Glossary - E

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Earn out: In the lending business, the term earn out refers to a stipulation in the loan document that enables a borrower to enhance the loan earnings depending on the precise performance of the property concerned. In other words, the expression denotes a process of funding the sale of a business significant on actual performance. The balance of the purchase price of the business can be founded on the actual performance or productivity of the business after the closing date by first subtracting the down payment. Normally, earn out is for a very brief period, usually not more than six to 12 months. An earn out is utilized when the lender is comparatively certain that there will be an enhancement in the income flow depending on a lease roll over, a scheduled lease bump or some other influential event.
When earn out is used as the base for repaying debts, it is capable of resolving the anticipated disparity between the amount desired by the seller and what the buyer is willing to pay. In fact, a buyer may be willing to pay what the seller wants even if the earlier productivity of the business may suggest that the price is rational. Actually, time and again, this is an indication of the fact that the buyer is anxious regarding the prospects of the business owing to several reasons. Hence, the remaining payment may be extended over a certain period with the sum of each payment depending on the income of the business. Generally, there are three categories of earn outs in the market, although the possibilities are numerous.
Easement: The term easement denotes a right, privilege, permission or interest that a property owner enjoys in another person's, for instance, the neighbor, property for a precise and restricted use. An easement runs with the land and is granted for specific purpose and not for general use and occupation of the land. For instance, an easement may include the use of another person's property through right of way, right to take water, right of light and air, right to construct a pipeline under the land or the right to extend a power line over the land. An easement may also include taking something away from the land (known as a positive easement) or stop the land owner from using his or her land in any particular manner (known as a negative easement).
Generally, an easement may be developed by constant use of the right for a precise number of years, usually 20 years, without any opposition from the land owner or after acquiring a piece of land. Once an easement is conceded, it remains to the land and also binding for all succeeding owners of the land. For granting an easement, there needs to be a dominant tenement or the land that benefits from the easement and a sevient tenement or the land that serves the easement. While it is essential that the dominant and servient tenements should have separate ownership, it is not mandatory for the two tenements to be adjoining.
Economic age-life depreciation method: In matters pertaining to real estate, the phrase economic age-life depreciation method denotes the calculation of the depreciation (reduction in value) of a property on the basis of the forecasted life of the property or structure.
Economic life: In the context of real estate, the term economic life, also called average life, economic useful life, effective life, mean life, or useful life, refers to the expected period of time for which a structure or fixed asset is likely to perform the function for which it was intended and continue to provide benefits to the owner. In other words, it is regarded as the period during which developments to any real estate adds to the worth of the property. The term economic life is usually denotes in number of years and is considered to be less than the asset's physical life and is the period over which the asset's depreciation is charged.
In fact, the economic life is utilized to ascertain the capital revival period for developments in the residential procedure of income capitalization. In addition, economic life is also utilized in approximating the accrued depreciation or reduced value in the cost approach while ascertaining value estimation.
Effective age: In the context of real estate, the term effective age refers to an evaluator's estimation of the physical condition of a building or real property and is expressed in terms of years. In contrast to the actual age, the effective age of a property depends on the amount of depreciation it has endured. In other words, effective age is also the approximated age in years that is shown by the condition and usefulness of a real property depending on the age of the structures of similar utility, condition and the remaining life expectancy of the property, which is different from its chronological age. The term may also be expressed as the difference between a property's entire economic life and its residual economic life.
Supposing a building has been maintained in a manner that is above average, its effective age may be even less than its actual age. However, if the maintenance has not been adequate, the effective age of the building may possibly be greater than its actual age. For instance, a 40-year-old building may have an effective age of 20 years owing to repairs or renovation. While appraising the value of a property, the effective age is a significant concern since it influences the amount of depreciation subtracted while approximating the property's value using the cost approach.
Effective date: The term effective date denotes the day or date on which a transaction is registered or when an agreement becomes effective. In other words, it refers to the date on which something takes place or stops happening. From the real estate viewpoint, the effective day of an evaluation is a fine instance. This is because though the approximation of the property's value in shown to be applicable on a precise day, the exercise undertaken in ascertaining the approximation may have been finished days, months or even years after the effective date is mentioned in the evaluation.
