Glossary of Terms
The following is a glossary of real estate terms, copied
directly from Financial Analysis for Commercial Investment Real Estate –
Reference Manual, as published by the Commercial Investment Real Estate
Institute, copyright 1997.
Abatement - In a lease, the reduction or elimination of rent for a period of time.
Accelerated Depreciation - Depreciation methods that allow a taxpayer to take faster write-offs than with straight-line during the early part of an assets useful life.
Adjusted basis – The original cost basis of a property plus
capital improvements, less total accumulated cost recovery deductions and
partial sales taken during the holding period.
Amortization – The repayment of loan principal through equal
payments over a designated period of time.
Annual debt service (ADS) – The total amount of principal
and interest to be paid each year to satisfy the obligations of a loan
Appreciation – An investment’s increase in value
Balloon payment – The final payment of the balance due on a
partially amortized loan.
Capital gain – Taxable income derived from the sale of a
capital asset. It is equal to the sale
price less cost of sale, adjusted basis, suspended losses, excess cost recovery
and recapture of straight line cost recovery.
Capitalization rate – A percentage that relates the value of
an income-producing property to its future income, expressed as net operating
income divided by price.
Cash-on-cash rate – A simple return measure. Calculated as cash flow before taxes divided
by initial equity investment.
Class life – The useful economic life of an asset set by the
Compound interest – Interest computed on the original
principal and accumulated interest.
Cost approach – A way to determine the market value of a
property by evaluating the costs of creating a property exactly like the
Debt coverage ratio (DCR) – Ratio of net operating income to
annual debt service. Expressed as NOI
divided by ADS
Depreciation – The loss of utility and value of a property
Financial leverage – The use of borrowed funds to acquire
Financial risk – The possible change in an investment’s
ability to return principal and income
Gross operating income – The total amount of cash generated
by the operations of a property
Income capitalization approach – A way to determine the
market value of an income-producing property by converting its future income
stream into a single capital value
Internal rate of return (IRR) – The percentage rate earned
on each dollar that remains in an investment each year. The IRR of an investment is the discount rate
at which the sum of the present value of future cash flows equals the initial
Lease – A contract between landlords and tenants for a
possession of space for a specified amount of rent. Leases are used for all types of properties.
Leverage – The use of borrowed funds to finance a portion of
the cost of an investment
Liquidity – The ability to covert an investment into cash
quickly without loss of principal
Loan-to-value ratio (L/V) – The amount of money borrowed in
relation to the total market value of a property. Expressed as the loan amount divided by the
Market risk – The possibility that downward market trends
will reduce an investment’s market value
Negative leverage – Borrowed funds are invested at a rate of
return lower than the cost of funds to the borrower.
Net operating income (NOI) – The potential rental income
plus other income, less vacancy, credit losses and operating expenses
Net present value (NPV) – The sum of the present values of
all future cash flows netted against the initial investment, discounted at a
Operating expenses – Cash outlays necessary to operate and
maintain a property
Opportunity cost – The “cost” of selecting one alternative
is the benefit foregone from the next best alternative.
Passive income – Income from rental activity, limited
business interests or other activities in which the investor does not
Positive leverage – Borrowed funds are invested at a rate of
return higher that the cost of the funds to the borrower.
Potential rental income – The total amount of rental income
for a property if it were 100% occupied and rented at competitive market rates.
Present value – The sum of all future benefits accruing to
the owner of an asset when such benefits are discounted to the present by an
appropriate discount rate.
Property type – The classification of commercial investment
real estate. The four primary property
types are: retail, industrial, office and residential
Rate of return – The percentage return on each dollar
invested. Also knows as yield.
Sales comparison approach – A way to determine market value
by comparing a subject property to properties with the same or similar
Sale cost – The brokerage commissions and fees, and any
additional transaction costs that are incurred during the sale of the property.
Time value of money (TVM) – An economic principle
recognizing that a dollar today has greater value than a dollar in the future
because of its earning power.
Yield – A measure of investment performance, gauging the
percentage return on each dollar invested.
Also known as rate of return.
These terms are excerpted directly from Financial
Analysis for Commercial Investment Real Estate – Reference Manual, as
published by the Commercial Investment Real Estate Institute, copyright 1997.