transfer. There is no right of
survivorship (see Joint Tenants). Tenants in Common may hold unequal
interests and may acquire their interests at dierent times and pursuant
to dierent instruments (as contrasted with Joint Tenants or Tenants by
the Entirety).
Tenant Improvement (TI) Allowance: a negotiated sum that a
landlord agrees to contribute toward the cost of a tenant’s Improvements
that have been agreed to be completed by the tenant or landlord at the
tenant’s Premises. Tenant Improvement expenses in excess of the TI
Allowance must be paid by the tenant.
Tenant’s Proportionate Share (Tenant’s Share): the share of
Operating Expenses that are the responsibility of the tenant, calculated
based on the tenant’s square footage in relation to the total building
square footage.
Tenant’s Rights: as part of the landlord-tenant relationship, a tenant
has legal rights relating to their use and enjoyment of the leased
Property, but these rights may vary depending on the US state. In
general, a tenant has the right to actual or legal Possession of the
Property when the Lease is made, uninterrupted Possession throughout
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the Lease Term, and the right to enforce contractual promises in the
Lease. A residential tenant also has the right to Premises that are t and
suitable for human habitation.
Tenant’s Work: the portion of the tenant Improvements to be
performed at the tenant’s Premises by the tenant as opposed to the
landlord. Typically, the landlord will have approval rights over the scope
and details of Tenant’s Work, and sometimes the Tenant Improvement
Allowance is utilized to complete it.
Tenants by the Entirety: a type of concurrent estate in real Property
that allows spouses to each own the undivided whole Property, coupled
with the right of survivorship, whereby upon the death of either spouse,
the other automatically owns the Property outright.
Term: a xed period of time, usually in the context of dening the
duration of a contract or obligation, such as the Term of a loan or the
Term of a Lease. A Term can be cut short by early termination provisions
(such as the occurrence of an Event of Default) or extended pursuant to
an extension option or other similar provisions.
Term Conversion / Mini-Perm: a type of loan that serves as a
Construction Loan for purposes of funding the costs and expenses
incurred in the development or repositioning of a project and has a
conversion feature that allows the Borrower to convert the Construction
Loan into a permanent Term Loan facility for a set number of years upon
completion of Construction. Also a hairstyle that was popular in the ’80s.
Term Loan: a loan that matures at a specied point in time.
Term Sheet: used in all aspects of real estate transactions, a
document that sets forth the material terms of the transaction as agreed
between the parties. A Term Sheet is often a non-binding agreement
(at times with certain specied binding terms such as Exclusivity and
condentiality) or may be attached to a binding Commitment Letter as a
more detailed description of the terms that the parties intend to appear
in the denitive documentation.
Test Period / Measurement Period: the time period used to calculate
whether a party or Property at issue has satised the requisite nancial
benchmarks contained in the denitive documentation for a transaction.
Title Instructions: in the Closing Instructions, a direction to the Escrow
company not to disburse the borrowed funds until certain conditions are
met. Alternatively, a Title Instruction is a document that directs a title
company to record a Lien against the Property and then to issue a title
insurance policy.
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Title Search: the process of determining the validity of Property title,
restrictions, and allowances associated with the Property, and any
Encumbrances on the Property. The title company prepares the Title
Search for review by the attorneys for the buyer or lender.
Title Theory: the process that divides real Property title into legal title
held by a lender through a Deed of Trust while equitable title continues
to be held by the Borrower.
Torrens System: a method of registering land titles and any
Encumbrances on the Property, where land ownership is transferred
through registration of title, not Deeds. Only a few US states use this
system.
Total Taking: a taking that permanently deprives the owner of its
Property. See also Partial Taking and Temporary Taking.
Traditional REIT: a REIT that owns assets of a type or class
traditionally owned by REITs, such as oce, retail, multifamily, industrial,
hotels, healthcare, or self-storage, which it generally leases or licenses
to tenants.
Transfer: any sale, assignment, conveyance, exchange, distribution,
gift, Mortgage, pledge, hypothecation, or other Encumbrance or disposal
of all or any portion of an owner’s Equity interest in a company.
Transfer Restriction: contractual restrictions imposed on the owner of
Property proscribing the owner from transferring all or some portions of
its interest in the Property to a third party. The restrictions can broadly
proscribe all transfers of any kind of interest in the Property (including
creating Security Interests, granting Mortgage rights, or changes of
Control in the owner), or they can be more narrowly tailored. Transfer
Restrictions are most commonly found in loan documents (usually the
Loan Agreement and/or the Mortgage) and in Leases.
Transfer Taxes: taxes imposed, generally by a US state or local
authority, on the direct or indirect Transfer of securities or other Property.
Tree: the ability for multiple teams to represent multiple clients in
connection with the same transaction — for example, separate teams
that represent multiple bidders in an acquisition where each team is
called a Tree. Also a leafy plant that provides shade, food, and oxygen.
