Glossary of Investment Property Terms
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.
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