The real estate dictionary is comprised of definitions taken from various free sources on the web, and we do not guarantee the accuracy of the definitions. This section is meant to provide an initial understanding of the terms uses.  If you have questions regarding additional any of the terms or definitions, we advise that you contact  your CPA or real estate attorney for further clarification.

 

A
Abatement	A termination, ending, reduction or decrease which usually applies to the assessed value of ad valorem taxes following their assessment and levy
Accelerated Cost Recovery System	(ACRS) A part of the Internal Revenue Service (IRS) system designed to recover taxes not paid as a result of depreciation taken on depreciable real property that was acquired and placed into service starting in 1981.
Accelerated Depreciation	A method of cost write-off, which permits an earlier recovery of capital and a faster tax write-off of an asset, in which depreciation allowances are greater in the first few years of ownership than in subsequent years
Accrual for Depreciation	In appraisal, a provision in the income approach in which a return of the investment is provided for out of the income by way of the capitalization rate.
Accrual Method	An accounting method that calls for income to be booked when the income is earned and expenses when the obligation becomes payable. See Cash Method.
Accrued Depreciation	The actual monetary difference between the cost to replace a property as of the date of the original appraisal and the present appraised depreciated value.
Accrued Items of Expense	Those expenses shown on a balance sheet or closing statement such as real estate taxes that have been incurred but are not yet payable which get credited to the buyer on the closing statement and who will pay them later on behalf of the seller.
Accumulated Depreciation	In accounting, the amount of depreciation expense that has been claimed to date. See Accrued Depreciation.
Acquisition Costs	The price including all fees paid to purchase a property.
Active Participation	A type of investor position involves things like approving new tenants, rental terms and capital or repair expenditures which is less strict than for material participation which determines how personal income is taxed. See Material Participation.
Actual Depreciation	The depreciation that has occurred as a result of physical, functional or economic forces and have caused a loss in the value of a building.
Ad Valorem	A Latin phrase meaning "according to value" that is usually used in reference to real estate taxation.
Ad Valorem Tax	A real estate tax that is based according to either a percentage of or actual market value being multiplied by the tax rate to arrive at the actual tax paid.
Additional Principal Payment	A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining loan balance.
Adjustable Rate Mortgage	An adjustable rate mortgage (ARM) loan that bears interest at a rate that is subject to change and therefore adjustable during the term of the loan on a specified financial index that has been predetermined.
Adjusted Basis	The value of an asset (property or otherwise) that includes the original price plus the value of any improvement, and less any applicable depreciation.
Adjusted Cost Basis	The financial interest of an asset which equals its cost basis plus the value of any capital improvements, less any depreciation, which the IRS attributes to the owner at the time of sale for the purpose of determining any taxable gain or loss.
Alternative Minimum Tax	An aspect of the federal income tax program which is a flat tax applied on an "alternative minimum taxable income" basis to ensure that everyone with income above a certain level pays some income tax.
Amortization	The gradual elimination of a liability, such as a mortgage, through regular payments over a specified period of time which must be sufficient to cover both the principal and the interest.
Amortization Schedule	A table showing the periodic principal and interest payment requirements and the unpaid loan balance for each period of the life of a loan.
Amortization Table	A table showing the required payments to amortize loans at various interest rates over various periods of time.
Amortization Term	The length of time over which an amortized loan is repaid. Mortgages are commonly amortized over 15 or 30 years.
Amortized Loan	A mortgage where the principal and interest are repaid according to a plan through a series of equal or nearly equal payments in monthly or other periodic installments without any special balloon payment prior to maturity. Also known as a Level Payment.
Amortized Mortgage	A mortgage requiring periodic payments that include both interest and principal.
Appraised Value	The estimated fair market value of a property as developed by a licensed, certified appraiser following accepted appraisal principles.
Appreciation	The increase in value of property over a time period. Or The difference between the original value of a property and the new value of the property.
Asking Price	The price that an owner would like to receive which is also called list or listing price.
At-Risk Rule	Tax laws that limit the amount of tax losses investor can claim. At-risk rules were extended to real estate investments by the 1986 Revenue Reconciliation Tax Act, and apply to property placed in service after 1986. This means that losses on real estate investments will be deductible only to the extent of the amount of money the equity investor stands to lose.