Triple Net Lease: a Lease whereby the tenant pays all expenses
associated with owning the Property, including, but not limited to, taxes,
insurance, and maintenance such that the Rent received by the landlord
is absolutely net to the landlord (i.e., the landlord does not have to pay
any expenses associated with owning the Property).
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Trustee’s Deed: a signed and notarized Deed to be executed by
a trustee. Trustee’s Deeds are often used to Transfer Foreclosed
properties.
Umbrella Partnership Real Estate Investment Trust (UPREIT): a
REIT that holds all or substantially all of its assets through an Operating
Partnership. The value of one OP Unit is generally intended to equal the
value of one share of REIT stock, and a distribution made with respect
to an OP Unit will generally equal the dividend paid with respect to a
share of REIT stock. Owners generally are able to contribute their real
estate to an Operating Partnership on a tax-deferred basis in exchange
for OP Units and typically have an OP Unit Redemption Right with
respect to their OP Units. Thus, the UPREIT structure provides REITs
with a non-cash “currency” to acquire Real Estate Assets in a manner
that is attractive to Property owners. Although the redemption of OP
Units for cash or exchange of OP Units for REIT stock will generally be
a taxable transaction for a holder, contributing Property to an Operating
Partnership is attractive because it allows a Property owner to diversify
its investment on a tax-deferred basis while providing an opportunity for
liquidity in the future.
Underlying Documents: documents relating to a certain Property
that give a legal history of various claims to the title of the Property. An
attorney conducts Due Diligence by reviewing all Underlying Documents
to the Property in order to determine which rights to the Property have
already been given away.
Unfunded Commitment: the amount of a loan that a lender has
agreed to fund at Closing but has not yet funded. The Unfunded
Commitment is the total amount of Commitments less the amounts
funded at any point in time under the loan.
Unlawful Detainer: the keeping of Possession of real Property by a
party that was once permitted to have such Possession but no longer
has such right to Possession such as when a tenant holds over after
Lease termination despite the landlord’s demand for Possession.
US Real Property Holding Corporation (USRPHC): a corporation
that holds USRPIs, if the Fair Market Value of its USRPIs is at least
50% of the aggregate Fair Market Values of its USRPIs, interests in real
Property located outside the United States, and other assets used or
held for use in its trade or business.
US Real Property Interest (USRPI): an interest, other than an interest
solely as a creditor, in either (i) real Property located in the United
States or (ii) a US corporation that is or was a USRPHC at any time
during a ve-year testing period. The FIRPTA rules contain certain
134
exceptions from USRPI treatment. For example, stock of a Domestically
Controlled REIT, as well as stock of a REIT (or other C Corporation) that
is regularly traded on an established securities market and held by a
10%-or-less shareholder (or, in the case of a non-REIT C Corporation, a
5%-or-less shareholder) is not treated as a USRPI.
Use Clause: a provision in a Lease stating specic permitted uses or
placing restrictions on the use of the Property.
Vacancy Rate: a numerical value calculating the percentage of
occupied or unoccupied units or rooms in a rental or hotel Property
compared with the total available units. Vacancy Rate is based on the
percentage of vacant units. See also Occupancy Rate.
Variance: an exception to Zoning regulations either for placement or for
type of usage, granted by the applicable local authority upon application
by the Property owner.
Vesting Deed: grants good and sucient title to the buyer so that the
buyer legally has a claim to all of the rights and interests in the Property.
Voluntary Bankruptcy: a Filing and process by which an individual
or corporate entity petitions a Bankruptcy court for protection under
the Bankruptcy Code because such individual or corporate entity has
insucient assets to pay its debts as those debts come due.
Voluntary Prepayment: a repayment of loan Principal prior to the
payment due date made at the election of the Borrower. A payment of a
Prepayment Penalty / Prepayment Premium may sometimes accompany
Mandatory Prepayments and Voluntary Prepayments to ensure the
lender gets the return it negotiated for when the loan was made.
Walk Through: in connection with buying a home or other Property,
an opportunity to tour the Property and conrm everything is in working
condition.
Waste: permanent harm done to real Property by a person or persons
in legal Possession of that Property (e.g., a tenant).
Waterfall: ca the order of application of revenues earned by a Borrower
(in a loan context) or company (in a joint venture context). Think of the
funds in question as water running down a ight of stairs with a bucket
placed on each step — the water (money) ows to the top step rst and
lls that bucket before the overow continues to the second step and
lls that bucket before proceeding to the third step, etc. You only “run
the Waterfall” on periodic (usually monthly, quarterly, or semiannual)
payment dates, since if you lled up a lower Waterfall level in between
payment dates, you would be potentially depriving a higher Waterfall
135
level of funds when needed. The exception is Operating Costs, which
are paid at least monthly. The order of payments under the Waterfall
will vary depending on the transaction at hand (e.g., in a loan context,
whether debt service is paid rst or paid after Operating Expenses and
reserve Deposits; or in a joint venture context, how revenues are split up
among partners, what their rates of return are, and when the partners
get their promotion). Don’t go chasing them. Stick to the rivers and lakes
that you’re used to.
