Absorbtion Period – The actual or expected period required from the time a property is initially offered for lease, purchase, or use by its eventual users, until all portions have been sold or stabilized occupancy has been achieved. Although marketing may begin before the completion of construction, most forecasters consider the absorption period to begin after the completion of construction.
Ad Valorem Tax – 1. A tax levied in proportion to the value of the property being taxed. (USPAP, 2002 ed.) 2. A tax levied in proportion to the value of the thing(s) being taxed; generally refers to property taxes, etc. Exclusive of exemptions, use value assessment provisions, and the like, the property tax is an ad valorem tax. (IAAO)
Aggregate Retail – The sum total dollar amount when a multi-property development (condos, lots, etc.) is sold over time, one-by-one, to separate buyers.
Appraisal – The act or process of developing an opinion of value; an opinion of value. (adj.) of or pertaining to appraising and related functions such as appraisal practice or appraisal services.
“As If Complete” Bulk Value – When a multi-property development (condos, lots, etc.) is 100% complete but before the first unit is sold. Bulk value concept is the price one person would pay for all finished units on the same date.
“As If Complete” Non-Stabilized Value – When a property is 100% complete but has not reached its stabilized leasing potential.
“As If Complete” Stabilized Value – When a property is 100% complete and has reached its stabilized leasing potential.
“As Is” Prospective Value – The future physical and economic condition of the property if the current highest and best use of the property is not ready to start the development process.
“As Is” Value – The current physical and economic condition of the property as of the date of valuation.
Below-the-line expense – An expense that is recorded “below” the net operating income line in a reconstructed operating statement and therefore is not considered part of the total operating expenses for the property; tenant improvements and leasing concessions are the most common line items recorded below the net operating income. These are non reoccurring expenses that do not show in the Stabilized Operating Statement, and consequently do not impact the Stabilized Net Operating Income.
Cash Flow – The periodic income attributable to the interest in real property. See also After Tax Cash Flow (ATCF); Pretax Cash Flow.
Classification – The act of segregating property into two or more classes for the application of different effective tax rates by means of one or more special property taxes or a classified property tax system (IAAO). Valuexpose has 13 major property classifications (i.e. residential, office, retail, industrial, etc.)
Closing Costs – The settlements costs incurred in the transferring of property ownership, e.g., recording fees, attorney fees, and title insurance premiums.
Components of Value – Market value is the present value of the property’s forecasted future benefits. Therefore, bundled up in a property’s sale price are the market’s forecasts or “bets” associated with the expected benefits of the property. These “bets” are all components of value or (COV). Some of the major forecasts or “bets” are amount of rent the property can generate now and throughout the investment holding period; the occupancy levels; the expense levels; and what the property will sell for in the future at the end of the investment holding period. If these forecasts or “bets” are too optimistic or with a low probability of being achieved, the beginning sale price might not be sustainable throughout the investment holding period.
Cost of Production – Total cash needed to develop a property and deliver into the market place before it is leased (in the case of a single property) or selling the first unit (in the case of multi-units, i.e. Condos, lots, etc.). Total costs include: land cost, direct costs, entrepreneurial profit, opportunity costs, and soft costs. Cost of production does not include leasing or selling costs of the developed product.
Direct costs – 1. Expenditures for the labor and material used in the construction of improvements; also called hard costs. See also Indirect costs. 2. The labor, material, subcontractor, and heavy equipment costs directly incorporated into the construction of physical improvements.
Discount Rate – An interest rate used to convert future payments or receipts into present value. The discount rate may or may not be the same as the internal rate of return (IRR) or yield rate depending on how it is extracted from the market and/ or used in the analysis.
Discounted Cash Flow (DCF) Analysis – The procedure in which a discounted rate is applied to a set of projected income streams and reversions. 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. DCF analysis can be applied with any yield capitalization technique and may be performed on either a lease-by-lease or aggregate basis.