B
Balloon	A loan that has a series of monthly payments with the remaining balance due in a large lump sum payment at the end.
Balloon Mortgage	A mortgage with a balloon payment. See Balloon Payment.
Balloon Note	A form of promissory note that calls for the minimum payment of principal and the payment of interest at regular intervals. This type of note usually requires a substantial final payment, which represents the outstanding principal
Band of Investment	A method of developing a capitalization rate by combining the weighted average rates attributable to the different components of the invested capital.
Basis	generally, is that figure or value that is the starting point in computing gain or loss, depreciation, depletion, and amortization of a company. Specifically, it is the financial interest that the Internal Revenue Service attributes to an owner of an investment property for the purpose of determining annual depreciation and gain or loss on the sale of the asset. If a property was acquired by purchase, the owner's basis is the cost of the property plus the value of any capital expenditures for improvements to the property, minus any depreciation allowable or actually taken. This new basis is called the ADJUSTED BASIS.
Base Rent	A set amount used as a minimum rent in a lease with provisions for increasing the rent over the term of the lease. See also "Escalation Clause", "Operating Expense Escalation" and "Percentage Lease
Base Year	Actual taxes and operating expenses for a specified base year, most often the year in which the lease commences. Once the base year expenses are known, the lease essentially becomes a dollar stop lease
Book Depreciation	An accounting concept which an allowance is taken to provide for the recovery of invested capital.
Book Value	A sale in name only of real property to the state when a taxpayer is delinquent in paying property tax.
Boot	Something not of like kind such as cash or its equivalent or mortgage relief that is given to equalize any difference in value or equity between two properties in a tax deferred exchange.
Breakeven Point	The amount of income needed to simply meet the total amount of expenses for a project.
Building Capitalization Rate	In appraising. the capitalization rate is used to convert an income stream into a lump sum value and where the rate for the building may differ from that of the land because the building is considered to be a wasting asset
Building Residual Technique	In appraisal, a method of determining the contribution of an improvement to the current value of the entire property.
Buy Down	A subsidy (usually paid by a builder or developer) to reduce monthly payments on a mortgage.
Buyer’s Expenses	Documentary Stamps on Notes, Recording Deed and Mortgage, Escrow Fees, Attorney's Fee, Title Insurance, Appraisal and Inspection, Survey Charge
C
Call Provision	A clause in a loan that gives the lender the right to accelerate the debt upon the occurrence of a specific event which is normally an attempt to sell. See Acceleration Clause and Alienation Clause.
Called Loan	A loan that is due and payable at the demand of the lender usually as a result of an acceleration or alienation clause becoming effective. See Acceleration Clause and Alienation Clause.
Cap (Interest Rate)	The maximum interest rate increase allowable on an adjustable rate mortgage placed on the adjustments to protect the borrower from large increases in the interest rate or the payment level and which does not result in negative amortization.
Capital Additions
Capital Expenditure	The cost of a capital improvement such as investments in land, buildings, machinery, and equipment.
Capital Gain	Income of a capital item that results from the sale of an asset and not from the usual course of business, the amount by which, the net sale proceeds exceeds the adjusted cost basis (book value). Gains are used for income tax computations and are taxed.
Capital Gains Tax	A tax placed on the profits from the sale of real estate or investments.
Capital Improvement	Any structure erected as a permanent improvement to real estate, usually extending the useful life and value of a property, such as the replacement of a roof.
Capital Loss	A tax deductible loss on real property that has been held for more than six months. See Capital Gain
Capital Recapture	The manner in which the investment in a property is to be returned to investors, normally stated as a rate or dollar amount per unit of time
Capitalized Costs	are business expenses that are written off or deducted over a period of time through depreciation or amortization schedules.