Effective gross income: Effective gross income denotes the expected income from all operations of a real property after making an allowance for vacancy and collection losses. In other words, the term denotes the approximated possible gross income from each and every source after deducting the allowance to cover the losses owing to vacancy or the property as well as bad debts. Real estate evaluators often use the effective gross income while affecting the income approach during an appraisal process. In this case, the evaluator ought to restructure the operating statement of the income property to get the net yearly operating income which is then capitalized to ascertain the value of the property. It is important to mention here that the commercial practitioners ought to make a note of the fact that the jargon relating to computing income and expenses in not consistent. For instance, people who are occupied with real estate endowment study often use the expression gross operating income rather than effective gross income.
Effective interest rate: Effective interest rate denotes the actual rate of interest charged on a loan depending on the frequency of compounding or the result of inflation. Effective interest rate is different from the stated nominal rate of interest on a loan that discounts compounding and other aspects. In fact, the nominal rate of interest is more widespread in the market. Thus, if there is no compounding factor in calculating the interest on a loan, the actual and effective rates of interest would be similar. As the effective interest rate takes the effect of compounding into account, the actual rate of interest is much higher compared to the nominal rate of interest on a loan.
It is important to note that effective rate of interest are especially imperative in matters pertaining to mortgages. However, usually the discussions of the real estate practitioners with their clients/ consumers relating to mortgages focus on the stated or the nominal rate of interest. Like in all loans that take the compounding factor into account, the effective rate of interest is also higher compared to the nominal interest rate. Nevertheless, the Interest Act establishes precise prerequisites relating to the method of calculating the effective interest rate on mortgages that have blended monthly payments. The federal laws state that in the event of a mortgage having a blended principal and interest payments at specific intervals, the interest should always be computed on an annual or semi-annual basis and never in advance. The actual consequence of this prerequisite or condition is to lessen the effective rate by means of not more than two compounding periods in one year and that such compounding cannot be computed in payments made beforehand. Devoid of the intricacies of computing semi-annual not in advance payments, a straightforward instance making use of a personal loan will depict the disparity between the nominal or stated and the effective interest rates on a loan. In the event of an amount being compounded annually, the nominal interest rate and the effective interest rate on it will be similar. Conversely, if the compounding is done more regularly or often, the effective interest rate proves to be much higher than the stated or nominal interest rate.
Eminent domain: In real estate matters, the expression eminent domain refers to the right of a government entity, such as the municipality, to seize private property with the objective of constructing public utilities. In fact, the federal, provincial and even the local government has the right to seize people's homes or land under the stipulations in the eminent domain laws provided the owner of the property is compensated at fair market value. Several public utility projects, such as highways, hospitals, schools, parks, government office buildings and so on, necessitate the government to seize private property.
Eminent domain is obtained by means of a legal deed known as condemnation or expropriation whereby the appropriate body decides that the use of the land is a public utilization and also fixes the cost or compensation that is to be paid to the owner. Usually, the Crown (the government) or any other entity authorized by the provincial laws, such as the Expropriation Act, functions as the expropriating or confiscating authority. More often than not, the laws spell out the process for application to expropriate, arrange proper hearings as well as the process of recompensing the property owners.
Encroachment: The expression encroachment refers to an unlawful entering, intrusion or invasion of someone's property by another. Encroachments may be in various forms. For instance, a building extending further than the legal boundaries on to neighboring land or beyond the building-line of a road or street is considered to be an encroachment. Again if a neighbor erects a fence that is six inches into your property's boundary, it is regarded as an encroachment. In other words, encroachment denotes a building or a part or a building or any obstruction that physically breaks in, overlaps or trespasses upon another person's property is known as an encroachment.
Encroachment agreement: In matters pertaining to real estate, the term encroachment agreement refers to an accord between two parties whereby one party, called the licensor, grants permission to the other party, called the licensee, to construct an encroachment, for instance, a fence, on the licensor's property. However, the agreement is conditional on the right of the licensor to request the licensee to remove the encroachment whenever the former wants. Usually, one would come across encroachment agreements where a land owner has unintentionally constructed a building, driveway or fence on the adjoining land.
Encroachment agreements are likely to incorporate stipulations that necessitate the removal or dismantling of the offending construction in the event of any occurrence in future, for instance, damage of the improvement by wind or fire or by a precise period of time. There is a possibility of the market value of the encroached property being negatively affected or devalued as the encroachment poses a risk and/ or the offending construction may need to be taken away at a particular time or in the case of any part or full damage to it by fire or any other reason.
