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Glossary of Investment Property Terms 

 

Knowing real estate investment terms and exactly what they mean is important if you hope to find the best investment opportunity. The following terms can help you understand the nuances of the deal you’re contemplating. But don’t worry; there won’t be a quiz, and if you need help applying these concepts to your own investments, feel free to give me a call.

 

adjusted sale price: The figure produced when the transaction price of a comparable sale is adjusted for elements of comparison.

 

anticipation: The perception that value is created by the expectation of benefits to be derived in the future.

 

arm’s length transaction: A transaction between unrelated parties under no duress.

 

assemblage: The combining of two or more parcels, usually but not necessarily contiguous, into one ownership or use.

 

balance: The principle that real property value is created and sustained when contrasting, opposing, or interacting elements are in a state of equilibrium.

 

capitalization rate: Any rate used to convert income into value.

 

capital recovery: The return to investors of that portion of their property investment expected to be lost over the income projection period.

 

capital recovery rate: The return of invested capital, expressed as an annual rate; often applied in a physical sense to wasting assets with a finite economic life.

 

cash equivalency analysis: The procedure in which the sale prices of comparable properties sold with atypical financing are adjusted to reflect typical market terms.

 

comparables: A shortened term for similar property sales, rentals, or operating expenses used for comparison in the valuation process.

 

comparative unit method: A method used to derive a cost estimate in terms of dollars per unit of area or volume based on known costs of similar structures that are adjusted for time and physical differences.

 

competition: The active demand for real estate by two or more market participants.

 

consideration: The recorded price for which title to a property is transferred.

 

conventional loan: A mortgage that is neither insured nor guaranteed by an agency of the federal government, although it may be privately insured.

 

cost index: A multiplier used to translate a known historical cost into a current cost estimate. cost to cure. The cost to restore an item of deferred maintenance to new or reasonably new condition.

 

curable functional obsolescence: An element of accrued depreciation; a curable defect caused by a flaw in the structure, materials, or design.

 

curable physical deterioration: An element of accrued depreciation; a curable defect caused by deferred maintenance.

 

debt coverage: The ability of a property to meet its debt service out of net operating income.

 

debt/equity ratio: The ratio between an enterprise’s loan capital and its equity capital.

 

debt service: The periodic payment that covers interest on, and retirement of. the outstanding principal of the mortgage loan.

 

deferred maintenance: Curable, physical deterioration that should be corrected immediately, although work has not commenced.

 

depreciation: 1) In appraising, a loss in property value from any cause; 2) In regard to improvements, depreciation encompasses both deterioration and obsolescence.

 

direct capitalization: A method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the income estimate by an appropriate rate or by multiplying the income estimate by an appropriate factor.

 

discounted cash flow analysis: The procedure in which a discount rate is applied to a set of projected income streams and a reversion. The analyst specifies the quantity, variability, timing, and duration of the income streams as well as the quantity and timing of the reversion and discounts each to its present value at a specified yield rate.

 

easement. An interest in real property that conveys use, but not ownership, of a portion of an owner’s property.

 

economic age life method. A method of estimating accrued depreciation in which the ratio between the effective age of a building and its total economic life is applied to the current cost of the improvements to obtain a lump sum deduction.

 

economic life: The period over which improvements to real property contribute to property value.

 

effective age. The age indicated by the condition and utility of a structure.

 

effective gross income (EGI). The anticipated income from all operations of the real property after an allowance is made for vacancy and collection losses.

 

effective gross income multiplier. The ratio between the sale price (or value) of a property and its effective gross income.

 

effective interest rate Interest per dollar per period; the nominal annual interest rate divided by the number of conversion periods per year.

 

equity. The net value of a property, calculated by subtracting all liens or other charges against the property from its total value.

 

equity capitalization rate An income rate that reflects the relationship between a single year’s pretax cash flow expectancy and the equity investment.

 

equity debt ratio. The ratio of the equity value or equity capital invested in a property to the amount of debt incurred on that property.

 

equity ratio The ratio between the down payment paid on a property and its total price; the fraction of the investment that is unencumbered by debt.

 

equity yield. The dollar return on equity from all sources.

 

escalation clause. A clause in an agreement that provides for the adjustment of a price or rent based on some event or index.

 

estate. A right or interest in property. excess land. The land not needed to accommodate the site’s highest and best use.

 

excess rent. The amount by which contract rent exceeds market rent at the time of the appraisal; created by a lease favorable to the landlord.

 

expense ratio. The ratio of total expenses, excluding debt service, to either potential or effective gross income.

 

externalities. The principle that economics outside a property have a positive effect on its value while diseconomies outside a property have a negative effect upon its value.

 

external obsolescence. An element of accrued depreciation; a defect, usually incurable, caused by negative influences outside a site and generally incurable on the part of the owner, landlord, or tenant.

 

fee simple estate. Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

 

fixed expenses. Operating expenses that generally do not vary with occupancy and which prudent management will pay whether the property is occupied or vacant.

 

functional utility. The ability of a property or building to be useful and to perform the function for which it is intended according to market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns, and the size and type of rooms.

 

grantee. A person to whom property is transferred by deed or to whom property rights are granted by a trust instrument or other document.

 

grantor. A person who transfers property by deed or grants property rights through a trust instrument or other document.

 

gross building area. The total floor area of a building, including below grade space but excluding unenclosed areas, measured from the exterior of the walls.