Capitalization	1.A process of reflecting future income in present value and used to determine the value of property by considering its net income and a percentage of reasonable return on the investment. 2. Capitalization occurs when items owed on a loan are treated as part of a new, principal balance. When arrears are capitalized, the amount of the arrears is included in the principal before the interest is applied. Also a mathematical process for estimating the value of a property using a proper rate of return on the investment and annual net income expected to be produced by the property. [Income ÷ Rate = Value
Capitalization Rate	Also called the CAP Rate. The CAP Rate is the Rate of return considered likely from the target property, given its location, condition, rent and expense structure and market conditions.  CAP rate is a very useful driver in determining a property's value. For example, assume that the target property has a Net Operating Income of $125,000, and that you had paid "all-cash" for the property.  The CAP rate is the rate of return you could expect to earn on that money on an investment with similar risks.  Assume further that you paid $1,250,000 all cash and that the CAP rate for this (and other similar properties is 10%) - the value would indeed be $1,250,000.  This number is calculated by dividing the all-cash price by the CAP rate ($1,250,000/10%).  Learn this formula and remember it.  Later in the program you will learn how to use this formula to "solve-backward" to determine what a price should be, or what expenses should be based on price and CAP.  You can enter the CAP rate drivers in either the Instant Analyst or the Purchase and Resale Set Up.
Cash Flow	is earnings before depreciation and amortization. Cash flow is calculated as the difference between cash inflows and outflows. Cash flow can be derived from Operating Profit by adjusting for items which do not affect payments (e.g. depreciation) and items (e.g. changes in working capital) which affect payments but are not recorded in Operating Profit.
Cash Flow Analysis	is a type of financial analysis that compares the timing and amount of cash inflows with the timing and amount of cash outflows. A firm’s cash flow position can greatly affect its ability to remain in business. These effects may not be apparent from a cost-benefit analysis.
Cash Method	An accounting method that calls for income and expenses to be booked when the amount is received or the obligation is paid. See Accrual Method
Cash Out	Receiving money when refinancing the current loan
Cash-on-Cash	The Cash on Cash return is the property’s annual net cash flow divided by the amount of cash invested.  For example, assume that the net cash flow from the target property is 50,000 and that you have invested (not borrowed) 500,000 in cash.  In this instance, the cash-on-cash return is 10.0%. (500,000/50,000)
Class A Building	An attractive and efficient building of high quality that is sought by investors and prestigious tenants and is well designed and constructed with above-average material, workmanship and finishes and is excellently maintained and managed.
Class B Building	A building that offers useful space without special features, has a functional layout and design although not unique and maintenance and management average to good which is usually from ten to fifty years old
Class C Building	A typically older building that offers space without amenities, with average to below average maintenance and management and having average to poor mechanical, electrical, ventilation systems that attracts moderate to low-income tenants who need affordable space
Class of Property	A subjective division of buildings as to their desirability to tenants and investors which is based on age, location, construction quality, attractiveness of style, level of maintenance, etc.
Closing Costs	The miscellaneous expenses buyers and sellers normally incur at settlement in the transfer of ownership of real property over and above the cost of the property such as recording fees, attorney fees, title insurance premium, etc. Processing a mortgage application can be time consuming and costly. Typically this process takes anywhere from two to eight weeks. Avoid any mortgage closing delays by paying off unnecessary debt and checking your own credit file a few months before shopping for your mortgage. Once you've shopped, compared and closed on your mortgage, expect to accrue additional lender fees. Closing costs, which may consist of title insurance costs, lender attorney fees, appraisal fees and more, can add thousands of dollars to your borrowing costs. When shopping for your lender, work with your mortgage broker to collect good faith estimates (GFE) of lender closing costs and fees. Though lenders aren't required to provide a GFE of settlement charges before the borrower applies for the loan, federal law does require them to provide it three days after. Work closely with your broker, and take the time to scrutinize each estimate and define each closing cost fee so that you can make an informed decision.
Closing Statement	A separate accounting of funds to the buyer and seller as required by law at the completion of every real estate transaction
Common Area	There are two components of the term "common area". If referred to in association with the Rentable/Usable or Load Factor calculation, the common areas are those areas within a building that are available for common use by all tenants or groups of tenants and their invitees (i.e. lobbies, corridors, restrooms, etc.). On the other hand, the cost of maintaining parking facilities, malls, sidewalks, landscaped areas, public toilets, truck and service facilities, and the like are included in the term "common area" when calculating the tenant's pro-rata share of building operating expenses.
Common Area Assessment	Fees which are charged to the tenants or owners of properties to cover the costs of maintaining areas shared with other tenants or owners. Commonly found in condominium, PUD or office spaces.
Common Area Maintenance	(This is the amount of Additional Rent charged to the tenant, in addition to the Base Rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include: snow removal, outdoor lighting, parking lot sweeping, insurance, property taxes, etc. Most often, this does not include any capital improvements (see "Capital Expenses") that are made to the property.