Encumbrance: In the context of real estate, the term encumbrance denotes a claim or interest, such as liens, mortgages, leases or dower rights of easements, that restricts the right of the property. In addition, an encumbrance may also be in the form of court judgments, pending legal action, unpaid taxes, restrictive deed or loan covenants or zoning ordinances that has the possibility of affecting the clarity of an ownership or reduce the value or the property, but may not avert the transfer of title or ownership. For instance, a mortgage is a money encumbrance that influences a home's title by making it security for reimbursement of the credit.
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Equitable mortgage
Equity: The term equity generally denotes any right to an asset or property that is held by a creditor, proprietor or a shareholder/ stakeholder. It also denotes the ownership interest on an individual or business in an asset after subtracting its liabilities. All balance enclose an owner or shareholder's equity section that comprises, especially in the case of the shareholder, the categories of share capital, contributed surplus and preserved income. In matters pertaining to the real estate, equity usually denotes the disparity between the market value of a real estate asset and the mortgages and liens (security on property) against that property.
Equity capitalization rate: Equity capitalization rate refers to an income rate that manifests the correlation between a single year's before tax cash flow expectation and the equity investment in a property. This data is acquired from research relating to the sale of analogous properties.
Equity conservation: Equity conservation refers to a reverse mortgage attributes enabling borrowers or mortgagors to select their debt limits in advance.
Equity financing: The term equity financing is used for mortgages given basically based on the equity of a property along with secondary deliberation for the commitment or covenant of the borrower or mortgagor. In fact, equity financing is an alternative term for equity capital.
Equity of redemption: Equity of redemption refers to a mortgagor or borrower's rights in the mortgaged property. In other words, the term denotes the right a borrower has to clear the mortgage loan in full against a property that has gone into foreclosure or the power of sale proceedings and thereby redeem the property. Although this right is given to the mortgagors, it is nullified in the instance of a foreclosure.
Equity takeout loan: The term equity takeout loan denotes the act of mortgaging the borrower's equity in a property for numerous reasons. In fact, home owners may borrow money against their equity in their homes by means of organizing new financing or by undertaking fresh bargaining for an existing mortgage. In fact, equity takeout loans largely depend on the status of the home owner's equity in his or her property and the definite security. More often it has been found that the GDS and TDS (total debt service) concerns assume a secondary position during the qualifying procedure of the loan. In such cases, the lenders usually follow the fundamental rule where the highest equity takeout is 70 per cent (the loan to property value ratio) for any real estate asset against which the loan is being granted.
Equity yield rate: Equity yield rate refers to evaluation term concerning the return on investment (ROI) pertinent on the equity fraction of an outlay in real estate over a particular possession period. In matters related to real estate venture study, the equity segment denotes the funds made available by an investor to acquire a property and it is completely separate from the funds secured through loans. Thus, the equity yield rate is basically an appraisal of the return founded on the initial funds invested vis-à-vis project operations and cash flow from sale proceeds during a particular holding term. On the other hand, the mortgage yield rate is the analogous rate of return for the debt segment of the investment or the investment made with money obtained as loans.
Usually, the equity yield rates are computed on a before tax basis, but it may also be calculated or analyzed on the basis of cash flow after deduction of taxes. However, most equity yield rate appraisals are done before tax as commercial practitioners time and again evaluating the positions after tax for particular clients - known as the after tax equity yield. It is essential to clearly differentiate equity yield rate from the equity capitalization rate that conveys the correlation between the operating income and expenses and funds invested in a single year. In the same way, the mortgage yield rate, also called the interest charge on the mortgage, out to be distinguished from the mortgage capitalization rate.
Escalation clause: Generally speaking, the expression escalation clause refers to a stipulation in a contract that calls for an enhancement in price when there is a rise in specific costs. It also denotes a provision in a contract specifying a rise or reduction in wages, prices, benefits under specific conditions, such as changes in the cost of living. In the context of real estate, the term refers to rent increases tied to a cost-of-living index. In other word, this is an article incorporated in a contract and provides for enhancements or reductions in rent payment as per the instabilities of specific direct expenses of the landlord, such as property taxes, or settled on making use of any suitable economic pointer or index.
In the instance of lease agreements, there may be stipulations for increasing the rent payment during the term or at the time of renewing the contract. In this case, the lessee may have to pay a total rent plus any extra amount to substantiate an increase in the real estate property taxes that are applicable to the precise portion of the property occupied by the tenant. Usually, such increases apply to added taxes over a stated year, generally mentioned as the base year.