Economic Feasibility – The ability of a project or an enterprise to meet defined investment objectives; an investment’s ability to produce sufficient revenue to pay all expenses and charges and to provide a reasonable return on a recapture of the money invested. In reference to a service or residential property where revenue is not a fundamental consideration, economic soundness is based on the need for a desirability of the property for a particular purpose. An investment property is economically feasible if its prospective earning power is sufficient to pay a fair rate of return on its complete cost (including indirect costs), i.e., the estimated value at completion equals or exceeds the estimated cost. Valuexpose quantifies economic feasibility of a proposed development if the “as if complete” non-stabilized value is greater than the developments costs of production. In the case of a multi-property development (i.e. condos, lots, etc.), economic feasibility is achieved when the “as if complete” bulk value is greater than the development’s cost of production.
Effective Gross Income (EGI) – The anticipated income from all operations of real property after all allowance is made for vacancy and collection losses. Effective gross income includes items constituted other income, i.e., income generated from the operation of the real property that is not derived from space rental (e.g., parking rental or income from vending machines).
Entitlement – In the context of ownership, use, and/ or development of real property, the right to receive governmental approvals for annexation, zoning, utility extensions, construction permits, and occupancy/ use permits. The approval period is usually finite and may require the owner and/or developer to pay impact and/ or user fees in addition to other costs to secure the entitlement. Entitlements may be transferable, subject to covenants or government protocols, may constitute vested rights, and may represent an enhancement to a property’s value.
Entrepreneurial Profit – 1. A market-derived figure that represents the amount an entrepreneur receives for his or her contribution to a project and risk; the difference between the total cost of property (cost of development) and its market value (property value after completion), Which represents the entrepreneur’s compensation for the risk and expertise associated with development. 2. In economics, the actual return on successful management practices, often identified with coordination, the fourth factor of production following land, labor, and capital; also called entrepreneurial return or entrepreneurial reward. See also entrepreneurial incentive.
Escalation Clause – A clause in an agreement that provides for the adjustment of a price or rent based on some event or index, e.g., a provision to increase rent if operating expenses increase; also called expense recovery clause.
Equity Yield Rate – A rate of return on equity capital as distinguished from the rate of return on debt capital; the equity yield rate considers the effect of debt financing on the cash flow to the equity investor.
Feasibility – An indication that a project has a reasonable likelihood of satisfying explicit objectives. See also Economic Feasibility.
Financing Costs – The cost of acquiring capital to finance a project.
Going-in Capitalization Rate – The overall capitalization rate obtained by dividing a property’s net operating income for the fist year after purchase by the present value of the property. See also Terminal Capitalization Rate
Going-out Capitalization Rate – See terminal capitalization rate.
Gross Rent Multiplier – (GRM) The relationship or ratio between the sale price or value of a property and its gross rental income. See also Effective gross income multiplier(EGIM); Potential gross income multiplier (PGIM).
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 and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity.
Holding Period – The term of ownership of investment.
Indirect Costs – Expenditures or allowances for items other than labor an materials that are necessary for construction, but are not typically part of the construction contract. Indirect costs may include administrative costs; professional fees; marketing, sales and costs incurred to achieve occupancy or sale. Also called soft costs. See also Direct Costs.
Inflation – An erosion of the purchasing power of currency characterized by price escalation and an increase in the volume of money, i.e., the proliferation of monetary units and consequent decline in the value of each unit. Inflation tends to increase discount rates because investors require nominal rate of return to offset the loss in value due to inflation. Investors often include an additional risk premium in the required rate of return on investments that do not respond well to unexpected inflation. See also Appreciation.
Internal Rate of Return (IRR) – The annualized yield rate or rate of retrn on capital that is generated or capable of being generated within an investment or portfolio over a period of ownership. The IRR is the rate of discount that makes the net present value of the investment equal to zero. The IRR discounts all returns from the investment, include returns from its reversion, to equal the original capital outlay. This rate is similar to the equity yield rate. As a measure of investment performance, the IRR is the rate of discounts that produces a profitability index of one and a net present value of zero. It may be used to measure profitability after income taxes, i.e., the after-tax equity yield rate. See also. Equity Yield Rate; Financial management Rate of Return (FMRR); Modified Internal Rate or Return (MIRR) Yield Rate.