Comparable Sales	See Comparables.
Comparables	An abbreviated term used by appraisers to describe properties which are similar in size, condition, location and amenities to a subject property who's value is being determined. The Uniform Standards of Professional Appraisal Practice (USPAP) establish c
Comparison Approach	A method of real estate comparison also called "market comparison" that compares a particular property with similar or comparable surrounding properties.
Concession	A benefit granted by a seller to induce a buyer to make an offer.
Constant Payment Loan	A loan reduction plan whereby the borrower pays a fixed amount each month, a part of which is applied to the payment of interest and the remainder to the repayment of the principal.
Consumer Price Index	(Measures inflation in relation to the change in the price of a fixed market basket of goods and services purchased by a specified population during a "base" period of time. It is not a true "cost of living" factor and bears little direct relation to actual costs of building operation or the value of real estate. The CPI is commonly used to increase the base rental periodically as a means of protecting the landlord's rental stream against inflation or to provide a cushion for operating expense increases for a landlord unwilling to undertake the record keeping necessary for operating expense escalations.
Contract Rent	The amount of rent called for in a lease agreement.
Convertibility	The ability to change a loan from an adjustable rate schedule to a fixed rate schedule.
Convertible Arm	An adjustable rate mortgage that allows the borrower the option to convert at a specified point in time to a fixed rate schedule for a nominal fee and at a rate that is determined according to the loan documents
Cost Approach	A value estimate of a property by one of three appraisal methods which is arrived at by estimating the replacement cost of the improvements and then deducting the estimated accrued depreciation from it and then adding back the market value of the land.
Cost Basis	The dollar value amount assigned to property under provisions of the Internal Revenue Code at the time of acquisition for the purpose of determining gain, loss and depreciation in calculating the income tax to be paid upon the sale or exchange of the property.
Cost of Capital	That which must be paid to attract money into an investment project.
Cost Recovery	An Internal Revenue Service term for depreciation
Curable Depreciation	An item of physical deterioration or functional obsolescence which customarily gets corrected by repair or replacement by a prudent property owner and is thus considered to be "cured
D
Debt Capital	The money borrowed for a particular business purpose.
Debt Coverage Ratio	Also called Debt Service Ratio or Debt Service Coverage Ratio.  DCR is a measurement used by lenders to determine how likely it is that a property will generate sufficient net income to cover the debt service.  DSCR minimums are subject to each lender’s underwriting guidelines, the borrower’s credit and experience level, the property type, and other factors.  The Debt Coverage Ratio is calculated by dividing the Net Operating Income by the Annual Debt Service. For example, if a property has an NOI of 80,000, and the annual debt service is 65,000, the DSCR would be 1.23 (80,000/65,000).  This means that the property will generate sufficient cash to pay all of its expenses, plus cover the debt obligation 1.23 times.  Make sure that you check with your lender prior to setting the DSCR Driver in the Instant Analyst.
Debt Equity Ratio	The ratio of the amount a mortgagor still owes on a property to the amount of equity they have in the home. Equity is calculated at the fair market value of the home, less any outstanding mortgage debt.
Debt Service	The annual amount paid by a debtor to repay borrowed money.
Debt Service Coverage	The requirement that earnings be a percentage or dollar sum higher than debt service.
Debt to Equity Ratio	The relationship of the loan and equity components which for example if the debt is $80,000 and the equity is $20,000 there would be a debt to equity ratio of 4:1 or the equivalent to a 80% loan to value ratio.
Declining Balance Depreciation	An accelerated straight line depreciation method allowed by the IRS and used for income tax purposes in certain circumstances.
Defeasance	Defeasance is a substitution of collateral. It is not a simple prepayment but a 30-45 day process that usually is coordinated with a commercial sale or refinance.
Defeasance Clause	A clause in a mortgage that gives the mortgagor the right to redeem his or her property upon the payment of the mortgagor's obligations to the mortgagee. Defeasance is a substitution of collateral. It is not a simple prepayment but a 30-45 day process that usually is coordinated with a sale or refinance. Typically, the borrower uses proceeds from the sale or refinance to purchase a portfolio of U.S. government securities that is sufficient to make all of the remaining debt service payments. The securities are pledged to the lender, and the lender releases the real estate from the lien of the mortgage. The note, which remains outstanding, and the portfolio of securities are assigned by the borrower to a successor borrower who makes the ongoing debt service payments. Nearly every fixed-rate conduit/CMBS loan originated since 1998 requires the borrower to defeasea loan before selling or refinancing. Note that REMIC regulations prohibit defeasance during the first two years from the date the loan is securitized (not the date the loan was closed).