 

gross income multiplier. The ratio between sale price or value and potential or effective annual gross income.

 

gross leaseable area The total floor area designed for the occupancy and exclusive use of tenants,

 

gross lease. A lease in which the landlord receives stipulated rent and is obligated to pay all or most of the property’s operating expenses and real estate taxes.

 

gross rent multiplier The relationship or ratio between the sale price or value of a property and its gross rental income.

 

highest and best use. The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability.

 

holding period. The term of ownership of an investment.

 

incurable functional obsolescence. An element of accrued depreciation; a defect caused by a deficiency or superadequacy in the structure, materials, or design, which cannot be practically or economically corrected.

 

incurable physical deterioration. An element of accrued depreciation; a defect caused by physical deterioration that cannot be practically or economically corrected.

 

insurable value. 1) The portion of the value of an asset or asset group that is acknowledged or recognized under the provisions of an applicable loss insurance policy. 2) Valued used by insurance companies as the basis for insurance .

 

interim use. The temporary use to which a site or improved property is put until it is ready to be put to its future highest and best use.

 

internal rate of return The annualized yield rate of return or rate of return on capital that is generated or capable of being generated within an investment or portfolio over a period of ownership.

land to building ratio. The proportion of land area to gross building area.

 

land residual technique. A capitalization technique in which the net operating income attributable to the land is isolated and capitalized to indicate the land’s contribution to total property value.

 

lease. A written document in which the rights to use and occupy land or structures are transferred by the owner to another for a specified period of time in return for a specified rent.

 

leased fee estate. An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others.

 

leasehold estate. The interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions.

 

loan to value ratio The ratio between a mortgage loan and the value of the property pledged as security; usually expressed as a percentage

 

market rent. The rental income that a property would most probably command in the open market; indicated by the current rents paid and asked for comparable space as of the date of the appraisal.

 

mortgage constant The capitalization rate for debt; the ratio of the annual debt service to the principal amount of the mortgage loan.

 

net lease. A lease in which the tenant pays all property operating expenses in addition to the stipulated rent.

 

net operating income The actual or anticipated net income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book depreciation are deducted.

 

nominal interest rate A stated or contract rate; an interest rate, usually annual, that does not necessarily correspond to the true or effective rate of growth at compound interest.

 

 obsolescence. One cause of depreciation; an impairment of desirability and usefulness caused by new inventions, changes in design, improved processes for production, or other external factors that make a property less desirable and valuable for a continued use.

 

occupancy rate. The relationship or ratio between the income received from the rented units in a property and the income that would be received if all the units were occupied.

 

operating expense ratio The ratio of total operating expenses to effective gross income.

 

operating expenses. The periodic expenditures necessary to maintain the real property and continued production of the effective gross income, assuming prudent and competent management.

 

overall capitalization rate An income rate for a total real property interest that reflects the relationship between a single year’s net operating income expectancy or an annual average of several years’ income expectancies and total property price or value; used to convert net operating income into an indication of overall property value.

 

paired data analysis. A quantitative technique used to identify and measure adjustments to the sale prices or rents of comparable properties; to apply this technique, sales or rental data on nearly identical properties are analyzed to isolate a single characteristic’s effect on value or rent.

 

gross income The total income attributable to real property at full occupancy before vacancy and operating expenses are deducted.

 

gross income multiplier The ratio between the sale price of a property and its potential gross income.

 

remaining economic life. The estimated period during which improvements will continue to contribute to property value.

 

replacement allowance. An allowance that provides for the periodic replacement of building components that wear out more rapidly than the building itself and must be replaced during the building’s economic life.

 

replacement cost The estimated cost to construct, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised using modem materials and current standards d i d layout.

 

residual techniques. Procedures used to capitalize the income allocated to an investment component of unknown value after all investment components of known values have been satisfied.

 

reversion. A lump sum benefit that an investor receives or expects to receive at the termination of an investment; also called reversionary benefit.

 

reversion factor. A compound interest factor that is used to discount a single future payment to its present worth, given the appropriate discount rate and discount period.

 

risk factor. The portion of a given return or rate of return from capital invested in an enterprise that is assumed to cover the risks associated with the particular investment.

 

sale/leaseback. A financing arrangement in which real property is sold by its owner/user, who simultaneously leases the property from the buyer for continued use.

 

sandwich lease. A lease in which an intermediate, or sandwich, leaseholder is the lessee of one party and the lessor of another. The owner of the sandwich lease is neither the fee owner nor the user of the property; he or she may be a leaseholder in a chain of leases, excluding the ultimate sublessee.

 

sublease. An agreement in which the lessee in a prior lease conveys the right of use and occupancy of a property to another, the sublessee.

 

substitution. The appraisal principle that states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution.

 

supply and demand. In real estate appraisal context, the principle of supply and demand states that the price of real property varies directly, but not necessarily proportionately, with demand and inversely, but not necessarily proportionately, with supply.

 

units of comparison. The components into which a property may be divided for purposes of comparison; e.g., price per square foot, front foot, cubic foot, room, bed, set, apartment unit.

 

variable expenses. Operating expenses that generally vary with the level of occupancy or the extent of services provided.

 

yield capitalization. The capitalization method used to convert future benefits into present value by discounting each future benefit at an appropriate yield rate or by developing an overall rate that explicitly reflects the investment’s income pattern, value change, and yield rate

 

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