Escheat: In the context of real estate, the expression escheat refers to the returning or reversion of a real property to the state in the case of the property being abandoned or the death of the owner without leaving behind a will and has no legal inheritor who may take on the ownership of the asset. In fact, escheat is founded on the Latin principle of dominion directum as was frequently made use of in the feudal system when a property owner died without any inheritor or in the event of the owner being convicted of any criminal act. In fact, the escheat is one practice in real estate that continues to exist from the feudal times to this day. In escheat, the owner of a land was viewed by the Crown or powers that be as a tenant. The Crown possessed supreme powers as well as claims to all lands contained by the kingdom and hence seized the land of anyone who died without a legal heir or is unable to fulfill the services demanded from him or her. In such instances, the land was returned to the lord and the original grantor.
Escrow: Escrow, in general, refers to an understanding whereby a deed, money, security or other property or document is retained by a nonaligned third party - known as an escrow agent or officer, in trust for a first party, also called a grantor, obligor or promisor for a particular time frame or till a condition or event takes place. The escrow agent is committed to hand over the asset or document in his or her custody to a named second party, called a grantee, oblige or promise when the conditions mentioned in the escrow agreement are accomplished. In matters pertaining to real estate, the escrow officer holds vital documents and money associated with the purchase of a property before the transaction is actually closed. In fact, the buyer does not immediately move into the house even after the seller has accepted the purchase offer. There is a waiting period during which contingencies put forth by both parties have to be fulfilled or relinquished. It is during this period that the escrow officer retains with him or her down payment sum and other documents from the buyer and seller that are related to the transaction. When the deal is absolute, it is known as 'closing escrow'. In addition to holding money and the related transaction documents, the escrow officer had additional duties, including ensuring that the previous mortgage loan has been cleared and the loan has been financed.
Estate: Estate denotes the ownership of an individual in a land or, more explicitly speaking, the magnitude, amount, character and degree of authority or influence an individual has in a real estate asset. In simple words, estate refers to all the real estate assets that a person possesses and/ or is beneficially entitled to. It is interesting to note that the chronological backdrop of an estate goes back to the progress of the British law. Since then, the status of the person possessing a land interest, also known as a tenant, on behalf of the lord of the land, called the landlord, came to be recognized as an estate in the land. In the past, when there were disagreements regarding the interest in property, they were customarily taken to the royal courts and the decrees passed by these courts became a part of the general law. In fact, disputes over property gradually came to be identified as real actions engaging real estates. In contemporary speech, the expression estate is currently used to delineate perceptions of interests in, or rights to handle land and its elements.
Ethics: The term ethics denotes the moral conventions that lead an individual in any profession to conduct their duties and responsibilities in a proper manner. Ethics also refers to the rules of established behaviour that are amended from time to time and acknowledged by business to offer fair, honest, appropriate and moral practices.
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Eviction: The term eviction refers to the lawful expulsion or the legal process to oust a person from the possession of a real estate. In other words, eviction denotes forceful removal of a tenant from a leases property through a legal procedure. While the rules governing eviction may differ from one jurisdiction to another, in the majority of the cases an eviction ought to adhere to a precise legal procedure. In the first step, the landlord is supposed to issue a notice to the tenant mentioning about his or her wrongdoing and ways and means to mend the problem so as to avoid a possible eviction. If the problem persists even after serving the notice, the landlord usually should serve a complaint that would necessitate both parties moving the court where the case will be settled by a judge. In the event of the landlord winning the case, the tenant is required to vacate the property within a specific period of time failing which that police would be compelled to forcefully oust the tenant from the premises.
Exchange: The term exchange refers to an open marketplace where the sellers and buyers negotiate prices and trade securities, commodities, properties etc. In matters pertaining to real estate, the expression exchange denotes a transaction where one property is traded (exchanged) for another identical real property, but the deal may or may not necessitate any added factor.
In actual practice, if not impossible, it is very difficult to locate two real properties that are similar as far as quality and utility are concerned. Hence, in the majority of exchanges one party also makes some payment to the other with a view to make up for the difference in the two properties. Though exchanges are not a common affair in the Canadian real estate market, the registration contracts include provisions for such cases. The clauses or wordings used in the listing agreements differ from one provincial jurisdiction and/or real estate board to another.