Deferred Gain	The gain that does not have to be recognized for tax purposes in the current tax year and gets deferred to a subsequent year(s).
Deferred Interest	When the amount of interest a borrower is required to pay on a mortgage loan is less than the amount of interest accrued on the outstanding principal balance. This amount is usually added to the outstanding principal balance of the mortgage loan.
Depreciable Real Property	In taxation, real estate that is subject to deductions for depreciation which includes income-producing property as well as property used in a trade or business.
Depreciation	The natural decline in property value due to market forces or depletion of resources.
Depreciation Allowance	The amount that can be claimed or is allowed for depreciation on one's federal income tax return.
Depreciation Base	The cost of acquiring a depreciable asset.
Depreciation Convention	is utilized to determine how much depreciation to charge the first year when an item is bought part way through the year. Three different conventions are used: 1. Half year convention - All property placed in service is considered to be placed in service half way through the year. During the first year, half of the "normal" depreciation is taken. At the end of the depreciation period, the other half of the "normal" depreciation is taken; 2. Mid-quarter convention - If the amount of depreciation claimed on new items during the last 3 months of a year exceeds 40% of the total depreciation claimed during the year, then the mid-quarter convention is used. The amount of depreciation of each item is figured for one year then multiplied by 87.5% if was placed in service during Jan. - March, 62.5% if it was placed in service during April - June, 37.5% for items placed in service during July-Sept, and 12.5% for items placed in service during Oct. - Dec.; or, 3. Mid-month convention - All property is considered to be placed in service during the midpoint of the month. This requires some calculations.
Depreciation Method	In appraising, the methods used to measure decreases in the value of an improvement which generally are the annuity, the sinking fund and the straight-line methods.
Depreciation Rate	The periodic amount or percentage at which the usefulness of a property is used up and especially referring to the percentage at which amounts are computed to be set aside as an accrual for future depreciation
Depreciation Recapture	is a provision contained in the Internal Revenue Code that makes excess depreciation taken on real property subject to income tax upon the sale or disposition of the property.
Depreciation Schedule	is the statement over time, as to the schedule (timing and amounts) of depreciation of any long-term asset. A depreciation schedule is used for any type of depreciation applicable, i.e., either straight line or accelerated depreciation. See DEPRECIATION.
Direct Capitalization	A process of dividing the net operating income by an overall capitalization rate to establish value
Discounted Cash Flow	is a valuation method best used to evaluate a business established for the purpose of fulfilling a specific project, in certain startup and other companies where cash flow is more important than net income, and when a certain time frame is set where an investor wishes to see his investment returned over a specific period of time. In discounted cash flow, the present value of liabilities is subtracted from the combined present value of cash flow and tangible assets, which determines the value of the business.
Discount Rate	is the interest rate that the Federal Reserve of the U.S. Government charges a U.S. bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.
Dollar Stop	An agreed dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. May be applied to specific expenses (e.g., property taxes or insurance).
E
Effective Gross Income	Also called Gross Operating Income, also called Adjusted Gross Income.  This is the target property’s gross rental income, less allowance for vacancy and credit loss
Equity
Equity Component	That portion of a lease that pertains the base rent, not including expense recoveries
Equity Dividend Rate	The relationship between the pretax cash flow and the owner’s equity in a property.  This is expressed as a percentage.
Expense Stop	An agreed dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. May be applied to specific expenses (e.g., property taxes or insurance). Also referred to as “Over Base” costs.  The expense stop limits a landlord’s obligation to pay expenses over a certain amount. For example, a lease may call for a landlord to pay for utilities up to $1,000, and the tenant pays all amounts over that amount.  The stop in this instance is $1,000.  You can specify expense stops for each lease and for any expense in any period by entering the stop in the expense recovery section of the Detailed Lease Analysis section of the software.
F
Fair Market Value	The sale price at which a property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Also known as FMV.