Interest Rate – The price of money; the level of market interest carried by a debt instrument from the day it is created over the duration of its life. The rate of return or yield rate on debt capital, usually expressed as the nominal annual percentage of amount loaned or invested.
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.
Land Residual technique – A method of estimating land value in which the net operating income attributable to the land is isolated and capitalized to produce and indication of the land’s contribution to the total property.
Leasing Commissions – Fees paid to an agent for leasing tenant space. When leasing fees are spread over the term of a lease or lease renewal, they are treated as a variable operating expense. Initially leasing fees usually fall under capital expenditures for development and are not included among periodic expenses.
Leasing Fees – See Leasing Commissions
Leverage – The effect of borrowed funds, which may increase or decrease the return that would be realized on equity free and clear.
Loan to value ratio – The ratio between a mortgage loan and value of the property pledged as security; also called loan ratio.
Lot – 1. A distinct piece of land; a piece of land that forms a part of a district, community, city block. Etc.2. A smaller portion into which a city block or subdivision is divided; described by reference to a record plat or by definite boundaries. A piece of land in one ownership, whether platter or unplatted.
Market Area Life cycle – The objective analysis of observable and/ or quantifiable data indicating discernible patters of urban growth, structure, and change that may detract from or enhance property values; focuses on four sets of considerations that influence value: social, economic, governmental, and environmental factors.
Market Value – The major focus of most real property appraisal assignments. Both economic and legal definitions of market value have been developed and refined. Continual refinement is essential to the growth of the appraisal profession.*
- The most widely accepted components of market value are incorporated in the following definition: The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming the neither is under undue duress.
- Market value is defined in the Uniform Standard of Professional Appraisal Practice (USPAP) as follows: A type of value, stated as an opinions, that presumes the transfer of a property (i.e., specific conditions set forth in the definition of the term identified by the appraiser as applicable in an appraisal. (USPAP, 2002 ed.)
USPAP also requires that certain items be included in every appraisal report. Among these items, the following are directly related to the definition of market value.
- Identification of the specific property rights to be appraised.
- Statement of the effective date of the value of opinion.
- If the appraisal is conditioned upon financing or other terms, specification as to whether the financing or terms are at, below or above market interest rates and/ or contain unusual conditions or incentives. The terms must be clearly set forth; their contribution to, or negative influence on, value must be described and estimated; and the market data supporting the opinion of value must be described and explained.
- The following definition of market value is used by agencies that regulate federally insured financial institutions in the United States: the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by specified date and passing of title from seller to buyer under conditions whereby:
- Buyer and seller are typically motivated;
- Both parties are well informed or well advised, and acting in wheat they consider their best interests;
- A reasonable time is allowed for exposure in the open market;
*Person performing appraisal services that may be subject to litigation are cautioned to seek the exact definition of market value applicable to the jurisdiction where the services are being performed. For further discussion of this important term, see The Appraisal of Real Estate, 12th ed. (Chicago: Appraisal Institute, 2001), 21-24.
Natural or Intrinsic Value – The beginning value (sale price) and the reversion (ending sale price) of a property that would achieve the markets expected annual yield of the investment over the holding period. The annual yield expectation is compared to alternative investment of similar risks that can be found in the market place. Consequently, the going out capitalization rate or terminal rate used to capitalize the ending net operating income is the annual yield expectation. Higher or lower going out capitalization rates will push the beginning value and the reversion (ending sale price) away from the natural or intrinsic beginning and ending value. No matter how far these market values detach from the natural or intrinsic values, the annual yield between these two market values will be the same as the natural or intrinsic values. Consequently, the farther the detachment the greater the hidden risk because market values tend to gravitate toward natural or intrinsic values (equilibrium) over time.
Net operating Income (NOI) – 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; may be calculated before or after deducting replacement reserves.
Off-site Costs – Costs incurred in the development of a project, excluding actual building construction costs, e.g., the costs of streets, sidewalks, curbing, traffic signals, water and sewer mains; also called common costs or off-site improvement costs.
