Glossary

Acceleration Clause - A condition in a real estate financing instrument giving the lender the power to declare all sums owing lender immediately due and payable upon the happening of an event, such as sale of the property, or a delinquency in the repayment of the note.

AD VALOREM - A Latin phrase meaning "according to value." Usually used in connection with real estate taxation.

Amortization - A financial obligation paid in installments; An amortized loan includes both principal and interest, usually due monthly, resulting in complete payment of the amount borrowed, with interest, by the end of the loan term.

Amortized Loan - A loan which is completely paid off, interest and principal, by a series of regular payments which are equal or nearly equal.

Boot - Profit gained in exchange of properties on which income tax is not deferred. May be anything of value, which includes Loan relief.

Annual Percentage Rate (APR) - The cost of credit including interest, loan fees and discount points stated as an annual percentage.

Capital Asset - Tangible property which cannot easily be converted into cash and which is usually held for a long period, for example, real estate.

Capital Expenses - Capital expenses are expenditures that increase the long-term value of a capital asset. Capital expenses are depreciated over the life of the asset.

Capitalization Rate - The capitalization rate (or "cap" rate) for a property is determined by dividing the property's net operating income by its purchase price. Generally, high cap rates indicate higher returns and greater perceived risk.

Cash Flow - The amount of cash an income-producing property investor receives after deducting operating expenses and loan payments from gross income. Cash Flow can be calculated on a pre-tax and post-tax basis.

Cash-On-Cash Return - A rate of return defined as cash flow after debt service divided by total dollar investment.

Comparative Market Analysis - An estimate of the value of a property based on an analysis of sales of properties with similar characteristics. These similar properties have approximately the same size, location and attributes. The CMA is used by agents to estimate the fair market value of the properties.

Debt Coverage Ratio - Measures a property's ability to cover monthly Loan payments. It is defined as the ratio of net operating income over the Loan payments. A Debt Coverage Ratio of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments.

Debt Service - the periodic payments required by the loan documents to repay the indebtedness expressed on an annual or monthly basis.

Discount Rate - The rate applied to each year's cash flow of an investment property to determine the Net Present Value (NPV) of a series of cash flows.

Depreciation - A decrease or loss in property value due to wear, age or other factors. In accounting, depreciation is a periodic allowance made for this real or implied loss.

EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization.

Equity - The difference between the market value of the investment property and the amount the amount of remaining debt.

Fair Market Value (FMV) - A value assigned to a property based on market analysis (see Comparative Market Analysis).

Ginnie Mae - Government National Loan Association.

Gross Income - Total income from property before any expenses are deducted.

Gross Operating Income - The amount of income collected from the operation of a property after deductions for vacancy and credit losses, but before deductions for operating expenses. Also known as the Gross Effective Rent.

Gross Rent Multiplier - A number which, times the gross income of a property, produces an estimate of value of the property. For example:
The gross income from an unfurnished apartment building is $200,000 per annum. If an appraiser uses a gross multiplier of 7%, then it is said that based on the gross multiplier the value of the building is $1,400,000.

Gross Scheduled Income - Income which would be collected from a real property if every space were leased, and if there were no vacancies or credit losses. The maximum Potential Rental Income.

Industrial Property - A property used for light or heavy manufacturing or warehouse space. Property type also includes office/warehouse.

Interest Rate Cap - Limits the interest rate or the interest rate adjustment to a specified maximum. This offers protection to the borrower from increasing interest rates.

Leasing Commission - A commission paid to a leasing agent by an owner as compensation for the procurement of a lease. The leasing commission is often percentage of the rental income for the term of the lease.

Lease Term - The length of time expressed in years of a lease.

Loan Origination Point - Fee, represented as a percentage of the Loan, lender charges to prepare all the documents associated with your loan.

Loan Term - The length of time between the date of the note and the maturity date in the note.

Loan-to-Value Ratio - The ratio between the principal amount of the loan balance to the current value of the underlying real estate property. The ratio is often expressed to a potential borrower as the percentage of value a lending institution is willing to finance.

Negative Amortization - Occurs when the interest accrued during a payment period is greater than the scheduled payment and the excess amount is added to the outstanding loan balance.

Net Income Multiplier - The Fair Market Value (FMV) of an income property divided by the Net Operating Income (NOI) it generates. It is a useful measure for judging how effective an asset is at generating income, compared to its market price.

Net Operating Income (NOI) - The income projected for an income-producing property after deducting losses for vacancy, collection and operating expenses. This is the amount of annual income the property can produce prior to debt service and tax considerations.

Net Present Value - The difference between the present value of cash inflows generated by real estate and the amount of the initial investment. The present value of future cash flows is computed using the discount rate.

Operating Expense Ratio - The ratio is the Net Operating Expenses divided by the Gross Operating Income. This ratio is often used in real estate lending analysis.

Passive Loss Rules - Passive activities are those investments in which you do not materially participate. Losses from these investments can be used only to offset income from other similarly passive investments. Generally , passive losses can't be deducted against other kinds of income, such as salary or income from interest, dividends or capital gains. Generally, all real estate and limited-partnership investments are considered passive activities, but there exists a limited exception for rental real estate in which you actively participate. Losses you can't use because you have no passive income to offset can be carried over to future years.

Passive Loss Rules Exception - The exception to the passive loss rule is the $25,000 loss rule. As long as the property is considered rental property, you may be able to deduct as much as $25,000 in rental losses against any other income. However, this allowance begins phasing out if your adjusted gross income (AGI) for the year exceeds $100,000, and it disappears by the time AGI reaches $150,000. To qualify for the $25,000 deduction, you must "actively" manage the property. This means that you must control rental agreements and approve capital improvements, among other things. However, you can hire a property manager to handle the day-to-day management as long as the property in question is real estate. Passive loss rules can be very complex and investors should consult a tax adviser regarding all tax issues involving their real estate investments.

Present Value - Present value is the value in today's dollars assigned to an amount of money in the future, based on some estimate rate-of-return (e.g. discount rate) over the long-term.

Pro Forma - A projection that estimates an investment property's income, expenses and net operating income on an annual basis.

Recovery Period - The life of an asset in years used to determine depreciation.

Refinance - The renewal of existing loan(s) by the same borrower.

Reversion - The lump-sum dollar amount an investor expects to receive at the sale of an investment property.

Sale and Leaseback - An arrangement whereby a freeholder or lessee sells his interest in a property for an agreed sum and takes back a lease on the whole or part of the property from the purchaser.

Tenant Improvements (TIs) - the cost for improvements or renovations a specified unit in a commercial property based upon the tenant's requirements.

Turnover Vacancy - A percentage of rental income plus reimbursements for each lease term .

Valuation - Making an estimate of the worth of real property or other assets for a particular purpose.