Fixed Expenses	Costs such as real estate taxes and insurance, which do not fluctuate in proportion to the level of occupancy.
Fixed Expense Ratio	The ratio or relationship between fixed expenses and income, expressed as a percentage.
Fixed Expense Recovery
Funded Reserves	is a reserve setup to cover the replacement cost of those capital assets covered within the depreciation schedule.
G
Gross Income
Gross Lease	A lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc.
Gross Lease Area
Gross Building Area	The total floor area of the building measuring from the outer surface of exterior walls and windows and including all vertical penetrations (e.g. elevator shafts, etc.) and basement space.
Gross Operating Income	Also called Effective Gross Income, also called Adjusted Gross Income.  This is the target property’s gross rental income, less allowance for vacancy and credit loss
Gross Rent Multiplier	A method of determining the target property’s value based solely upon a multiple of its gross rents.  It is derived by dividing the fair market value of the property by the gross rents.  The GRM method of valuation is typically used in the valuation of multi-family property.  It is a less reliable method of determining value because it does not consider the expense structure or other key factors.    You can specify which type of valuation method to use in the Purchase and Resale Set up.  There are three choices.  CAP rate, Appreciation Rate, or GRM. For example, Assume that you’re analyzing a 10 unit deal that has 160,000 in gross rents, and the asking price is 895,000.  In this instance the GRM would be 5.59 (895,000/160,000).  What isn’t expressed in this equation is the current expense structure of the property, the status of the leases, or physical condition of the property.  Based on its limitations, it would be advisable to use the GRM method ONLY for purposes of comparison to other similar types of properties
H
HUD-1	A form used by a settlement or closingagent itemizing all charges imposed on a borrower and sellerin a real estate transaction.Thisformgives a picture of the closing transaction, and provideseach party with a complete list of incoming and outgoing funds. "Buyers" are referred to as "borrowers" on this form even if no loan is involved.The Real Estate Settlement Procedures Act (RESPA) requires the HUD-1 form be used as the standard real estate settlement form in all transactions in the U.S.involving federally related mortgage loans. RESPA statesborrowers should be given a copy of the HUD-1 at least one day prior to settlement, although entries may still be coming in a few hours before closing. Most buyers and sellers study the form on with their real-estate agent andthe settlement agent. The more people who review it, the greater the likelihood of detecting any errors.
I
Inflation Rate	is an increase in the general price level of goods and services; alternatively, a decrease in the purchasing power of the dollar or other currency.
Initial Investment	The amount of cash initially placed into an investment.
Internal Rate of Return (IRR)	The annualized yield rate or rate of return 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, including returns from its termination, 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 discount that produces a profitability index of one and a net present value of zero. It is often used to measure profitability after income taxes, i.e., the after-tax equity yield rate
L
Long-Term Capital Gain	See Capital Gains
M
Market Value
Modified Internal Rate of Return (MIRR)	MIRR) is a financial measure used to determine the attractiveness of an investment. It is generally used as part of a capital budgeting process to rank various alternative choices. As the name implies, MIRR is a modification of the financial measure Internal Rate of Return (IRR). The main difference is that rather than ignoring the investment rate of the positive cash flow, MIRR makes an explicit assumption about the rate of investment of those flows. There are a few misconceptions about the IRR calculation. The major one is that IRR automatically assumes that all cash outflows from an investment are reinvested at the IRR rate. IRR is the "internal rate of return" with "internal" meaning each dollar in an investment. It makes no assumptions about what an investor does with money coming out of an investment. Whether the investor gives it away or puts it in a coffee can, the IRR stays the same.   It does however have a few drawbacks. First, IRR is not made to calculate negative cash flows after the initial investment. If an investment has an outflow of $1,000 in year three and an IRR of 30%, the $1,000 is discounted at 30% per year back to a present value. You would have to put this PV amount in an investment earning 30% per year for the IRR to reflect the true yield. Also, IRR ignores the reinvestment potential of positive cash flows. Since most capital investments will have intermediate positive cash flows, the firm will need to reinvest these cash flows, and the firm's cost of capital is a reasonable proxy for the return to be expected. Investments with large or early positive cash flows will tend to look far better with IRR than with MIRR for this reason.   To illustrate: a firm has investment options with returns that are generally moderate. An unusually attractive investment opportunity comes up with much higher return. The cash spun off from this latter investment will probably be reinvested at the moderate rate of return rather than in another unusually high-return investment. In this case, IRR will overstate the value of the investment, while MIRR will not.   The modified internal rate of return assumes all positive cash flows are re-invested (usually at the WACC) to the terminal year of the project. All negative cash flows are discounted and included in the initial investment outlay. MIRR ranks project efficiency consistent with the present worth ratio (variant of NPV/Discounted Negative Cash Flow), considered the gold standard in many finance textbooks. (Principles of Corporate Finance, Brealey, Myers, and Allen; or Economic Evaluation and Investment Decision Methods, Stermole and Stermole)
Month Placed in Service	The month that an improvement was completed and available for use as intended.
