Adjusted Basis – The original cost basis of a property plus capital improvements, less total accumulated cost recovery deductions, and partial sales have taken during the holding period.
Amortization – The repayment of loan principal through equal payments over a designated period consisting of both principal and interest.
Annual Debt Service (ADS)-The total amount of principal and interest to be paid each year.
Appreciation – A real estate investment that increases in value during the holding period.
Average Annual Effective Rate -The average annual effective rent divided by the square footage
Balloon payment – The final payment of the balance due on a partially amortized loan.
Capitalization rate (CAP Rate) –Used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor's potential return on their investment in the real estate market. Also referred to as cap rate.
Capital Gain – Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of cost recovery (Depreciation).xa
Capital Markets – The supply and demand for resources to invest in real estate and other investments.
Cash-on-Cash Rate – A return measure that is calculated as cash flow before taxes divided by the initial equity investment.
Closing – Closing is the final step in executing a real estate transaction. The closing date is set during the negotiation phase and is usually several weeks after the offer is formally accepted. On the closing date, the ownership of the property is transferred to the buyer. In most jurisdictions, ownership is officially transferred when a deed from the seller is delivered to the buyer. Lenders providing a mortgage loan will often require a title search, title insurance, appraisal, land survey, and attorneys to be involved
Compound interest – Interest computed on the original principal and accumulated interest.
Compounding – A type of calculation in which interest earned is reinvested and earns additional interest.
Cost Approach – The cost approach is a real estate valuation method that surmises that the price a buyer should pay for a piece of property should equal the cost to build an equivalent building. In cost approach appraisal, the market price for the property is equal to the cost of land, plus the cost of construction, less depreciation. It yields the most accurate market value when the property is new.
Depreciation – Real estate depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property placed into service by the investor. Depreciation is essentially a non-cash deduction that reduces the investor’s taxable income.
Discount Rate – The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium.
Double-Net Lease (NN) -A double net lease is a lease agreement in which the tenant is responsible for both property taxes and premiums for insuring the building. Unlike a single net lease, which only requires the tenant to pay property taxes, a double net lease passes more expenses along in the form of insurance payments. The landlord is still held responsible for structural maintenance expenses.
Due Diligence – The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.
Environmental Hazards – Any physical or natural condition or event which possesses a risk to humans
Environmental Impacts – The repercussions of an activity or specific land use on the physical/social environment because of emissions, waste disposal, water, and power usage, etc.
Equity Yield Rate – The return on the portion of an investment financed by equity capital.
Exchange (1031 Exchange) -Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate (like-kind refers to real property as such, rather than the quality or quantity of property).
Fully Amortized Mortgage Loan – A method of loan amortization in which equal periodic payments completely repay the loan.
Gap Analysis – An evaluation of the difference in the demand and supply of space (measured in terms of square footage) for a particular type of commercial property in a given market area where gaps are expressed as the amount of square footage demanded less the amount of square footage available in a given time period. Note that if demand exceeds supply, the gap will be positive. A positive gap indicates that potential opportunities exist for successful commercial real estate transactions. However, transactions might be avoided when supply exceeds demand (or when a negative gap occurs), as there is an oversupply of available space in the market.
Gross Operating Income – The total income generated by the operations of a property before payment of operating expenses. It is calculated from potential rental income, plus other income affected by vacancy, less vacancy and credit losses, plus other income not affected by vacancy.
Gross Rent Multiplier (GRM)– A method investors may use to determine market value. This method calculates the market value of a property by using the gross rents an investor anticipates the property will produce at end of year 1 multiplied by a given factor (known as the gross rent multiplier extracted from the marketplace).
Interest-Only Loan – A method of loan amortization in which interest is paid periodically over the term of the loan and the entire original loan amount is paid at maturity.
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 capital investment.
Loan Balance -The amount of money remaining to be paid on an amortizing loan at a given time.
Loan or Mortgage Value -That portion of the value of real property recognized by the lender when used to secure a loan.
Loan Point – A charge prepaid by the borrower upon the origination of a loan. One-point equals one percent of the loan amount.
Loan-to-Value Ratio (LTV)– The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value.
Market Adjustments – A change in market parameters or conditions brought about in response to one or more market signals (including price changes from shifts in supply and demand); typically characterized as cycles, fluctuations, or trends (categories that differ in terms of cause, duration, and impact on commercial real estate markets).
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.
Partially Amortized Mortgage Loan – The payments do not repay the loan over its term and thus a lump sum (balloon) is required to repay the loan.
Participation Mortgage – A loan secured by real property, with a stated interest rate that also provides for a share to the lender in annual net cash flow, gain on sale or proceeds from refinancing the property.
Passive Income – Income from rental activity, limited business interests, or other activities in which the investor does not materially participate.
Payment (PMT)– A periodic amount paid or received for two or more periods.
Percentage rent – The additional rent (over a base amount) that is paid by tenants to owners on tenant sales over a specified dollar amount. It is frequently found in retail leases. Also known as overage rent.
Triple Net Lease (NNN) – A triple net lease (NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance.
Yield – A measure of investment performance that gauges the percentage return on each dollar invested. Also known as the rate of return.
Vacancy Rate – The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a point in time within a given market.