On-site Costs – Costs incurred for the actual construction of buildings and improvements on a particular parcel of land. See also Construction cost; direct costs.
Opportunity Cost – The lost interest cost a developer would incur by taking his money out of a safe rate financial instrument or account for development purposes.
Present Value (PV) – The value of a future payment or series of future payments discounted to the current date of to time period zero.
Price – The amount a particular purchaser agrees to pay and particular seller agrees to accept under the circumstances surrounding their transaction.
Property Tax – Is the annual amount paid by a homeowner or landowner to the local government or the municipal corporation in his area. Because the concept of market value presumes a sale, a property (real estate) tax projection should consider the impact of the presumed sale on the anticipated assessed value and taxes.
Property Type – Specific property type under one of the 13 classifications (see classifications)
Property Yield – The dollar return on the entire real property from all sources, i.e., the annual net operating income including any gain or loss in the original property investment at termination.
Prospective value Opinion – A forecast of the value expected at a specified future date. A prospective value opinion is most frequently sought in connection with real estate projects that are proposed, under construction, or under conversation to a new use. Or those that have no achieved sellout or a stabilized level of long-term occupancy at the time the appraisal report is written. See also Effective Date; Value as is.
Real Estate Taxation Appraisal – See Ad Valorem Tax.
Remodeling – A type of renovation that changes property use or configuration by changing property design.
Rent Escalation – See Escalation Clause.
Rent Loss Insurance – Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the lease premises unavailable for use and as a result of which the tenant is excused from paying rent.
Replacement Cost – The estimated cost to construction, at current prices as of the effective appraisal date, a building with utility equivalent to the building being appraised, using modern materials and current standards, design, and layout.
Reservation – A clause found in legal instruments and conveyances that creates a new right or interest on behalf of the grantor. While title passes to the grantee, some use or income is reserved for the grantor. Reservations may include mineral rights, rental income, or easements.
Reversion – A lump-sum benefit that an investor receives or expects to receive at the termination of an investment; also called reversionary benefit. See also Terminal Capitalization Rate.
Risk Management – Procedure to minimize the effects of a possible financial loss by 1) Identifying potential sources of loss, 2) measuring the financial consequences of a loss occurring, and 3) using controls to minimize actual losses or their financial consequences.
Sales Commission – A fee paid to a sales-person or broker who arranges for the sale of property; generally expressed as a percentage of the sale price.
Sinking Fund – A fund in which a periodic deposits of equal amounts are accumulated to pay a debt or replace assets; usually designed to receive equal
Stabilized Occupancy – Occupancy at that pint in time when abnormalities in supply and demand or any additional transitory conditions cease to exist and the existing conditions are those expected to continue over the economic life of the property; the optimum rage of long-term occupancy that an income-producing real estate project is expected to achieve under competent management after exposure for leasing in the open market for a reasonable period of time at terms and conditions comparable to competitive offering. See also Stabilized income.
Tenant – One who holds or posses real property; commonly a person who occupies and uses the property of another under a lease, although such a person is technically a lessee, not a tenant.
Tenant Improvements – Fixed improvements to the land or structures installed and paid for by a tenant or lessee.
Terminal Capitalization Rate – The rate used to convert income, eg., NOI, cash flow, into an indication of the anticipated value of the subject real property at the end of an actual or anticipated holding period. The terminal capitalization rate is used to estimate the resale value of the property. Also called reversionary capitalization rate or going-out capitalization rate. See also Going-in Capitalization rate.
Time Series – A statistical technique used to describe and measure the cyclical movements, random variations, seasonal variation, and secular trends observed over a period of time.
Valuation – The process of estimating the market value, insurable value, or some other property defined value of an identified or interests in a specific parcel or parcels of real estate as of a given date. Valuation is a term used interchangeably with appraisals.
Variable Expenses – Operating expenses that generally vary with the level of occupancy or the extent of services provided.
Wave Cycle – Typical stages of the fundamental market cycle (expansion, contraction, recession, and recovery) in relation to a property’s equilibrium or intrinsic value.