N
Negative Amortization	In finance, negative amortization, also known as NegAm, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. As an amortization method the shorted amount (difference between interest and repayment) is then added to the total amount owed to the lender. Such a practice would have to be agreed upon before shorting the payment so as to avoid default on payment.
Net Lease	A lease in which there is a provision for the tenant to pay, in addition to rent, certain costs associated with the operation of the property. These costs may include property taxes, insurance, repairs, utilities, and maintenance. There are also “NN” (double net) and “NNN” (triple net) leases. The difference between the three is the degree to which the tenant is responsible for operating costs.
Net Operating Income (NOI)	Net Operating Income or “NOI” as it is commonly called is the Gross Operating Income, less a provision for vacancies and credit loss, minus the operating expenses.  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.This number does not include a provision for income tax or for the recovery of the invested capital amounts.
Net Present Value (NPV)	Net present value usually is employed to evaluate the relative merits of two or more investment alternatives. It is calculated as the sum of the total present value of incremental future cash flows plus the present value of estimated proceeds from sale. Whenever the net present value is greater than zero, an investment opportunity generally is considered to have merit.
O
Operating Cost Escalation	Although there are many variations of escalation clauses, all are intended to adjust rents by reference to external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of buildings. During the past thirty years, Landlords have developed the custom of separating the base rent for the occupancy of the leased premises from escalation rent. This technique enables the landlord to better ensure that the “net” rent to be received under the lease will not be reduced by the normal costs of operating and maintaining the property. The landlord’s definition of Operating Expenses is likely to be broad, covering most costs of operation of the building. Most landlords pass through proper and customary charges, but in the hands of an overly aggressive landlord, these clauses can operate to impose obligations which the tenant would not willingly or knowingly accept.
Operating Expense
Owner’s Coverage	See Title Insurance
Operating Expense Escalation	Although there are many variations of operating expense escalation clauses, all are intended to adjust rents by reference to external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of buildings.
P
Passive Activity	is defined in the US Tax Code as one or more trades, business or rental activity, that the taxpayer does not materially participate in managing or running. All income and losses from passive activities are grouped together on an income tax return and, generally, loss deductions are limited or suspended until the passive activity that generated them is disposed of in its entirety.
Personal Property
Percentage Lease	Refers to a provision of the lease calling for the landlord to be paid a percentage of the tenant's gross sales as a component of rent. There is usually a base rent amount to which "percentage" rent is then added. This type of clause is most often found in retail leases.
Per-Diem	is a. one every day (e.g., save 10 man-hours per diem); or, b. payment of daily expenses and/or fees of an employee or an agent.
Phase I Environmental
PITI	is an acronym for Principal, Interest, Taxes and Insurance when dealing with property mortgages.
Points	are additional fee paid to a lender. Points are generally stated as a percent of the total amount borrowed and are in essence prepaid interest. Points paid can be deducted over the life of the loan.
Pre Paid Expenses
Present Value (PV)	is the discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present Value represents a series of future cash flows expressed in today's dollars. A given amount of money is almost always more valuable sooner than later, so present values are generally smaller than corresponding future values.
Principal
Pro Forma	A financial balance sheet or income statement for a business prepared by an accountant; in appraisal, a reconstructed operating statement used to project gross income, operating expenses, and net operating income for a future period based on specified assumptions; also called pro forma statement
Prorata	Proportionately; according to measure, interest, or liability. In the case of a tenant, the proportionate share of expenses for the maintenance and operation of the property. See also "Common Area" and "Operating Expenses".