Wetland: a certain type of land where saturation with water is the
dominant factor. Such lands in the US are subject to the Clean Water
Act and regulation by the Environmental Protection Agency. The
Clean Water Act denes Wetlands as “those areas that are inundated
or saturated by surface or groundwater at a frequency and duration
sucient to support, and that under normal circumstances do support,
a prevalence of vegetation typically adapted for life in saturated soil
conditions. Wetlands generally include swamps, marshes, bogs, and
similar areas.”
Wild Deed: a recorded Deed that is not connected to a Property’s
Chain of Title or a Deed that was improperly recorded and thus will not
provide potential purchasers with constructive notice.
Wins Per Day: the theoretical number of wins per unit per day on a
gaming machine.
Work Letter: a document, often attached as an exhibit to a commercial
Lease, in which the landlord denes the building standards employed in
constructing the tenant’s space and work that the landlord will perform
to build out the tenant’s space.
Worker Adjustment and Retraining Notication Act (WARN
Act): a US law that protects workers, their families, and communities
by requiring most employers with 100 or more employees to provide
notication 60 calendar days in advance of plant closings and mass
layos. (29 USC. § 2101, et seq., as well as the rules and regulations
thereto, set forth in 20 CFR 639, et seq.)
Worker’s Compensation Insurance: US state-mandated insurance
coverage that employers are required to maintain that covers employees
who sustain injuries while on the job. Lenders also require Borrowers (or
their contractors) to maintain Worker’s Compensation Insurance.
Working Capital: a measure of a company’s short-term Liquidity,
calculated by subtracting current liabilities from current assets.
Wraparound Mortgage: a form of second Lien nancing for the
purchase of real Property given by a seller to a buyer. The Wraparound
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Mortgage secures the second Lien nancing provided by the seller in
an amount equal to the underlying Senior Mortgage (also issued to the
seller) on the Property plus any remaining purchase price the seller is
required to be paid. The seller then makes payments to the underlying
Senior mortgagee after receiving payments from the buyer. Should
the new purchaser Default on those payments, the seller then has the
right to Foreclose on the subject Property. Note that because title for
the underlying Property encumbered by the Wraparound Mortgage is
transferred from seller to buyer, the Transfer will violate any due on sale
clause in the underlying Mortgage.
Yank-a-Bank: a Credit Agreement provision that allows the Borrower to
throw a lender out of a credit facility if it won’t agree to an Amendment
(or sometimes if it asks for a Gross-Up indemnity that not all of the
lenders are claiming). Certain Credit Agreement Amendments (including
Amendments aecting pricing of the loans) cannot be achieved without
approval of all lenders. Yank-a-Bank provisions enable the Borrower
to squeeze out dissenting lenders in a 100% vote situation so long as
the majority of the lenders has approved the Amendment. The “yanked”
lender is replaced with a new lender who approves the Amendment and
is willing to purchase the outstanding loans and Commitments of the
yanked lender, usually at Par.
Yardi: integrated Property management software widely used
throughout the REIT industry.
Yield: distributions received by the holder of an investment, generally
consisting of Interest, dividends, or other similar payments, expressed
as an annual percentage of the investment’s cost, Fair Market Value, or
face value. Yield and Capital Appreciation together comprise the total
return on an investment in a particular asset.
Yield Spread Premium (Yield Maintenance Premium): a
Prepayment Penalty that is designed to make the lender whole for lost
Interest as a result of an early prepayment of a loan prior to its natural
Maturity.
Zero Lot Line: real Property on which the structure comes up to or very
near to the boundary of the Property line.
Zone of Insolvency (Zone of Silence): when a previously solvent
Borrower gets close to insolvency, the courts have held that the Board
of Directors’ Fiduciary Duties morph to include duties toward the
Borrower’s creditors. Prior to entering the Zone of Insolvency, Borrowers
do not owe their creditors any Fiduciary Duties.
137
Zoning: a division of Property by local governments into various zones
with specied type of Land Uses permitted (or prohibited) in such
Zone, such as residential, commercial, and industrial (may also include
regulated characteristics).
Zoning Map: a map of all the Zoning districts within a particular area.
Zoning Ordinance: legal regulations that a local governmental
agency issues specifying permitted uses within a given area of a local
municipality. Zoning Ordinances may also regulate other characteristics
of development within such zone (e.g., building heights, setbacks, and
density).
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