R
Recoveries
Recovery Ratio
Refinance
Reinvest Rate
Remaining Economic Life	The remaining time that an asset has before it has been depreciated to zero value.
Renewal Option (in leases)	A clause giving a tenant the right to extend the term of a lease, usually for a stated period of time and at a rent amount as provided for in the option language.
Rent Roll	A table that shows a list of tenants in a property along with pertinent information about the leases.
Rentable Square Feet	Rentable Square Footage equals the Usable Square Footage plus the tenant’s pro rata share of the Building Common Areas, such as lobbies, public corridors and restrooms. The pro-rata share, often referred to as the Rentable/Usable (R/U) Factor, will typically fall in a range of 1.10 to 1.16, depending on the particular building. Typically, a full floor occupancy will have an R/U Factor of 1.10 while a partial floor occupancy will have an R/U Factor of 1.12 to 1.16 times the Usable Area.
Reserve Fund	in real estate, is a fund set aside for replacement of common property in a condominium, PUD, or cooperative project; particularly that which has a short life expectancy, such as carpeting and furniture.
Return on Equity (ROE)	measures the overall efficiency of the firm in managing its total investments in assets and in generating a return to stockholders. It is the primary measure of how well management is running the company. ROE allows you to quickly gauge whether a company is a value creator or a cash consumer. By relating the earnings generated to the shareholders' equity, you can see how much cash is created from the existing assets. Clearly, all things being equal, the higher a company's ROE, the better the company. Formula: Net Income / Stockholders Equity
Return on Investment (ROI)	is a profitability measure that evaluates the performance of a business. ROI can be calculated in various ways. The most common method is Net Income as a percentage of Net Book Value (total assets minus intangible assets and liabilities).
Revenue Reconciliation Act
Reversion
S
Safe Rate
Source of Funds	A statement showing the sources of all funds required for an investment.
Straight Line	Also known as straight line depreciation or straight line amortization, this is the simplest deprecation method. Basically, it just spreads out the cost of an asset equally over its lifetime
Tax Stamps
Stabilized
Stabilized Income
Stabilized Expenses
T
Tenant Improvements	Improvements made to the leased premises by or for a tenant. Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by the landlord.
Title Insurance	Insurance thatcovers loss of an interest in a property due to legal defects and that is requiredifthe property has a mortgage.Most title insurance is lender's title insurance, which is paid for by the borrower but protects onlythe lender.Owner's title insurance is a separate policy, in some areas paid for by the seller, to protect the buyer's equity in the property.
Total Expense Ratio	The ratio, or relationship between the total expenses and the income.
Transfer Tax	Real estate transfer tax is a tax that may be imposed by states, counties, or municipalities on the privilege of transferring real property within the jurisdiction. Total transfer taxes range from very small (for example, .01% in Colorado) to relatively large (2.2% in the District of Columbia).[ Some states have a variety of transfer tax laws which may include specific exemptions for certain types of buyers based on buying status or income level (e.g. Maryland exempts certain "first time buyers" from a percentage of the total [2] or excludes a portion of the property's sales price from taxation altogether). Another variation which exists is either the legal requirement to split the taxes between the parties or the local custom to do so. Thus, in Washington, DC, the 2.2% is generally split between the seller and the buyer. Prior to buying or selling, it is advisable to check with the Recorder of Deeds, a Realtor, or title company to confirm a specific jurisdiction's practices.
Triple Net (NNN)	A lease in which the tenant pays, in addition to rent, certain costs associated with a leased property, which may include property taxes, insurance premiums, repairs, utilities, and maintenances. There are also “Net Leases" and “NN” (double net) leases, depending upon the degree to which the tenant is responsible for operating costs. See also “Gross Lease”.
U
Use of Funds	A statement that shows how funds required for an investment will be utilized.
Useful Life	is the expected period of time, in years, during which a depreciating asset will be productive.
V
Vacancy and Credit Allowance	The amount of gross revenue that pro forma income statements anticipate will be lost because of vacancies, often expressed as a percentage of the total rentable square footage available in a building or project.
Variable Expense
Variable Expense Ratio
Variable Expense Recoveries
Z
Zoning	The division of a city or town into zones and the application of regulations having to do with the structural, architectural design and intended use of buildings within such designated zone (i.e. a tenant needing manufacturing space would look for a building located within an area zoned for manufacturing).